The consequences of expansive monetary policy: interest rates, inflation and the role of demographics

The global financial world has been in a state for some time that has been surprising many experts and observers. Despite the constant massive expansion of the money supply by the central banks, interest rates have remained at a historically extremely low level. At first glance, this phenomenon appears contradictory, because according to the classic economicUnderstanding should lead to a constant printing of money to significantly higher inflation and a significant weakening of currencies. But reality shows a different picture. The reason for this lies in a large number of factors, the interaction of which develops complex dynamics in today’s economy. In order to understand the deeper causes, it is worthwhile to use the central mechanismsto look more closely at this seemingly paradoxical interaction between money supply, interest rates and inflation.

The limited effect of money creation on the real economy

A decisive factor in the absence of strong inflation is the fact that the newly created money only finds its way into the real economy or to the citizens to a very small extent. Rather, a significant part of this freshly generated liquidity flows directly into the hands of speculators, large investors and institutional actors who, with large sums,financial markets act. The result is that while the money is circulating in the system, it hardly ends up in the areas that would provide a broad demand for goods and services. As long as the money remains in the financial sector’s cycles and does not get into consumption or investments in the real economy, the price pressure on goods and services remains low. soa situation arises in which inflation rates remain low despite the enormous expansion of liquidity and the feared currency devaluation does not materialize.

Investments in securities and the impact on capital markets

A second central element in this structure is the way in which the central banks and the commercial banks use the money they have created. Instead of directing the cash flows into productive investments, the majority of stocks, government bonds with dubious creditworthiness and low-quality corporate bonds are acquired. These purchases increase the prices of these securities,while their returns continue to fall. This creates an artificial price level that pushes the interest on investors to a historically low level. This development has far-reaching consequences for the capital markets, as it is ensuring an ever-increasing decoupling of the financial markets from real value creation. At the same time, the pressure on investors is increasing, more and more riskyto choose investments to still achieve an acceptable return. The central banks’ expansive monetary policy ultimately serves to relieve commercial banks of inferior securities by buying them up by the central banks. However, the risks of these processes are not eliminated, but shifted to the general public, since ultimately the taxpayer for the lossesstands in. This creates a fragile system that seems unsustainable in the long term.

The importance of demographic development in the industrialized countries

Another aspect, often underestimated, is the demographic structure of the Western-style industrialized countries. These societies are characterized by an aging population, which has a profound impact on consumption, investment and growth. The large generation of baby boomers, who have developed enormous consumption during their most active years, is in thein the past decades, a phase of life in which savings and asset protection are the focus. While in earlier times the demand for consumer goods and capital goods was driven by this generation, the focus is now on securing retirement and on medical and nursing expenditure. The result is a weakeningConsumption demand, which can no longer be decisively boosted even by massive monetary policy stimuli. The expansive monetary policy is thus losing its effectiveness because the social framework conditions prevent the desired effect.

Historical experiences: The example of Japan and the West as repeat offenders

The Japanese economy provides a clear example of how much demographic changes can limit the effect of monetary policy measures. After the peak of the baby boomer generation’s willingness to consume, Japan tried to revitalize the economy with ever new financial injections and state investment programs. The key interest rates remained for many yearsat an extremely low level, but could not provide sustainable growth impulses. Economic stagnation continued despite all measures and price levels remained under pressure. These experiences seem to be underappreciated in Europe and America, because similar tools are being used again to stimulate the economy, although demographicconditions are almost identical. The consequences are foreseeable: A growing debt of the states without resulting in sustainable growth or higher inflation.

The illusion of growth through expansive monetary policy

The assumption that the consumption behavior of the aging societies could be fundamentally changed by means of ever new monetary and fiscal policy measures turns out to be a fallacy. The vast majority of the elderly population will use additional funds, if at all, for their own hedging or debt reduction, but will not fall into excessive consumer behavior. theneeds have shifted: Expenditure on health, care and safety is in the foreground, while demand for luxury goods or new consumer trends is becoming less important. The assumption that cheap money could generate permanently high demand is based on a misjudgment of social reality. The power of central banks and governments is triggeredYour limits if the basic conditions for growth and consumption are missing.

Consequences for the financial markets: stagnation and falling corporate profits

The economic and social changes are also reflected in the financial markets. Companies’ profit margins come under pressure, net profits are stagnating or declining, and future expectations are becoming more cautious. The valuations on the stock exchanges are faltering, because with falling corporate profits, the multipliers are also shrinkingwhich will be assessed for future income. This development does not affect all companies to the same extent, but it is emerging as a superordinate trend. Experienced market participants can already see which companies will have difficulties in this environment, which ones can assert themselves and which even benefit from them. For the broad mass of investors, this change isHowever, it is still hardly visible, which opens up space for speculation and risky betting. The joy of those who are counting on falling prices grows with every day the majority still hopes for a miracle. Experience from Japan shows how long such a phase can last and how profound the consequences for the economy and society are.

The limits of monetary control in aging societies

The development of the past few years illustrates the limits that monetary policy controls in aging societies are hitting. Despite the massive expansion of the money supply and historically low interest rates, the hoped-forward upswing will not materialize. The causes lie in the distribution of the newly created money, the focus on financial markets and demographic reality. The instruments ofCentral banks are losing their impact as long as the social framework is not in line with the economic goals. The danger of a stagnant economy, combined with growing national debt and an ever-breaking financial market structure, is real. The lesson from history is that sustainable growth demands more than cheapmoney: It needs social change, innovation and a policy that focuses on people’s actual needs. Until then, the hope of a reversal of development remains – but the signs are more likely to continue stagnation, which began in Japan and is now also becoming increasingly apparent in the West.