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Is it Time for the USA and China to Start Printing Money Again?

09 Jul 2018 - Archive

If you are an investor, this past week has been quite unpleasant. Markets across the globe weakened significantly.

For the year as a whole, the European equity markets are showing no gain, while the American equity market is in the red.

Remarkably, the Shanghai composite is still in the black for the year, although the index has given up most of the gains it had achieved through the first half of the year (in June, the Shanghai composite stood at +60%; it is now down to +10%).

The weakness in the global equity markets is certainly on policymakers’ minds.

One of the many options policymakers can use to address the weakening equity markets is printing money.

Here is a look at some of the biggest central banks and what they are doing with their balance sheets. (Some of the graphics we have shown before in a separate context.)

The Europeans

Here is a look at the European Central Bank (ECB) balance sheet.

The Europeans restarted their money printing operations in October 2014.

Unsurprisingly, since the Europeans started printing money, European equity markets are performing relatively better than the equity markets with less of a connection to the ECB.

The performance of the DAX over the recent period of ECB money printing operations is case in point.

The Japanese

Here is a look at the Nikkei index over the period of the recent Bank of Japan money printing operations. Again, the connection is easy to see.

The Chinese

Here is the relationship between the People’s Bank of China balance sheet and the performance of the Shanghai Index.

The recent weakness in the Shanghai Index certainly corresponds to the breather the PBoC has taken in money printing.

The Americans

Lastly, here is the American experience.

It is a little more difficult to see. If one looks closely, when the Federal Reserve started printing money, the American S&P 500 has strengthened. When the Federal Reserve stops printing, equity markets weakened.

Thinking About the Overall Picture

With the experience of the Europeans, Chinese, Japanese, and Americans relatively clear, it is easy to see that if the American Federal Reserve and the People’s Bank of China wants to stop the decline in global equity markets, Fed and Chinese officials could simply follow the lead of the Europeans and the Japanese and start printing money again.

Such a move would, of course, be a complete 180 from what the Federal Reserve has been saying over the past few months.

Conclusion

If you had to guess which central bank – the European Central Bank, the Bank of Japan, the People’s Bank of China, or the U.S. Federal Reserve – is the most hawkish, you might well mention the PBOC.

This view would certainly stem from the observation that growth in the land of the dragon is around 7%.

Interestingly, it is the Americans that are set to raise interest rates and stopped the money printing presses.

With global equity markets in trouble, one can reasonably ask –Is it time for the Americans to start printing money again?

Such a step might would certainly be a welcomed step from the financial markets.

Unsurprisingly, it might also be a positive move for gold demand, with inflation-hedge demand jumping, as well as increased demand from a possibly stronger global growth picture.

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