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Central Banking Goes Negative
Central Banking Goes Negative
NEW HAVEN – In what could well be a final act of desperation, central banks are abdicating effective control of the economies they have been entrusted to manage. First came zero interest rates, then quantitative easing, and now negative interest rates – one futile attempt begetting another. Just as the first two gambits failed to gain meaningful economic traction in chronically weak recoveries, the shift to negative rates will only compound the risks of financial instability and set the stage for the next crisis.
The adoption of negative interest rates – initially launched in Europe in 2014 and now embraced in Japan – represents a major turning point for central banking. Previously, emphasis had been placed on boosting aggregate demand – primarily by lowering the cost of borrowing, but also by spurring wealth effects from appreciating financial assets. But now, by imposing penalties on excess reserves left on deposit with central banks, negative interest rates drive stimulus through the supply side of the credit equation – in effect, urging banks to make new loans regardless of the demand for such funds.
This misses the essence of what is ailing a post-crisis world. As Nomura economist Richard Koo has argued about Japan, the focus should be on the demand side of crisis-battered economies, where growth is impaired by a debt-rejection syndrome that invariably takes hold in the aftermath of a “balance sheet recession.”
Such impairment is global in scope. It’s not just Japan, where the purportedly powerful impetus of Abenomics has failed to dislodge a struggling economy from 24 years of 0.8% inflation-adjusted GDP growth. It’s also the US, where consumer demand – the epicenter of America’s Great Recession – remains stuck in an eight-year quagmire of just 1.5% average real growth. Even worse is the eurozone, where real GDP growth has averaged just 0.1% over the 2008-2015 period.
…click on the above link to read the rest of the article…
The Fed Has Created A “Monster” And Just Made A “Dangerous Mistake,” Stephen Roach Warns
The Fed Has Created A “Monster” And Just Made A “Dangerous Mistake,” Stephen Roach Warns
Stephen Roach is worried that the Fed has set the world up for another financial market meltdown.
Lower for longer rates and the proliferation of unconventional monetary policy have created “a breeding ground for asset bubbles, credit bubbles, and all-too frequent crises, so the Fed is really a part of the problem of financial instability rather than trying to provide a sense of calm in an otherwise unstable world,” Roach told Bloomberg TV in an interview conducted a little over a week ago.
To be sure, Roach’s sentiments have become par for the proverbial course. That is, it may have taken everyone a while (as in five years or so) to come to the conclusion we reached long ago, namely that central banks are setting the world up for a crisis that will make 2008 look like a walk in the park, but most of the “very serious” people are now getting concerned. Take BofAML for instance, who, in a note we outlined on Wednesday, demonstrated the prevailing dynamic with the following useful graphic:
Perhaps Jeremy Grantham put it best: “..in the Greenspan/ Bernanke/Yellen Era, the Fed historically did not stop its asset price pushing until fully- fledged bubbles had occurred, as they did in U.S. growth stocks in 2000 and in U.S. housing in 2006.”
Indeed. It’s with that in mind that we bring you the following excerpts from a new piece by Roach in which the former Morgan Stanley chief economist and Yale fellow recounts the evolution of the Fed and how the FOMC ultimately became “beholden to the monster it had created”.
* * *
From “The Perils of Fed Gradualism” as posted at Project Syndicate
By now, it’s an all-too-familiar drill. After an extended period of extraordinary monetary accommodation, the US Federal Reserve has begun the long march back to normalization.
…click on the above link to read the rest of the article…
The Wrong War For Central Banking
The Wrong War For Central Banking
Fixated on inflation targeting in a world without inflation, central banks have lost their way. With benchmark interest rates stuck at the dreaded zero bound, monetary policy has been transformed from an agent of price stability into an engine of financial instability. A new approach is desperately needed.
The US Federal Reserve exemplifies this policy dilemma. After the Federal Open Market Committee decided in September to defer yet again the start of its long-awaited normalization of monetary policy, its inflation doves are openly campaigning for another delay.
For the inflation-targeting purists, the argument seems impeccable. The headline consumer-price index (CPI) is near zero, and “core” or underlying inflation – the Fed’s favorite indicator – remains significantly below the seemingly sacrosanct 2% target. With a long-anemic recovery looking shaky again, the doves contend that there is no reason to rush ahead with interest-rate hikes.
Of course, there is more to it than that. Because monetary policy operates with lags, central banks must avoid fixating on the here and now, and instead use imperfect forecasts to anticipate the future effects of their decisions. In the Fed’s case, the presumption that the US will soon approach full employment has caused the so-called dual mandate to collapse into one target: getting inflation back to 2%.
Here, the Fed is making a fatal mistake, as it relies heavily on a timeworn inflation-forecasting methodology that filters out the “special factors” driving the often volatile prices of goods like food and energy. The logic is that the price fluctuations will eventually subside, and headline price indicators will converge on the core rate of inflation.
This approach failed spectacularly when it was adopted in the 1970s, causing the Fed to underestimate virulent inflation. And it is failing today, leading the Fed consistently to overestimate underlying inflation. Indeed, with oil prices having plunged by 50% over the past year, the Fed stubbornly maintains that faster price growth – and the precious inflation rate of 2% – is just around the corner.
…click on the above link to read the rest of the article…
The Irony Of Market Manipulation
The Irony Of Market Manipulation
Having gazed ominously at the extreme monetary policy smoke-and-mirrors intervention in bond markets, and previously explained that “the stock market is to important to leave to the vagaries of an actual market.“ While the rest of the world’s central banks’ direct (BoJ) and indirect (Fed, ECB) manipulation of equity markets, nobody bats an eyelid; but when PBOC steps on market volatility’s throat (like a bull in a China bear store), people start complaining… finally. There is no difference – none! And no lesser Asian expert than Stephen Roach warns that we should be afraid, very afraid as he states, the great irony of manipulation, he explains, is that “the more we depend on markets, the less we trust them.”
BoJ is directly buying Japanese Stocks and the rest of the world’s central banks are buying bonds with both hands and feet… for the first time ever, central banks are set to monetize all global government debt, something we showed previously…
But with China’s heavy handed “measures” seemed to save the world (until the last 2 days)…
9-Jul-15 Thurs CSRC:
1) suspended reviews of IPOs & other secondary market fundraising activities from Jul 9;
2) asked listcos to choose 1 out of 5 measures (including share buyback by major shareholders, companies and senior executives, employee stock buyback
incentive & employee stock ownership) to protect share price.
China Banking Regulatory Commission (CBRC):
1) allowed banks to roll over matured loans pledged by stocks;
2) encouraged banks to provide liquidity to China Securities Finance Corp Ltd. (CSFC) & offer financing to listed companies to buy back shares.
China Insurance Regulatory Commission (CIRC): insurance asset mgt companies should not demand early repayment from brokers for debt products on margin financing.
Minister of Public Security & CSRC: to investigate malicious short selling activities on Jul 9.
State-Owned Assets Supervision & Admin Commission (SASAC): asked provincial SASACs to submit daily report if local SOEs’ increased stock holdings starting Jul 9.
CSFC: issued Rmb80bn short-term note in interbank market on Jul 9, yield at 4.5% p.a., duration at 3 months; and will purchase mutual fund products to stabilize liquidity.
…click on the above link to read the rest of the article…
