Global monetary policy is going wrong. Quantitative easing has become a tide that is raising all ships, but with a disappointing impact on the growth vessel that central banks had in mind when they started their experiment in massive money creation.
The market flotilla is buoyant. US stocks have hit new all-time highs and yields on US, European and Japanese government bonds are at ultra-lows. US junk bonds yield less than five per cent, a pre-crisis return on Treasuries. Commodities have participated less in the latest bull phase, yet Brent oil is still over $100 a barrel - a level that would normally be deemed high enough to cause recession.
Some corporate profits are coming in above expectations, but the best explanation for high prices in so many markets is the relentless flow of additional liquidity. The Bank of Japan's new monthly infusion is almost as big the US Federal Reserve's monthly $85 billion.
In theory, the new money should lead to higher asset prices, which then inspire more confidence and speed GDP growth. In practice, only the first part is clearly working. About half of the Fed's monthly QE dose feeds into the housing market, lifting the very sector whose bubble helped precipitate global crisis.
But growth proves reluctant. Part of the reason may be commodity inflation. The US Energy Department says American households spent four per cent of their pretax income on gasoline in 2012, the most in 30 years. Europeans will spend euro 500 billion on oil imports this year, about euro 200 billion more than average, according to the International Energy Agency.
Investors are intoxicated by the liquidity binge yet should be fearful of the hangover. Central banks' claim that they can exit their exceptional policy safely looks doubtful. Global markets are vulnerable to a strengthening of US economic growth, which would lead to a tapering of Fed policy. The more markets rise on the liquidity glut, the larger the potential future asset price falls.
The past two decades have shown that too much money can do as much damage as too little. Central banks do not appear to have learned that lesson.
