The central bank put is dead. Long live the central bank put! In the recent past, investors could rely on policy makers to bail out markets and economies at the first sign of trouble by lowering interest rates and pumping money directly into the financial system. Although such a reaction function on the part of central banks has probably become impossible with inflation surging globally, it doesn’t necessarily mean investors will be hung out to dry if the crisis in Ukraine intensifies.
The Federal Reserve, European Central Bank and others have created so much money to go along with unprecedented support from governments to combat the Covid-19 pandemic that the world is awash in liquidity. The combined fiscal and monetary stimulus efforts of the U.S., China, euro zone, Japan and eight other developed economies increased their aggregate money supply by $20 trillion over 2020 and 2021 to a record $102.5 trillion, according to data compiled by Bloomberg. That amount has increased by an additional $1 trillion this year already.
Call it the stealth central bank put. It’s unprecedented in modern times for the amount of money sloshing around the global economy and financial system to have surged 25% over two years. This excess liquidity should act as a cushion for markets and economies even if central banks start to tighten monetary policy. Just consider emerging markets, which in the past would have been a glaring weak spot in times of crisis. No longer. At $3.89 trillion, the foreign-exchange reserves for the 12 largest emerging-market economies excluding China is up from less than $2 trillion in 2009, according to data compiled by Bloomberg.
Although the global stock market as measured by the MSCI All-Country World Index is down about 8% this year and the Bloomberg Global Aggregate Index of bonds has dropped 3.03%, the one market that dwarfs either of them in terms of trading volume has remained calm despite rising geopolitical tensions. Volatility in the $6.6 trillion-a-day currency market is about 20% below the average in data going back to the start of 2021 as measured by JPMorgan Chase & Co.
Much of the focus on what is happening between Russia and Ukraine has been on the fallout in the energy markets, and oil in particular. Brent crude rose 2.5% on Tuesday to $97.77 a barrel as of 12:01 p.m. in London, extending this year’s jump to 26%. West Texas Intermediate crude gained 2.12% to $93, bringing its year-to-date gain to 24%. Prices haven’t been this high since 2014. Yes, Russia is a critical supplier of oil to the world, but fossil fuels are a declining part of the global economy. The International Energy Agency estimates that oil’s share of the global energy mix has declined to 31% from 45% in 1974. Plus, the amount of oil consumed per unit of economic output has also fallen by a third since 2000.
And consumers are certainly feeling the effect of higher energy prices at the pump. The price of a gallon of regular-grade gasoline has risen to $3.53, the highest since 2014, according to the Automobile Association of America. The thing to remember, though, is that as my Bloomberg Opinion colleague Liam Denning has pointed out, spending on gasoline and other motor fuels as a share of disposable income is about half what it was in the first decade of this century.
What would be concerning is if financial conditions were tight and getting tighter, but that’s not the case. Despite the Fed signaling its intention to tighten monetary policy by raising interest rates this year and shrinking its $8.91 trillion balance sheet, contributing to the weakness in equities and bonds, the Bloomberg U.S. Financial Conditions Index+ remains near its loosest on record. This, again, should help cushion the fallout from the Ukraine crisis.
Let’s not forget that financial markets barely budged when Russia annexed Crimea from Ukraine in early 2014. The MSCI All-Country World Index tumbled 4.07% that January before going on to rally 4.65% in February and eking out a gain of 2.10% for the year. And that’s when the global money supply was only about $60 trillion, or some 40% below current levels. As the strategists at BlackRock Inc. pointed out in a research note to clients on Tuesday, it’s normal for geopolitical tensions to cause short-term gyrations. What’s not normal is for them to become continuing market drivers. And if that proves true again this time, part of the reason will be the stealth central bank put.
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