A couple of weeks ago we had the central bank “rock-star concert” in Jackson Hole. There we heard Federal Reserve chairwoman Janet Yellen start yelling about the labour market following the Great Recession and provided a few breadcrumbs as to how this narrative may unfold. The president of the European Central Bank (ECB) Mario Draghi meanwhile offered a call for action to halt deflation, even suggesting a European version of quantitative easing.

At the end of the day a lot was said that ultimately offers little in clarity but a lot in conjecture. All the central bank fanfare aside, what is really the current macro story is yields — or what is left of them? The table shows G-10 yields as of August 29.

You will notice from the table that there are three countries with ten-year yields less than one percent! Anchor’s GDP-weighted index of the G10 ten-year government bond yields dropped to 1.78 percent at the end of August.

This is just 26 basis points shy of the all-time low set in May of 2013. Part of this plunge in yields worldwide is the result of Mario Daghi’s comments and part is the escalating fear of worldwide deflation.

Several business surveys in Germany indicate a modest slowdown in economic activity which does not bode well for overall Eurozone growth. Unfortunately, the European central bankers have proven to be slow in their actions which have accentuated the recent downturn in inflation expectations.

As long as words are not followed by action the odds are high that bond yields will be pushed lower in the Eurozone. In fact BCA analyst Chen Zhao recently wrote: “It is entirely possible that the developed world is converging to zero inflation in a few years …. As things stand today, inflation is undershooting expectations in every major economy around the world, with the euro zone on the precipice of mild deflation. Global bond yields could head even lower for longer.”

To say that the current year’s yield decline is unexpected is probably an understatement. Virtually all of Wall Street was calling for higher yields this year. They don’t call the market “The Great Humiliator” for nothing.

This global threat of deflation is a serious risk. More so is the fact that this risk is slowly revealing that the “Emperor” (the central banks) has no clothes. The assumption that monetary policy will fix the labour market and spur traditional forms of inflation seems to me to be extremely misplaced. Central bank policies have been effectively neutralised.

Even dropping rates to all-time lows globally and tripling the amount of excess reserves since the commencement of the financial crisis has not made much of a difference in this regard.

Sure corporations and households have been able to refinance at lower rates to help with debt servicing but it hasn’t truly altered the world’s growth trajectory. Central banks have essentially only offset the poor government polices around the world.

Government spending, redistribution, and regulation have become increasingly burdensome and have become an enormous drag on growth which even aggressive monetary policy can’t overcome (see Japan).

Let’s look to Europe to see what is not working. François Hollande’s government in France has offered a combination of excessive taxation and opulent government spending, which has effectively killed growth.

Ireland’s flexible labour market and quick adoption of structural reforms from the so-called Troika helped stabilise its recovery. This is in stark contrast with Spain where their inefficient labour markets are only beginning necessary reformation. The world, in my opinion, needs to refocus on effective fiscal policies that aid in growth. This means adopting policies that encourage lower taxes, expansion of global trade and the reduction of government encroachment.

Meanwhile, central banks around the world will likely keep rates pinned to nothing for much longer than many want or believe — hoping that monetary policy will magically alter aggregate demand. Maybe they should all take a visit to Japan ….

Nathan Kowalski is the chief financial officer of Anchor Investment Management Ltd. The views expressed are his own. Anchor Investment Management Ltd is licensed to conduct investment business by the Bermuda Monetary Authority. He can be reached via e-mail at nkowalski@anchor.bm

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