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The fact that the equilibrium prices of financial assets (long-term interest rates, share prices, credit spreads) are de facto prices administered by central banks and no longer have any information content (on growth, inflation, borrower defaults, earnings, fiscal deficits, etc.) is a serious problem. This is because savers and investors no longer receive this information by observing financial market prices. As a result, they can no longer allocate their savings optimally – efficiently – between financial assets, per Natixis.

See: Number of zombie firms to increase more than the rise in bankruptcies – Natixis

Key quotes

“A highly expansionary monetary policy consists in central banks buying massive quantities of bonds, sovereign bonds and also smaller amounts of corporate bonds. Accordingly, savers and investors switch to other asset classes, also corporate bonds and equities. It is important to understand that this leads to a demand for financial assets that does not have the normal characteristics. Central banks buy bonds without taking into account the yield on these bonds. Other investors are then forced to switch to other financial assets, and therefore express abnormally strong demand for these assets.”

“The fact that abnormally strong demand for financial assets appears, regardless of the yield and risk characteristics of these assets, eliminates the informational content of asset prices, since demand for financial assets no longer depends on the characteristics of the assets.”

“In the recent period (2019-2020), we have seen that long-term interest rates have remained low despite the fiscal deficits and, in the most recent period, despite the rise in expected inflation; credit spreads have reacted only slightly to the rise in corporate default rates and share prices have reacted only slightly to changes in expectations for growth and earnings.”

“So long-term interest rates no longer provide information on the expected state of public finances or expected inflation; credit spreads no longer provide information on the outlook for corporate bankruptcies; share prices no longer provide information on the future trend in activity or earnings.”


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