There is talk of another 2008 hitting the markets.
However, what’s coming will not be another 2008. It will be worse than 2008.
There are several reasons for this.
Firstly, today, there is over $20 trillion more debt in the financial system than there was in 2008. If 2008 was a debt bubble that needed to burst; today the bubble is even larger.
Secondly, Central Bankers have already employed both ZIRP and NIRP for years. In 2008, we had only just begun to experience ZIRP in the West and NIRP was still considered a “nuclear option” that bordered on insanity.
Today both ZIRP and NIRP are commonplace. Indeed, the EU has cut rates into NIRP three times in the last 18 months. The world has watched as these actions have barely resulted in an uptick in the EU’s inflation.
Central Bankers have also employed Quantitative Easing, another “nuclear option” that had yet to be unleashed back in 2008 (the Fed launched the first QE program in December 2008).
To date, global Central Banks have printed over $14 trillion in new money to buy bonds via QE. Even banking systems in which the legality of QE was questionable, such as the EU, have launched QE programs that are €1 trillion or larger.
These programs have been massive in scope. In Japan, a single QE program equal to 25% of GDP was launched in April 2013. Japanese GDP growth barely moved higher before once again rolling over. Even an expansion of this already incredible monetary policy in October 2014 failed to ignite significant growth for Japan’s economy.
Finally, today, Central Bank balance sheets are already bloated to the point of being larger than even some of the larger countries’ economies.
The Fed’s balance sheet is over $4.5 trillion, larger than the economy of Germany and just smaller than the economy of Japan. The ECB’s balance sheet is €2.7 trillion, larger than the economies of France or Brazil. The Bank of Japan’s balance sheet is over $3 trillion, larger than the economy of the UK.
And on and on.
With Central Bank balance sheets so massive already, the marginal effect of more expansion, (even via massive new QE programs) will be much less than it was in 2008. In 2008, Central Bank balance sheets had ample room to grow. Today, investors have already seen what a 200% or 300% expansion of a Central Bank’s balance sheet can buy.
In short, Central Banks are in far worse shape than they were in 2008 to deal with another crisis. And that’s too bad, because the coming crisis will be significantly larger than that of 2008 (again there is over $20 trillion MORE debt in the system than there was then).
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Chief Market Strategist
Phoenix Capital Research