NEW YORK (
) -- There has been much discussion over the validity of unconventional monetary policy around the world. Many believe it has limited effects and will ultimately lead to a hyper-inflationary spiral.
Although there are truths to both sides of the argument, in today's financial system, stimulus can be beneficial. Stimulus has allowed corporations to boost earnings even in the face of lower revenues.
With regards to inflation, the
balance sheet is as large as ever, and M1 money stock continues to move higher. Interestingly enough, inflation expectations remain suppressed and global growth continues to be tepid. The reasoning is that sentiment drives these concepts rather than some hardwired economic truth.
The last aspect that will be discussed is investor sentiment. Unconventional monetary policy creates a blanket over financial markets that boosts sentiment and is an eventual self-fulfilling prophecy. If a majority of market participants believe the market will go up, eventually it will.
The first premise of the argument is that record-low interest rates have given corporations room to expand credit at cheaper rates and subsequently boost earnings. After the financial crisis, most corporations decreased their labor forces and reined in investment. They were essentially in survival mode. When the dust cleared and the Federal Reserve enacted policy to drive down long-term rates, a sense of relief ensued.
Record-low interest rates allowed companies to take out large sums of credit at a much cheaper price than at any time before. Revenues were still suppressed due to weak consumer demand, but with credit, companies were able to continue operating in an efficient manner.
A reason that financial markets have been able to reach record levels, even as economic data remain volatile, is due to such corporate earnings. Interest payments have considerably dropped and earnings per share for the aggregate market have increased.
There is always the fear that easing policy at the lengths we have will eventually come back to bite us. The issue of inflation is as much tied to expectations as it is increased money supply.
Currently our money supply and central bank balance sheet are at historic highs. However, a weaker global growth picture has led to a selloff in inflation hedges, gold and Treasury Inflation Protected Securities.