Central banks came out firing this week. There is an adage that you “Don’t fight the Fed.” Then surely you don’t fight the Fed, the European Central Bank and China’s policy makers, among the other major players in this week’s global intervention.
The Fed, in coordination with five other central banks, also nearly cut in half the rate at which foreign central banks pay to borrow U.S. dollars from 1.08 percent to 0.58 percent through Feb. 1, 2013. (That’s cheaper than American banks pay, which is 0.75 percent.)
Also this week, it was reported that the Fed plans to purchase more mortgage-backed securities, Chinese officials are reducing capital requirements for banks and there is the possibility of an IMF bailout for Italy. All of this amid more bond purchases by the European Central Bank.
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The trend has shifted. Many emerging markets were hit by food-price spikes in recent months. However, they tightened credit to reduce inflation and now are in the process of loosening. In addition, the Europeans are finally waking up to the severity of the situation and realizing that aggressive action must be taken.
Now, I don’t think these measures will create economic growth.
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These actions, some of which were meant to demonstrate that there won’t be a liquidity crisis like 2008 as the European debt crisis comes to a head, will in fact are very inflationary. They also will probably help equity markets in the short to intermediate term.
The biggest beneficiary will be gold and precious metals. As inflation again seeps through the system, you will see a flight to quality in these assets. During all the past easings, gold saw investors flock to it.
I wouldn’t fight the central banks in their effort to refuel the global economy. At the very least, it is going to cause large increases in asset, and especially commodity, prices.
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