The major central banks of the world have been easing their monetary policies significantly since the financial crisis of 2008. They’ve succeeded in averting another financial crisis so far. They’ve also succeeded in recovering most of the fortunes that were lost during the crisis. Equity investors have benefited from the stock market rally. Bond investors also enjoyed big gains as yields fell and prices rose. The 12-month average of the median existing home price is up 29% since February 2012.

Nevertheless, the central banks have been frustrated by the slow pace of the recoveries in their economies since the crisis of 2008. Reviving self-sustaining economic growth hasn’t been as easy as easing has been. The ultra-easy monetary policies of the central banks might perversely have contributed to the slow pace of economic growth. Yesterday, I listed several reasons why the Fed’s policies actually have contributed to the subpar pace of the US economic recovery. Allow me to further elaborate:

(1) Not much trickling down from the wealth effect. It is widely believed that many retail investors who left the stock market following the bursting of the Internet bubble and the bear market of 2007-2008 never returned. If so, the wealth effect from the current bull market in stocks hasn’t trickled down to most Americans.

(2) Forcing savers to save more. Savers have been forced to save more, and spend less, as a result of the Fed’s NZIRP (near-zero-interest-rate policy). The 12-month sum of personal saving has been running around $700 billion since the end of the financial crisis in 2008, double the pace during the 1990s and the first half of the previous decade.

(3) Enabling fiscal excesses. Last Friday, Fed Chair Janet Yellen said that one of the headwinds that the economy faced during the current recovery until recently was fiscal drag. That’s true, as measured by federal, state, and local government spending in the real GDP accounts. However, it’s hard to see any such fiscal austerity in the federal deficit, which reflects the need to finance all government spending, including entitlements, in excess of tax receipts.

The Fed has clearly enabled the federal government to run large deficits. Fed officials may deny that their QE programs have monetized the debt, but that’s exactly what they have done. The Fed’s balance sheet now has $2.46 trillion in Treasury securities. The effective cost of that debt to the Treasury is just 25bps since all interest earned by the Fed is returned to the Treasury less expenses, which mostly includes the 0.25% paid on bank reserves deposited at the Fed.

(4) Worsening income inequality. Fed Chair Yellen in a 10/17/14 speech said, “The extent of and continuing increase in inequality in the United States greatly concern me.” She is quite alarmed: “It is no secret that the past few decades of widening inequality can be summed up as significant income and wealth gains for those at the very top and stagnant living standards for the majority.” She doesn't acknowledge that the Fed’s policies might also be contributing to inequality. An important source of income for many senior citizens has been the interest they receive on their fixed-income securities. Income inequality has certainly been worsened by the fact that older people are living longer on less interest income.

(5) Misallocating capital. The Fed’s policies have led to significant misallocations of capital. As a result of the Frank-Dodd Act, the Fed and other banking regulators have forced the banks to tighten lending standards. At the same time, extremely low interest rates have allowed investors to raise lots of money in the capital markets to buy up distressed properties around the country. As a result, home prices have rebounded significantly over the past few years, reducing affordability for first-time home buyers. Corporate bond yields have been trading below the S&P 500’s forward earnings yield since 2004, providing companies with an incentive to buy back their shares and engage in M&A rather than invest in plant and equipment. Relatively weak business spending to expand payrolls and capacity has boosted profit margins; the S&P 500 margin rose to a record-high 10.4% last quarter. Buybacks boosted earnings per share.

The result has been a great bull market in stocks, largely reflecting financial engineering rather than healthy economic activity.

(Based on an excerpt from YRI Morning Briefing)

On Monday, Josh Brown, a panelist on CNBC’s “Halftime Report,” commented that the major central bankers’ policy of “kicking the can down the road” seems to be working. Since the start of the bull market in stocks, the bears have argued that ultra-easy monetary policy was only postponing the “endgame.” They said that central banks were kicking the can down the road, implying that there was a cliff or a brick wall at the end of the road.

If you kick the can down the road, you delay a decision in hopes that the problem or issue will go away or somebody else will make the decision later. The phrase also means to defer conclusive action with a short-term solution. In this particular version of the game, there is no endgame as long as there is another short-term solution. The major central banks have been playing this game by providing additional rounds of monetary easing when the previous rounds didn’t revive growth or boost inflation as well as they had hoped. So ZIRPs (zero-interest-rate policies) have been followed by QEs and NIRPs (negative-interest-rate policies) and QQEs.

Brown was specifically talking about the Eurozone’s problem with Greece. It started in 2010, when the country needed a bailout to avoid a Grexit that threatened to unravel the monetary union. It was provided, and so was lots of easy money by the ECB. Brown opined that while the problem hasn’t been solved, the short-term fixes bought time for the Eurozone to reduce significantly the damage that would result from a Grexit. The strength in the EMU MSCI this year, despite the possibility that Greece might soon default after all, confirms Brown’s view.

The latest news is that Greece needs to borrow more to make its debt payments. The socialist government has rehired public employees and refuses to cut pensions. That news did unnerve Eurozone stock and bond markets last week. So ECB officials let it be known that their current QE bond-buying program will be front-loaded during June and July. Stocks and bonds recovered on this news.

The major central bankers have become central planners. They are using all the means available to them to manage their economies. Central planning invariably produces suboptimal economic performance. Central planners tend to be experimenters, like some mad scientists in a lab. When their plans don’t pan out as they predicted, they try something else or more of the same. If nothing else, it’s a good diversion. The public is told that while the previous plan was a disappointment, the next one will work great. If all else fails, blame a few of the planners and execute them.

So what’s the latest plan? More of the same, with an increased emphasis on driving stock prices higher. If so, then this raises the odds of a global stock market melt-up. The major central banks are run mostly by macroeconomists rather than bankers these days. They believe that one of the major “transmission mechanisms” between monetary policy and the economy is the wealth effect.

Their critics say that the policies of the central bankers have worsened income and wealth inequality and thereby perversely contributed to global secular stagnation. I’m inclined to agree. Needless to say, the monetary central planners reject this critique and insist that they’ve been relatively successful so far, at least in averting another global recession and financial crisis. Consider the following:

(1) China. Monday’s WSJ included an extremely germane article on this subject. It is titled “As Chinese Stocks Rise, Beijing Wins.” The main point is that the Chinese government, which in the past viewed the stock market as a casino for speculators, now is using it to boost the economy and enable reforms.

(2) Japan. They must be doing high-fives at the BOJ. Real GDP rose by an annualized 2.4% during Q1, much better than a revised 1.1% in Q4. It also beat a 1.5% growth forecast by economists in a WSJ survey. The BOJ continues to buy bonds under its QQE program. As a result, the monetary base is up 35% y/y. Japan’s central bank also continues to support the stock market, as a 5/13 Reuters article reported.

(3) Eurozone. The ECB isn’t buying stocks (just yet), but the bank’s officials are certainly doing their best to boost stock prices by depressing the euro and keeping a lid on interest rates. Last Thursday, ECB President Mario Draghi countered any notion that the bank’s QE might be tapered ahead of schedule. He was clearly concerned about the recent backup in bond yields, strength in the euro, and weakness in stock prices.

(4) US. So far, this year hasn’t been a good one for the Stay Home investment strategy. It’s been much better for the Go Global strategy. That’s mostly because the Fed has been out of sync with the other central banks. The FOMC terminated QE last October and has been chattering about whether liftoff for the federal funds rate should come sooner or later this year. The suspense has weighed on the US stock market.

(Based on an excerpt from YRI Morning Briefing)

ECB President Mario Draghi is the Fairy Godfather of the Eurozone’s bond market. Bond yields dropped dramatically in the region after he pledged to do whatever it takes to defend the euro. He said so on July 26, 2012. He has delivered on his promise so far. He had to renew his vows with the bond crowd along the way. He proved he meant what he said by lowering the ECB’s official lending rate from 1.00% to 0.05%, and even cutting the bank’s deposit rate below zero to minus 0.2%.

Then on March 9, he implemented a massive QE program, finally overcoming lots of resistance to it coming out of Germany in particular. All of his words and deeds pushed the euro down from last year’s high of $1.39 on May 6 to this year’s low of $1.05 on March 13.

However, better-than-expected economic indicators in the Eurozone and worse-than-expected ones in the US have pushed the euro back up to $1.14, though it retreated below $1.12 yesterday after an ECB policymaker hinted that the Bank is preparing to ramp up its bond-buying program before the summer. A few observers question whether QE was even necessary. Some are wondering whether the program should be terminated sooner rather than later. Furthermore, bond yields, which fell close to zero in mid-April, have subsequently spiked up.

So last Thursday, Draghi updated his pledge in a lecture at an annual IMF series in Washington, DC:

After almost 7 years of a debilitating sequence of crises, firms and households are very hesitant to take on economic risk. For this reason quite some time is needed before we can declare success, and our monetary policy stimulus will stay in place as long as needed for its objective to be fully achieved on a truly sustained basis.

Thus, he tried to sink the suggestion that the ECB might wind up its QE scheme early.

To make sure everyone got the message, Benoît Cœuré, a member of the ECB’s executive board, said in London on Monday evening that the bank will front-load some of their purchases of sovereign debt in May and June to deal with an expected shortage of liquidity in July and August. (His remarks were not published by the ECB until Tuesday morning, raising questions about the release of market sensitive information by the central bank.) Obviously, ECB officials want to squelch any notion that they will taper the pace of bond buying.

The markets got the message, as the euro edged down and stock prices jumped higher.

(Based on an excerpt from YRI Morning Briefing)