- New Science in old markets -

Brick time?

Much has been written about central banks' efforts to improve economic conditions and how they are having less and less effect. It has been pointed out that each successive round of QE and other unconventional tricks has produced less improvement in 'real' growth yet plenty of rising asset prices. Lately even this side effect has failed to occur - witness the poor Japanese stock-market response to the introduction of negative rates late last month. The conclusion seems to be that the central banks have used all their ammunition and that it has all come to nothing. Maybe not.

The global contraction in economic activity in the aftermath of the 2008 crisis was very severe. This needed a robust central bank response, which is eventually what we got and this probably did steer the world away from a worse fate. That is all that happened though - this was an entirely ordinary drop in growth that came as a consequence of the over-enthusiasm of the early and mid 2000s. Big boom, big bust and the authorities needed to act.

When central banks or other arms of government try to rescue a bad economic situation there is always a lag between the action and the effect. In the past this has been likened to pulling a brick along with a piece of elastic. Nothing seems to be happening until the brick suddenly hits you in the eye. This delay has often led to the mistaken view that the policy hasn't worked so needs to be increased in scale.

As a result, more and more stimulus is applied until the eventual delayed economic and market response is massive, which then sets the scene for the next boom. This overshoot is normal and may be what we have been seeing again this time around in the world of markets, central banks and intervention. The policies of QE, negative rates and so forth may be just as potent as was thought but the apparent lack of effect could just be due to a bigger lag than normal. Big boom, big bust, big stimulus, big lag...

Is the brick about to move?