The plenty of interest rate cuts, which ricocheted in the markets, is certainly not enough. The widespread turmoil in the markets reiterates that what really matters is the volume of money, not their price. Markets need additional support from central banks in times of crisis because that’s when liquidity runs out.

Other central banks should quickly follow the US Federal Reserve and begin new rounds of quantitative easing, rather than lowering interest rates further. We have probably already passed the so-called turning point, after which the cuts actually hurt the financial system and thus destroy the liquidity.

The global financial crisis of 2007-2008 – let’s call it GFC1 (Global Financial Crisis 1) – was a supply shock to the liquidity mechanism that triggered a subsequent shock of demand in the real economy. But this crisis, GFC2, is a shock to supply for the real economy, which has triggered a massive safety shock in the search for more liquidity.

The surge in repo rates in September 2019 was supposed to be a warning, similar to the 2007 failure of specialist mortgage lenders such as Northern Rock, before GFC1. World debt now stands at about 130 trillion USD higher than GFC1, according to our own calculations based on IMF data. Within this, corporate debt is growing by as much as 155%.

Those about 280 trillion USD of debt have an average maturity of 5 years, which means that about 50-60 trillion USD has to be refinanced every year. This type of financing demand is too high, as the current financial capacity of the balance sheets is limited and there is no security reserve to absorb systemic shocks such as the coronavirus.

Mature financial systems are essentially refinancing mechanisms where balance sheet capacity is vital. Regulators failed to cope with this. The last time Citigroup’s Chuck Prince picked up the award for the most inappropriate comment on the crisis when he said the bank was “still dancing”. This time it may be Christine Lagarde of the European Central Bank, who said: “Our job is not to limit spreads (in government bond yields)”.

Worse than that, central banks are progressively pulling the rug out from under them. In 1971, when they discontinued the Bretton Woods system, they relinquished control of their currencies. By the early 21st century, they had lost control of their banking and credit systems. Over the last few years, though they will vigorously deny it, they have also lost control of their sovereign bond markets.

Take for example the collapse in the yield of 10-year US government securities, which is determined by the markets and by the GFC1 fell by a huge 4.5 percentage points. At the moment, excessive debt has become so pernicious and widespread that even in the last market crash, even government securities have become dubious collateral.

It is true that US banks now have huge surplus reserves. It is also true that bond dealers hold government securities and many emerging market economies self-sufficient against the shortage of US dollars through large foreign exchange reserves. But can these assets be disposed of quickly in times of crisis? The so-called market and financing liquidity interact negatively in times of crisis, as falling asset prices deplete collateral values ​​and thus destroy credit.

This puts a strain on the dealers and means that stock prices, which are gradually climbing the ladder during normal times, collapse in crises because dealers cannot hold stocks.

The Fed’s balance sheet could easily exceed 6 trillion USD in the coming weeks, up from about 4.3 trillion USD now. We need to call this the QE5 quantitative easing cycle, because, strictly speaking, the increase of about 400 billion USD in the Fed’s balance after September 2019 was QE4.

Even so, the eventual QE5 excludes possible future large-scale swap lines that meet the demanding needs of dollar-hungry supply chains around the world whose cash flows are drying up.

In short, we still need more quantitative relief. Regulators not only forced the debt-to-GDP ratio to rise sharply after GFC1 by reducing interest rates and depreciating credit but ignored the more dangerous fall in coverage between the global pool of global liquidity available and global debt.

The quantitative easing worked in 2008 insofar as it encouraged risk-taking and encouraged bank lending. It will now work again, ideally with fiscal measures.

But regulators’ mechanical response to falling interest rates is only exacerbating the situation, boosting debt demand while destroying liquidity supply by eroding bank margins, and reducing credit incentives due to increasing counterparty risks.

Excessive debt is the shadow that has gone down in the previous crisis and is now going down.