Global liquidity stalls as Fed puts QE into full-throttle reverse
GLOBAL liquidity is vanishing faster than water on the beaches of Mont-St-Michel as the tide goes out.
The two great central banks of the Western world – the US Federal Reserve and the European Central Bank – are both dialling down stimulus rapidly even though the world economy is slowing.
The $2 trillion (£1.5 trillion) flow of stimulus each year from “peak QE” has plummeted to zero. By early next year the net effect will be negative. “We are moving into an entirely different world,” said Brian Coulton, chief economist at Fitch.
Quantitative easing by the Fed is now in full-throttle reverse. The pace of bond sales rises to $50bn a month this quarter. Since the Fed has always argued that QE “works” by driving up equity prices and holding down credit spreads, one might infer that the opposite also holds: that falling asset prices usefully helps the Fed do its dirty work.
Investors have been complacent about this accumulating shock, although the credit crunch is already plain to behold in emerging markets. Borrowers in Asia, Latin America, the Middle East and Africa have together wracked up $7.2 trillion of dollar loans and equivalent derivatives – double the pre-Lehman levels – and are having to roll over debt in an ever less friendly climate.
Markets have also been complacent about the future path of US rate rises, betting Continued on Page 8