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Are Central Banks Losing Effectiveness?

Published on: Aug 11 2016

Most analysts focus on which actions central banks will take next. Will they change interest rates or stand pat?

It is an interesting question, but there’s a more important long-term question. Investors should be asking if central bankers are losing their omnipotence. Are the central banks, as the saying goes, “pushing on a string?” Until recently, the question was unthinkable. Some analysts declared this the age of the central bankers and asserted that central banks could move markets and economies at will.

During the financial crisis, the central banks decided to do everything they could to stabilize markets and boost economies. After reducing interest rates to near zero, they resorted to quantitative easing (QE), which basically is the central bank buying bonds from the private sector. The goal of QE is to inject money into the markets and boost asset prices. The assumption is that higher asset prices will increase optimism and wealth, causing investors and businesses to spend and invest more.

While QE apparently did help most economies return to positive growth rates, we could be nearing the end of the line for that policy’s effectiveness. Each phase of QE has been less effective than the previous one. Also, asset prices now are high. They can’t go a lot higher without much higher economic growth. Asset prices certainly can’t rise at the same rate they have since 2008.

Analysts and policymakers should be studying Japan. That country reached excessive debt levels before the rest of the developed world and has been struggling with how to recover from the debt overhang since about 1989. The country has struggled with very weak growth and low asset price appreciation. Japan shows few signs of being able to bounce back. Here is the question we should ask: Is Japan’s experience since 1989 the future of the United States, the United Kingdom and Europe?

Of course, Japan has some unique issues. Key policy mistakes were made by its leaders early in its depression. But it faces the same basic issue of how to recover after an economy accumulates far too much debt.

It is plausible that Japan is a few years ahead of other developed countries. I’ve been saying for a while that central bank policies are less effective than right after the financial crisis. If we want to avoid a couple of decades of long economic growth and low investment returns, we need pro-growth fiscal policies to supplement the monetary policies of central banks.

Regardless of which policies are implemented in the future, we’ll continue to have the short-term cycle of growth and recessions in the economy. There also will be matching bull and bear markets for investments. But without new policies, the long-term outlook is below-average economic growth and anemic returns on major asset classes. Investors need to be prepared for that scenario if they want to reach their financial goals.

The Data

Last Friday’s Employment Situation reports were much better than expected. In addition to the 255,000 new jobs for the month, the previous month’s new jobs numbers were revised higher. Hourly wages and hours worked also increased in the latest jobs report. That report is consistent with my view that wages and salaries are increasing faster  than earlier in this recovery, and that’s likely to push inflation higher than markets expect.

The JOLTS (Job Openings and Labor Turnover Survey) report tells a similar story. This report is more detailed than the Employment Situation reports but is about a month behind. Job openings rose 2% in June. Layoffs declined, and the percentage of employees quitting jobs was unchanged.

Weak productivity continues to squeeze business profit margins. Productivity declined for the third consecutive quarter, this time falling by 0.5%. Lower productivity, coupled with wage increases, made unit labor costs rise by 2%.

New unemployment claims declined by 1,000, and last month’s 3,000 increase was revised down to an increase of only 1,000. The result is that both the weekly claims and four-week average remain near historic lows.

Consumer credit didn’t increase much last month, but there was a surprise. Revolving credit (mostly credit cards) rose sharply for the month. Through this recovery, most increases in credit use have been in vehicle and student loans. Credit card use has been modest. It will be interesting to see if this is a one-month event.

Small businesses continue to be more optimistic, according to the NFIB Small Business Optimism Index. The index was slow to show optimism earlier in the recovery, as initial gains after the financial crisis went primarily to large, global businesses. But starting a couple of years ago, the index had a strong run before tumbling early this year. It fell to a two-year low in March 2016. But it’s now increased four months in a row and is nearing the highs of the recovery.

The Markets

Emerging market stocks had a great week, returning 3.17% for the week ended with Wednesday’s close. The All-Country World Index followed with a 1.68% gain. The S&P 500 rose 0.68%. The Dow Jones Industrial Average did better, jumping 0.96%. The Russell 2000 returned 0.86%.

Long-term bonds delivered a 1.26% return. Investment-grade bonds gained 0.96%. Treasury Inflation-Protected Securities (TIPS) returned 0.51%, while high-yield bonds jumped 1.44%.

The dollar rose 0.04%.

Energy-based commodities were unchanged for the week. Broad-based commodities lost 0.87%, with gold declining 0.84%.

Bob’s News & Updates

I’ll be making several appearances in the next few months. Of course, you know that soon I’ll be at the MoneyShow San Francisco, Aug. 23-25. Free registration is available to my readers by calling 800-970-4355 (please mention priority code 041205) or sign up online at

On the evening of Sept. 20, I’m scheduled to speak at the Pittsburgh chapter of the American Association of Individual Investors (AAII). Details soon will be available here.

I’ll also be at the new MoneyShow Dallas, Oct. 20-21. I’ll provide details later.

At these events, I’ll be discussing material from my widely praised revised edition of “The New Rules of Retirement.” It covers all the financial issues related to retirement and retirement planning. Order your copy today.

Some Reading for You

Here are strategies for making vacations more enjoyable and beneficial.

This article explains why in some areas housing becomes unaffordable but not in other areas.

Here’s more evidence on why you should ignore expert forecasts.

I comment and link to these and other items on my public blog at




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