Ok fine, central banks are "running out of road", however at the same time they are terrified to rip (or even peel) the band-aid off. This has put the system in an unstable equilibrium: on one hand, central bankers - as even they admit - need to hand over the growth impulse over to governments, yet on the other hand, they terrified of even the smallest change to the status quo as they know they may undo some 7 years of "wealth effect" creation overnight.
How much longer can this charade continue?
While many would be quick to answer "indefinitely" that is not true, because with every bond, ETF or stock, purchased by central bankers they come to the point where they either monetize the entire lot, or they increasingly impair the functioning of the capital markets (just ask the dozens of marquee hedge funds that have shuttered in recent years).
Luckily, in a recent analysis, Ray Dalio's Bridgewater asked precisely this question, and even better, provided the answer to how much time is left until both the ECB and BOJ hit the limits on their existing programs.
As the chart below shows, assuming no changes to existing programs, the ECB and the BOJ, the two central banks most actively monetizing debt currently, have 8 and 26 months respectively, if they do no changes to their programs.
However, if incremental easing is layered on, like expanding the scope of their bond buying programs or purchasing equities even more aggressively, the total rises substantially. The final answer: 68 months, or just above 5 and a half years, in the case of the ECB, were it to steamroll all political opposition and monetize virtually every possible bond (and 20% of the equity market), and 48 months, or 4 years, in the case of the BOJ.
3 years ago