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How do Governments and Central Banks influence Money?

Published 17 Sep 2020

The COVID-19 pandemic has unleashed a global slowdown never before experienced. As countries went into lockdown during 2020, governments and central banks were forced to implement unprecedented economic support programs, likely to cost US$50T, in order to cushion the pandemics’ impact, and impact on investors.

Governments and central banks each have different financial and economic tools to stimulate economic growth.

Governments predominantly use fiscal stimulus measures which include wage support, one-off bonus payments, and industry support packages. As growth returns, large infrastructure projects are also common to provide construction workers with employment. 

In 2020 and 2021, most governments globally will likely incur budget deficits approaching 20% of their annual GDP output to cover these expenses, adding to each nation’s debt balances. 

Global central banks favor monetary stimulus to drive economic growth. With their most common tool (interest rate adjustments) hovering near zero globally, central banks have been forced to find more ‘creative’ methods to stimulate growth.

Since the 2008 global financial crisis, central banks have adopted quantitative easing as their new monetary tool to keep interest rates low. This involves central banks purchasing government debt (mostly treasury bonds), thereby injecting cash into the economy. By becoming the largest buyer in debt markets, global central banks have worked together to effectively gain control of interest rates. This supports the fiscal efforts of governments, allowing them to raise funds (issue new debt) at artificially low interest rates. 

Some central banks are also adopting currency controls to support their export industries. Switzerland, selling Swiss Francs to buy US Dollars, has used the proceeds to build a listed technology equities portfolio surpassing US$100B. [1]

What is the impact on investors?

M2 is a measure of money supply in the economy. Shadow Stats founder John WIlliams estimates the US Federal Reserve is growing M2 money supply by 25% in 2020 [2] to keep the economy from stalling, High M2 in the 1970’s resulted in high inflation – is history repeating itself?

We believe that investors need to rethink asset allocation strategies to ensure they maintain their purchasing power by growing their assets faster than M2 growth.  This is because global central banks have trapped themselves with monetary intervention and will need to maintain it over the 2020s.

 

 

Footnotes

[1] https://www.snb.ch/en/iabout/assets

[2} http://www.shadowstats.com/charts/monetary-base-money-supply

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