It’s not usually a good thing when your biggest export market, biggest source of foreign direct investment, and the country that owns your entire banking oligopoly experiences a major economic slowdown. Yet New Zealand, at least in the past decade or so, watched its fortunes wane as Australia’s mining sector boomed, while the bust in Oz has gone hand-in-hand with stronger growth in Middle Earth.
You might think a central bank looking at inflation significantly below its target, a relatively weak jobs market, and a policy interest rate well above zero would be keen on loosening up. In the case of Australia, however, you would be wrong.
Compared to most rich countries, Sweden handled the twin challenges of the 2007-8 crisis and the never-ending euro crisis with aplomb. The share of people in Sweden with a job is at all-time highs. Real output per person is at all-time highs, and has grown much more than in most other rich countries over the past ten years. Underlying inflation is essentially at its long-term average. The trade surplus remains massive. And Swedish house prices continue to float into the stratosphere. Yet despite all this, Sweden’s central bank has been unusually aggressive in trying to stimulate its economy by cutting interest rates far below zero, buying assets, and cheapening its (already undervalued) currency. We recently had the chance to talk to a former Swedish central banker about this. He suggested the Riksbank could potentially justify its behaviour as an attempt to heal structural problems in Sweden’s jobs market.
Good idea: More reactive than a quantitative target; can signal long-term commitment to policy; potentially reduces purchases required if market believes your yield target is credible; potentially good for effectiveness of fiscal policy; potentially good for banks as it can imply a steeper yield curve; and allows for an “automatic exit” from the policy if everything goes to plan.
That is, by diluting if not outright abandoning the quantitative/ balance sheet expansion aspect of its policy with a move to QQE with yield control has the BoJ admitted that the current stage of central bank action is nearing its limits? Citi’s Buiter et al seem to think so:
It has been called China’s Great Ball of Money, the vector through which bubbles come and pass. Of course any particular bubble is not the beginning. There is no beginning in a China which is more and more interconnected, meaning its risks and excesses flow as easily as that giant ball of money. But just as property turns to stocks turns to bonds turns to property once more… this bubble is a beginning*. From SocGen’s Wei Yao, with our emphasis: … asset price appreciation seems to be worryingly unstoppable. Especially, housing market indicators continued to show a brisk momentum in sales and prices, but a muted construction recovery. Even the officials at the central bank admitted that there is a bubble.
The Fed sure seems to be getting comfortable with the idea of acting as a centralised counterparty for collateral transactions. It’s unclear whether the market’s quite as enamored with the idea. This year’s Jackson Hole conference was on monetary policy implementation, which often serves as a shorthand for the following questions: how should the Fed control interest rates, and how big of a role should it play in financial markets? While the topic seems arcane, it’s important to understand how thoroughly the Fed has changed its approach to controlling interest rates (and through that, its relationship with markets). The topic isn’t just for technocrats — the debate now is over whether that change should be a permanent one.
Or illusions… Before that though, here is a thing we know and have known since the ECB launched its (probably) soon to be extended QE programme: Draghi et al will have to deal with the idea of QE scarcity — it’s running out of available bonds to buy. It’s already coming up against a self-imposed constraint and it has been well flagged that the big one, Germany, is looming as an ever larger roadblock. Here is a thing we also know and have already mentioned in this post: The constraint is self-imposed and, as such, can be alleviated. Like this, for example:
Inflation is always and everywhere a monetary phenomenon…Government spending may or may not be inflationary. It clearly will be inflationary if it is financed by creating money, that is, by printing currency or creating bank deposits. If it is financed by taxes or by borrowing from the public, the main effect is that the government spends the funds instead of the taxpayer or instead of the lender or instead of the person who would otherwise have borrowed the funds. Fiscal policy is extremely important in determining what fraction of total national income is spent by government and who bears the burden of that expenditure. By itself, it is not important for inflation. –Milton Friedman, “The Counter-Revolution in Monetary Theory” (emphasis in original) Friedman’s idea was radical when he suggested it in 1970, but it has since become boringly mainstream. Nowadays the standard line is that central banks have all the power and (usually) offset the impact of fiscal policy changes. So it was refreshing to read a speech by Christopher Sims at this year’s Jackson Hole economic symposium suggesting that the common view has things backwards. To the extent central banks have any impact on inflation, it’s by tricking elected officials:
Four banks have stolen loads of column inches on Wednesday with news that they are developing “a new form of digital cash that they believe will become an industry standard to clear and settle financial trades over blockchain, the technology underpinning bitcoin”. In the fanfare, however, lots of common sense has been abandoned. The big idea here (allegedly) is that banks will use a “utility settlement coin” to bypass the need for costly and inefficient fiat liquidity from the cbank. The utility settlement coin, based on a solution developed by Clearmatics Technologies, aims to let financial institutions pay for securities, such as bonds and equities, without waiting for traditional money transfers to be completed. Instead they would use digital coins that are directly convertible into cash at central banks, cutting the time and cost of post-trade settlement and clearing.
Citi’s Matt King has some harsh words for central bankers ahead of this week’s gathering in Jackson Hole, Wyoming: he says they’ve broken the market. King echoes a group of fund managers who say central banks’ stimulus efforts are distorting the way global markets function. The problem is this: with negative yields on $13 trillion of safe assets, investment managers are crowding into the shrinking group of investments with yield — or into securities they may be able to sell to central banks.
Here’s an interesting thought from Grant Spencer, the Deputy Governor in charge of financial stability at the Reserve Bank of New Zealand: While boosting the capacity for development and housing supply is paramount, it is also important to explore policies that will keep the demand for housing more in line with supply capacity…We cannot ignore that the 160,000 net inflow of permanent and long-term migrants over the last 3 years has generated an unprecedented increase in the population and a significant boost to housing demand…There may be merit in reviewing whether migration policy is securing the number and composition of skills intended. While any adjustments would operate at the margin, they could over time help to moderate the housing market imbalance.