This really misses the point:
It’s time for central bankers to ask for help.
As the International Monetary Fund prepares to downgrade its outlook for the world economy again, monetary policy makers are running low of ammunition to fight a fresh downturn. Bank of America Merrill Lynch calculates they have reduced interest rates more than 600 times since the 2008 collapse of Lehman Brothers Holdings Inc. with theReserve Bank of India extending the run on Tuesday by cutting its benchmark more than expected.
While the European Central Bank and Bank of Japan haven’t ruled out buying even more bonds, there are doubts over how much more quantitative easing can achieve given yields are already around record lows and inflation still remains beneath the target of most policy makers. Even easier monetary policy may just end up propelling asset markets rather than economies.That leaves economists and investors increasingly looking toward governments to lead the rescue efforts should the China-led slowdown in emerging markets infect developed nations. BofA Merrill Lynch sees a 25 percent chance of a recession-like slump this year.
“Monetary policy is basically exhausted in terms of producing real growth and even inflation,” billionaire Bill Gross of Janus Capital Management LLC told Bloomberg Television this month. “Fiscal policy is the second piece of the leg that has to take place in order to get us back to where we want to go.”
Almost every day something happens that refutes the claims made here. First of all, there is no evidence that central bankers are not achieving their goals. The Fed is about to raise rates. The ECB seems satisfied with its progress in promoting a eurozone recovery. I don’t think it should seem satisfied, but it does. Ditto for the BOJ. Just weeks ago Draghi said he’d do more QE if necessary. And yet if you believe what I just quoted above, Draghi’s recent announcement should have had no impact on the markets, either because there are no more bonds to buy (out of ammo) or because QE has no effect. Instead here’s what happened to the euro:
If Bill Gross were correct then it should be impossible to guess what time of day Draghi made his announcement. But I’ll bet even Ray Lopez can guess. (Hint, easier than expected money usually makes a currency depreciate in value.)
A beggar thy neighbor policy? Let’s see how Wall Street reacted:
Wall Street has also welcomed Mario Draghi’s pledge to take more stimulus measure if needed.
The Dow Jones industrial average, and the broader S&P 500, are both up by almost 1%.
The following sounds appealing, until you think about the implications:
If the world economy enters a downdraft, Steven Englander, global head of G-10 FX strategy at Citigroup Inc., proposes a more revolutionary response, akin to the “helicopter money” once advocated by Milton Friedman.
In what he calls “cold fusion,” politicians would cut taxes and boost spending. Central banks would then cover the resulting increase in borrowing by purchasing more bonds as part of a commitment to permanently expand their balance sheets. The easier fiscal policy would be covered by QE Infinity.
“Politically it is difficult for central banks to outright endorse monetization of government debt, but faced with another slump and armed with ineffective policy tools, we expect that central banks will quickly give the wink and nod to fiscal measures,” Englander said in a report to clients last week.
The upshot would be greater purchasing power would be injected straight into the economy, increasing activity and inflation. Long-term bond yields would rise, yet short-term yields adjusted for inflation would turn negative.
Give him credit for recognizing that easier money can end up raising long term bond yields. And “cold fusion” sounds pretty cool. But otherwise this makes no sense. What does it mean to promise the injections will be permanent? That suggests you are targeting the monetary base, which could have catastrophic results. You need to make just enough of the injections permanent to hit your NGDP target. But if you do that, then the fiscal stimulus is pointless. Even Paul Krugman claims that monetary policy ineffectiveness occurs when central banks cannot make credible promises to make monetary injections permanent. But if you assume the promises are made and believed, then the fiscal part of the policy does nothing other than increase the national debt, worsening a problem that is already becoming increasingly worrisome as the population ages.