Anna's Deep Dives

_{Just facts, you think for yourself}

How Liquidity Flows Through Markets

Central Bank Asset Purchases (QE) & Money Supply

Central banks inject money into the economy through asset purchases. This process is called Quantitative Easing (QE). Under QE, a central bank creates new electronic money. It uses this money to buy assets, typically government bonds, from financial institutions.

These purchases increase the reserves held by commercial banks at the central bank. This action directly expands the monetary base. It aims to boost the broader money supply circulating in the economy.

The U.S. Federal Reserve implemented large-scale QE after the 2008 crisis. Its assets grew from less than $1 trillion before the crisis to over $4 trillion by 2014. By 2022, the Fed's balance sheet reached about $9 trillion.

The European Central Bank (ECB) also utilized extensive QE. It started its major asset purchase program in 2014. By 2025, its total bond purchases under various programs exceeded €5 trillion. During the peak of the COVID-19 pandemic crisis, the ECB acquired over €350 billion in assets by June 2020.

Emerging market central banks adopted QE during the COVID-19 pandemic too. Their purchases averaged 1.5 percent of GDP. These actions helped stabilize their financial markets without causing large currency devaluations.

QE aims to lower longer-term interest rates. It seeks to encourage bank lending and stimulate economic activity. The massive increase in central bank money affects global liquidity; M2 money supply growth eventually slowed to 2.1 percent globally by 2025 after earlier expansion. The opposite of QE, Quantitative Tightening (QT), shrinks the money supply and central bank balance sheets.

Role of Commercial Banks & Primary Dealers

The liquidity created by central banks flows through financial intermediaries. Commercial banks are the primary channel. They transmit monetary policy effects to households and businesses.

Banks accept deposits and provide loans. This credit creation process fuels economic activity. A bank's loan-to-deposit ratio reflects its lending intensity. Central bank policies, like reserve requirements set by the People's Bank of China which added RMB 1 trillion in liquidity, directly impact banks' capacity to lend.

Primary dealers form another critical link in the system. These are banks and securities firms authorized to trade directly with the central bank. They participate in central bank open market operations and government debt auctions.

Primary dealers help implement monetary policy. Their trading activity transmits central bank interest rate decisions to the broader market. They ensure liquidity in the vital market for government securities.

Global examples illustrate their function. Qatar established a Primary Dealer framework to enhance market operations. In Sri Lanka, non-bank primary dealers used 76 billion LKR in central bank financing for government securities. Kuwait International Bank's participation in the IILM supports the $4.14 billion Islamic short-term funding market (Sukūk).

Commercial banks and primary dealers act as the plumbing of the financial system. They distribute the liquidity provided by central banks. Their health and activity determine how effectively monetary policy influences the real economy.

Immediate vs. Lagged Effects on Financial Markets

The effects of liquidity flows appear at different speeds. Some market reactions are almost instantaneous. Other economic impacts take considerable time to develop.

Direct liquidity injections by central banks often trigger immediate responses. When the Reserve Bank of India injected 750 billion rupees ($8.63 billion), short-term rates and treasury bill yields fell within days. The People's Bank of China's 958.4 billion yuan ($131 billion) injection lowered interbank rates quickly. The Bank of Korea's 10 trillion won ($7.07 billion) support immediately influenced short-term markets.

Asset purchase announcements under QE can also have swift effects. Research suggests a $1 billion increase in the Federal Reserve's balance sheet could impact the S&P 500 index within a week, indicating rapid market processing. Vietnam's stock market showed positive responses to U.S. monetary policy news during the Global Financial Crisis.

However, the broader impacts of monetary policy actions unfold with significant lags. Changes in central bank policy rates, like the ECB's cut to 2.75% in January 2025 or the Fed's hikes to 5.25% by mid-2023, take time to influence overall inflation, GDP growth, and employment.

Estimates suggest these peak effects might take 12 to 18 months in the euro area. The Reserve Bank of Australia notes lags of 9 to 12 months for GDP impacts and 18 months for inflation effects from cash rate changes. The long-term consequences of QE, such as potential effects on asset allocation or investor confidence, also develop slowly over time. The ECB's plans for Quantitative Tightening estimate a gradual 35 basis point impact on interest rates from bond runoff.

The Debt Engine: Corporate, Government, and Household Borrowing

Cheap Credit & Its Impact on Corporate Buybacks, M&A

Low interest rates provided cheap fuel for corporations. This easy borrowing encouraged specific financial activities. Share buybacks became a dominant use of corporate cash.

U.S. companies allocated approximately $6 trillion to repurchase their own shares from 2010 to 2019. Forecasts projected over $1 trillion in buybacks for 2025 alone. Cheap debt made funding these repurchases attractive.

Merger and acquisition (M&A) activity also flourished. Global M&A volume reached $4 trillion in 2024. This represented the highest level since before the COVID-19 pandemic.

Corporate leaders increasingly saw M&A as vital for expansion. In 2023, 80 percent of executives considered M&A key to their growth strategy. This marked a rise from 56 percent in 2021.

The technology sector led this M&A wave. Tech deals comprised 30 percent of all transactions in 2024. Companies acquired technology to enhance competitiveness. Renewable energy M&A also saw growth, totaling $50 billion in 2025, indicating strategic shifts funded by accessible capital.

Cheap credit impacted other corporate areas like commercial real estate. It improved cash flow for projects but also pushed up prime asset prices. Individual company responses varied; some firms in India cut capital spending while others increased research investment.

Government Bond Issuance & Fiscal Expansions

Governments worldwide utilized low borrowing costs extensively. They issued large amounts of debt to fund spending, investment plans, and crisis responses. This led to a substantial increase in global public debt.

By the end of 2024, global public debt reached about 95.1 percent of global GDP. Total government debt surpassed $100 trillion globally by that year. Projections suggested the global debt-to-GDP ratio could reach 100 percent by the end of the 2020s.

Major advanced economies accumulated high debt levels. The U.S. federal debt-to-GDP ratio hit 120 percent in mid-2024. The Congressional Budget Office projected interest payments alone would consume 3.1 percent of U.S. GDP. The average debt ratio across advanced economies stood at 83 percent.

European governments also borrowed heavily. Germany unveiled a €500 billion investment plan in 2023, equal to 12 percent of its GDP. The overall EU government debt-to-GDP ratio was 83.3 percent. Governments increased issuance of green bonds, though rising rates later made this more costly.

Developing nations faced particularly severe debt burdens. Their combined public and private debt reached 206 percent of GDP by the end of 2023. The IMF reported over 50 developing countries were spending more than 10 percent of government revenues servicing debt. For 3.3 billion people, debt interest payments exceeded spending on health or education.

Consumer Credit Growth (Mortgages, Auto Loans, etc.)

Households actively participated in the borrowing boom fueled by low rates. Cheap credit made loans for homes, cars, and other purchases more accessible. This resulted in rising consumer debt levels globally.

In the United States, total outstanding consumer credit climbed to $5.113 trillion by October 2024. More than 70 percent of American adults held some type of debt. Canadian consumer debt reached $2.5 trillion in Q3 2024, a 4.1 percent increase year-over-year. Young generations like Millennials and Gen Z held a large share ($1.1 trillion) of Canadian household debt.

Mortgage borrowing expanded significantly. While benchmark rates rose later, mortgage rates around 6.5-7 percent in 2025 were down from peaks above 8 percent in October 2023. A large portion of U.S. homeowners, about 60 percent, held mortgages with fixed rates below 4 percent secured during the lowest rate periods. Household debt relative to income was high in places like the UK (130%) and South Korea (108% of GDP).

Auto loans contributed to the growth. The average Annual Percentage Rate (APR) for new auto loans was 7.1 percent in September 2024. However, rising rates led 60 percent of potential buyers to delay their purchases.

Credit card debt saw a dramatic surge. The average U.S. credit card APR hit 24.92 percent, its highest level since 2019. Approximately 40 percent of Americans carried an average balance of $6,900. Services like "Buy Now, Pay Later" also added to consumer indebtedness.

Global Policy Domino Effect

Synchronization vs. Contagion: G7 & Emerging Markets

Monetary policies set by major economies create global ripples. Sometimes, policies across countries move together (synchronization). Other times, negative shocks spread rapidly from one market to another (contagion).

Policies within the G7 nations recently showed divergence. The U.S. Federal Reserve kept interest rates relatively high due to a stronger economy. In contrast, the European Central Bank started cutting rates in June 2024 and reduced its main rate to 3.75% in 2025 to combat economic weakness.

Emerging markets (EMs) respond differently to these shifts. Indonesia, for example, raised its interest rates. Some Latin American countries lowered rates as inflation eased. This divergence creates challenges for international capital flows and economic forecasting. Global inflation was expected to fall to 4.9% in 2025.

Easy money policies can heighten contagion risks. Low interest rates might fuel asset price bubbles. High national debt levels make countries more vulnerable when shocks hit. Increased financial interconnectedness, partly through Non-Bank Financial Institutions (NBFIs) holding 47 percent of global financial assets, can accelerate the spread of problems. Private credit markets exceeding $2 trillion also pose risks during stress.

Geopolitical events act as another source of contagion. The Russia-Ukraine conflict generated a 76.40 percent spillover effect across global stock indices. This negatively impacted markets like India and China. Investor psychology, sometimes leading to herding behavior during easy money periods, can amplify market swings.

China's economic slowdown presents a further contagion channel. A projected slowdown to 3 percent growth by the decade's end carries global implications. A 10 percent fall in Chinese imports could reduce euro area GDP by 0.7 percent.

Foreign Exchange Implications

Central bank policies directly influence foreign exchange (FX) rates. Easy money, characterized by low interest rates and increased money supply, often tends to weaken a nation's currency. This makes its exports cheaper for foreign buyers.

Conversely, tighter monetary policy generally strengthens a currency. The U.S. dollar appreciated significantly between 2002 and 2011. More recently, Federal Reserve interest rate hikes aimed at curbing inflation further boosted the dollar's value. A strong dollar can hurt U.S. export competitiveness.

Tariffs also affect currency values. President Trump's tariffs increased the cost of imports, which contributed to dollar strength according to some analyses. The IMF generally finds tariffs strengthen the imposing country's currency but do not necessarily improve its trade balance.

The Japanese yen experienced high volatility due to Japan's prolonged low interest rates. This environment encouraged "carry trades," where investors borrowed cheap yen to invest in higher-yielding assets abroad. These flows pushed the yen to a historic low of 161.60 per U.S. dollar in August 2024. An unexpected Bank of Japan rate hike caused a 3 percent drop in the S&P 500, showing cross-market impacts.

Despite a persistent U.S. trade deficit, the dollar remains strong. Its status as the world's primary reserve currency creates consistent demand. High levels of foreign investment in U.S. assets also support the dollar's value.

Competitive Devaluations & Trade Tensions

Monetary policy divergence and economic pressures can lead to competitive devaluations. Countries might deliberately weaken their currency. They hope to gain an edge in international trade by making their exports cheaper.

Japan's yen depreciation boosted its exports by 11.9 percent in May 2024. However, it also hurt domestic businesses reliant on imports. The Bank of Japan intervened by spending ¥3.57 trillion ($30.11 billion) to support the currency.

Trade tensions often accompany currency fluctuations. The U.S.-China trade conflict intensified with multiple tariff rounds starting in 2018. In response to U.S. tariffs, China allowed the yuan to weaken in 2019. Trade volumes between the two countries subsequently declined.

In 2025, the trade conflict escalated again. The U.S. implemented tariffs raising the total rate on Chinese goods to 54 percent. China retaliated with tariffs up to 67 percent on U.S. goods. The European Union and Canada also imposed countermeasures. These actions fueled fears of a global trade war.

Economists anticipated China might let the yuan depreciate towards 7.5 per dollar due to U.S. tariffs. This could disadvantage competitors like India in shared export markets. However, China maintains controls over its currency's value. By 2024, China's reliance on the U.S. export market had already decreased, with U.S.-bound exports falling to 14.6 percent of its total from 19 percent in 2017.

Other countries implemented defensive trade measures. Turkey imposed a 40 percent tariff on Chinese electric vehicles. Chile applied tariffs of 25-34 percent on Chinese steel. These actions highlight the growing friction in global trade, often linked to currency movements and economic policies.

We don’t take shortcuts, chase headlines, or push narratives. We just bring you the news, straight and fair. If you value that, click here to become a paid subscriber—your support makes all the difference.

Table of Contents

(Click on any section to start reading it)

I. Introduction to the Near-Zero Era

1. From Crisis to ZIRP: The Road After 2008

• The 2008 Financial Meltdown’s Immediate Effects

• Political & Economic Motivations for Rate Cuts

• Timeline of Major Central Bank Interventions

2. Why Cheap Capital Mattered

• Defining ZIRP, NIRP, & QE

• Shifts in Investor Sentiment & Risk Appetite

• Emergence of Moral Hazard Concerns

II. The Mechanics of Easy Money

1. How Liquidity Flows Through Markets

• Central Bank Asset Purchases (QE) & Money Supply

• Role of Commercial Banks & Primary Dealers

• Immediate vs. Lagged Effects on Financial Markets

2. The Debt Engine: Corporate, Government, and Household Borrowing

• Cheap Credit & Its Impact on Corporate Buybacks, M&A

• Government Bond Issuance & Fiscal Expansions

• Consumer Credit Growth (Mortgages, Auto Loans, etc.)

3. Global Policy Domino Effect

• Synchronization vs. Contagion: G7 & Emerging Markets

• Foreign Exchange Implications

• Competitive Devaluations & Trade Tensions

III. Asset Bubbles & Market Distortions

1. Froth in Equities, Real Estate, and Beyond

• Overvaluation Signals in Key Sectors

• The Role of FOMO & Speculation

• Case Studies of Notable Bubble Expansions

2. Corporate Leverage: Risks & Ramifications

• Impact of Cheap Debt on Corporate Balance Sheets

• “Zombie” Companies & Distressed Debt

• Systemic Risks Triggered by Rising Rates

3. The Global Search for Yield

• Negative-Yielding Bonds & Risk-Tolerance Shifts

• Pension Funds, Insurers, & Yield Compression

• Alternative Investments (Art, Crypto, Farmland, etc.)

IV. Socioeconomic Consequences ^_(Premium)

1. Widening Wealth Gaps

• Asset Inflation & Unequal Gains

• Demographic Divisions (Generational, Regional)

• Potential Social Unrest & Policy Responses

2. Consumer Spending & Housing Affordability

• Mortgage Growth & Real Estate Booms

• Debt-Laden Households & Financial Fragility

• Shifts in Consumption Patterns

3. Emerging Markets on the Brink

• Pitfalls of Dollar-Denominated Debt

• Currency Volatility & Capital Flight

• Policy Tools to Withstand External Shocks

V. Central Bank Dilemmas & Policy Tools ^_(Premium)

1. Beyond Traditional Measures: QE, Forward Guidance, & More

• Evolution from Simple Rate Cuts to Full-Blown QE

• “Operation Twist” & Other Unconventional Tactics

• Balancing Short-Term Fixes vs. Long-Term Distortions

2. The Communication Challenge

• Importance of Signaling & “Fed Speak”

• Transparency vs. Strategic Ambiguity

• Global Market Sensitivity to Central Bank Announcements

3. Unintended Consequences & Moral Hazard

• Over-Reliance on Central Bank Backstops

• Encouraging Reckless Risk-Taking

• Eroding Faith in Fiat Systems & Central Bank Credibility

VI. From Easy Money to a New Equilibrium ^_(Premium)

1. The Path to Rate Normalization

• Historical Rate Hike Cycles & Their Fallout

• Managing Financial Stability Amid Rising Rates

• Challenges of Unwinding Bloated Central Bank Balance Sheets

2. Lessons Learned & Looking Ahead

• Key Takeaways for Policymakers & Regulators

• Investor Strategies in a Post-ZIRP World

• Economic & Structural Reforms for Future Resilience

3. Reimagining Global Finance Post-ZIRP

• Potential New Frameworks for Monetary Policy

• The Future of Digital Currencies & FinTech Solutions

• Long-Term Implications for Global Growth & Stability

Baked with love,

Anna Eisenberg ❤️