The rise and fall of the economic central planners

Yesterday was a day which was not a good one for Bank of England Governor Mark Carney. Even the usually supine and tame press corps have spotted that Forward Guidance has been a dismal failure especially for those who remortgaged on the hints and promises of higher mortgage rates only to find that they have fallen. In fact the situation was so bad we got an official denial that it had failed. Also the man who told us that monetary policy was not “maxxed out” ended up going down a familiar road with hints of lower interest-rates and more QE (Quantitative Easing). That does not go well with his mantra of higher interest-rate soon! Indeed this was the theme of the Open Mouth Operations as inflation and interest-rates were to be “higher…….or lower”.

Japan

We can take this theme wider as the attempts at central planning abroad are not going so well either. If we look at the Far East and Japan the policy of the Bank of Japan which is only a week old is already looking to be in dissarray. What I mean by this is that the mechanisms by which it is supposed to work are via a lower exchange-rate and via wealth effects from a higher stock market. If you boil Abenomics down to its basics then you have these two.

If we start with the value of the Yen then the main transmission mechanism is via the US Dollar exchange rate because it is the reserve currency in which most commodities are priced. But it is now at 116.9 which is stronger than it was before Governor Kuroda announced the move to an interest-rate of -0.1%. Yes the Yen shot lower as an initial response but since it has regained the ground and some. If we move to the Nikkei 225 equity index we see a similar theme where it shot higher on the announcement but since has come back to where it started and is now at 16,819 for the weekend.

The other mechanism that economic theory would suggest to be at play involves lower interest-rates stimulating the economy. We certainly have lower interest-rates although there are exceptions to the official -0.1% and bond yields too are now ultra-low with the ten-year JGB (Japanese Government Bond) falling as low as 0.01% this morning. But if lower interest-rates provided much of a stimulus in Japan we would not have the concept of the “lost decade(s)” would we?

The Euro

The situation described above has echoes for Mario Draghi and the ECB (European Central Bank). They have cut interest-rates to -0.3% promised further cuts to around -0.5% and are spending 60 billion Euros a month on QE bond purchases. Yet the Euro has gone boing like Zebedee in The Magic Roundabout and is now around 1.12 to the US Dollar. It has also risen to 1.30 versus the UK Pound £. Bloomberg sums it up thus.

The European Central Bank’s own calculation of the single currency’s effective exchange rate against a trade-weighted basket of 38 other currencies stood at 119.9056 on Thursday. That means that the real-world value of the euro has risen faster than the more commonly tracked exchange rate against the dollar.

Trade-weighted, the euro is at the highest level since Jan. 2, 2015,

The rally in 2016 so far has been approximately equivalent to a 0.6% increase in the ECB interest-rate. So we see that in the currency wars which are the major mover and shaker these days the central planners are seeing that their tanks are in retreat. Awkward. Although the ECB is in a better position than Japan because it is seeing some growth it must be wondering if that will now fade a bit.

US Federal Reserve

This is in disarray too right now. I do not particularly mean the response to the 0.25% interest-rate rise which has its own issues. I mean the Forward Guidance that we would get “3-5” more rises of that size in 2016. That has now disappeared with Federal Reserve members suggesting that financial markets have done much of their work for them. In the complicated world in which we live the US Dollar has fallen leading to partly cause the consequences discussed above and the US economy appears to have slowed.

Not good for our “masters of the universe” and the nearest to a world central bank we have.

Are bond yields signaling a recession?

In old-fashioned terms bond yields where they currently are would be signalling more of a depression than a recession. But of course the situation has been distorted by the trillions of bond purchases in the various QE programmes. However if we look at the yield curve we are seeing a reinforcement of this view. From Reuters.

The U.S. two-year/10-year yield curve, the difference between two-year and 10-year borrowing costs, this week fell to 110 basis points, the flattest in eight years…….A flattening yield curve has in the past been a reasonably accurate portent of slowing growth and an inverted curve, when the long-dated yield falls below the short-dated yield, an even more accurate guide to looming recession.

This has worked as a signal reliably in the past although the danger is of course that bond markets are now so distorted and manipulated that it may have changed. One thing we can say is that it is a failure for Forward Guidance that people are discussing it as confidence and psychology matter.

The Baltic Dry Index

This has been falling for a while now. It became fashionable for the economic commentariat to dismiss it hence the phrase Baltic Dry Index Twitter came to be. However rather awkwardly for them it continued to fall.

I know that a move of a particular percentage should have the same impact everywhere but it is at least more symbolic when you see a change from 3 to 2 as the big figure.

Harpex Shipping Index

There are challenges to the methodology of the BDI so let us also take a look at the Harpex which is based on rates for container ships. It hit a high of 646 last summer and since then it too has been falling and seems to have stabilised in 2016 around 364. As you can see it too is signalling in the words of Taylor Swift “trouble,trouble,trouble”.

Comment

There are plenty of signals right now that are flashing yellow alert about economic developments. We will have to see how they unfold but there very existence is a challenge to the central planners who bestride the globe proclaiming success as they overlook the moral hazards and junkie culture their polices and actions have encouraged. Eight years into the credit crunch they are in danger of repeating the lost decade from Japan.

Meanwhile the usually sensible and intelligent Gillian Tett has joined the control freak squad in the Financial Times today and returned us to the subject of banning cash so that negative interest-rates would be more effective.

For better or worse, the nature of money is changing. And who knows? If this revolution helps curtail tax evasion and terrorist finance — and makes our lives more convenient along the way, too — it might turn out to be one of the better developments to have emerged from the finance industry in recent years.

There is a good reply pointing out that terrorists use cars and mobile phones so should we ban them too? But underlying this is the fact that the central planners feel they need “More,More,More”

RIP Maurice White

it has been a bad year for music with one of the founders of Earth Wind & Fire dying overnight. Let me leave you with the opening verse of my favourite song of theirs.

Do you remember the
21st night of September?
Love was changing the minds of pretenders
While chasing the clouds away

 

 

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16 thoughts on “The rise and fall of the economic central planners

  1. Hi Shaun

    Although a lot of your blog is about “technical” issues you are aware that you cannot really look at a great deal of economics except through the prism of politics. The quote from Gillian Tett is illuminating as that the reasons given for a ban on cash are, to my mind, wholly specious and are merely an excuse for what would be outright wealth confiscation; it is making the unpalatable palatable by linking it with terrorism.

    Reverting back to central banks the policy of interest rate reductions in response to the slightest whiff of trouble goes back 20-25 years and not merely since 2008 and the distortions which you state have been going on for a very long time and we have now poisonously morphed into the certainty of “rewardless risk” from the previously optional “riskless reward”, a quite stunning inversion of morality.

    What is the alternative? From the point of view of TPTB – very little. If you own up and try to fix things this is not only very unpalatable to many but it destroys faith in some of the institutions; it shows them up as what they are: clueless and incompetent.

    It seems to me that, in effect, and by stealth, they have chosen to drive full speed into disaster and then pick up the pieces and rely on peoples willingness to make sacrifices in a crisis, sacrifices that should of course be unnecessary – but most will not realize this and will adopt the supine position.

    • Yes Bob, your second paragraph encapsulate the issue well. TPTB have indeed been trying for a long time. Economic indicators may rise and fall; another catastrophe may be averted; who knows. But we’ve all lost something we can never get back – Time. Pensions especially need time. We’ve lost so much of it that the lifetime income and wealth of whole swathes of the population has been seriously and permanently reduced. Now we’re talking of 7 years of emergency, foot-to-the-floorboards ZIRP and a lost decade or two. And the chances of a change in approach? – that’s virtually zero too. As you say Shaun, the cry is More!
      What an absolute and very costly shambles.

    • ‘The quote from Gillian Tett is illuminating as that the reasons given for a ban on cash are, to my mind, wholly specious and are merely an excuse for what would be outright wealth confiscation; it is making the unpalatable palatable by linking it with terrorism.’

      So true Bob.Good post.

  2. ohhh that sensible and intelligent Gillian Tit , sorry ,Tett ?

    1,For better or worse,
    = worse

    2,the nature of money is changing.
    see 1

    3,And who knows?

    neither her or Mark , obviously

    3,If this revolution helps curtail tax evasion and terrorist finance –

    a big word “If”, how about oil? ban that because ISIL was selling it to the Turks ? the “if” word is a
    get out clause – plausable denial can follow….

    4, and makes our lives more convenient along the way, too

    wishful thinking – good ploy to get hopes up – do we get a choice?

    5, it might turn out to be one of the better developments to have emerged from the finance industry in recent years.

    then again it might turn out to be a big pile of stinking poo – “it might” is another get out clause

    So basically she was looking out of the window ,chewing the end of her pencil and decided to write this
    day dream…

    Forbin

    PS: I hope she had popcorn , could be a good movie 😉

    • Hi Forbin

      If we wished to defeat ISIL then the easiest way to start would be to stop it selling oil. I think that the push to drive the oil price lower has the beneficial effect of reducing its finance. But we are told our military can spot a fly on the wall with all its technology and drones yet it cannot spot and stop ISIL stealing and pumping oil! We are being taken for fools again.

      As to central planners in your comment below they are now facing the consequences of past actions. Japan for example will be having a weekend with the Yen at 116.9 in spite of the fact that the US Dollar rallied overall after the employment report.

  3. “central planners who bestride the globe proclaiming success…. ”

    turning gold into lead all the way ……

    sort of Anti -Midas touch ….

    Forbin

    PS: doh! of course , what they mean by “success” is their portfolios and pension pots …..

  4. hmmm, I take it you were not aware of MiniTru article coming out today :-

    http://www.bbc.co.uk/news/business-35462879

    Are economics degrees fit for purpose?

    They still wont be , after reading the article it depressed me as there was no mention of Laws of Thermo-Dynamics or indeed anything do with physics

    I laughed at the statement “Mathematics was often a central part of the economics course. ” as it implied that perhaps it shouldn’d be? yes I agree psychology should be – they were worried about us “irrational” oomans …. 🙂

    Nor any mention that today’s neo-classical theory relies on fossil fuels ( lest they worry about energy inputs , poor dears )

    Still gotta laff , haven’t you ?

    Forbin

  5. Hi Shaun and thanks for another excellent article.
    I guess for Japan you can also add South Korea as the won greatly linked to the yen.
    The Central Banks are in disarray and Forward Guidance has been exposed for the nonsense that it is.
    Mark Twain said politicians like dipers should be changed often and for the same reason.I think he was right.

    • Hi Midge and thank you

      I agree about South Korea which finds itself trapped between two currency manipulators.On the one side China and on the other Japan. Although according to the Bank of Korea the situation is as follows right now.

      “while the Korean won has depreciated substantially
      against both the US dollar and the Japanese yen”

      Of course that will cause yet more anguish for Abenomics and the Bank of Japan.

  6. Hi Shaun
    The worldwide tangled web is
    still tightening.
    Let us hope that your cause
    reaches many more people, by
    whatever means. If as seems likely the
    fed rise has swung the pendulum this
    much in such a short time, then TBTF
    cannot last forever, or can it?

    Buffalo Springfield

    Something’s happening here
    But what it is ain’t exactly clear
    There’s a man with a gun over thee
    Tellin me I should beware

    JRH

  7. That central planners have failed, and continue to fail, is beyond doubt; the question, since all remain in place, is, “Where is their deserved fall?”

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