Today the Bank of England will or if you are reading this later in the day announce its monetary policy decision. For earlier readers care is needed as it voted yesterday and there is a danger that there are those trading in markets who already have the “Early Wire”. However those who used to be cheerleaders for monetary action have in many cases moved on to fiscal policy. Sadly they are very rarely asked why the policies of which they were not only enthusiastic advocates of but also promised success were apparent failures. After all why do we now need something else? Nobody except me seems to point out that it would be better to follow intellectual leaders who have a track record of being correct as opposed to being wrong.
Monetary policy as fiscal policy
The dividing line between the two supposedly separate types of economic policy has been crossed by the scale of the Quantitative Easing we have seen undertaken. If we look across the Channel to the Euro area we see that some 1.084 trillion Euros of bonds have been purchased under the current program of which some 875 billion are government bonds. The total is rising at some 80 billion Euros a month.
This means that debt repayments are much lower than they otherwise would be. This is because new bonds can be issued at such low yields. If I pick out one country Italy we see that its ten-year yield is a mere 1.2%. Yet it is a country where national debt is around 130% of GDP and only yesterday saw that banking problem theme return as an old favourite on this blog Unicredit reported not only lower capital ratios but lowered past ones too, “Tis but a scatch” etc. The Italian government is seeing quite a boost to its fiscal policy via debt interest. In more than a few cases at the shorter maturiites Euro area governments are actually paid to borrow now.
The Bank of England would step further onto such ground if it announces more QE itself today. But whatever it decides the net effect of all of the various policies is that the UK is before any announcement getting a fiscal boost from low Gilt yields. I cannot repeat enough how extraordinary a 1.62% yield for the 30 year Gilt actually is.
Why do we not here more about this? Governments like to take the credit themselves claiming confidence in their policies and so much analysis these days is simply copy and pasting such announcements.
The fiscal stimulus plan
There have been two versions of this over the past 48 hours or so. Let me start with the one for Japan by Adam Posen from the Financial Times. His ascent to prominence has been unaffected by the fact that he got UK inflation trends so wrong it led to him departing from the Bank of England.
What is promising about Mr. Abe’s latest stimulus package is not its size—the real amount spent will certainly be less than half of the announced ¥28.1 trillion ($276 billion)—but its ties to labor market reforms. The first rounds of Abenomics), the prime minister’s attempt to revitalize the Japanese economy in 2013 and 2014, showed the power of such a combination. Spending to increase the availability of public childcare places and cuts to taxes that penalized families’ second earners contributed to a substantial rise in women joining the labor force.
You may note the effort to present Shinzo Abe as a reformer which including Shinzo himself makes 2 people I think. Whilst I welcome a change in the misogynistic nature of Japanese society the fact is we would not be where we are if the third arrow of reforms had happened. Later we get an explanation of success being lower wages which is odd as previously we were told by people like Adam it would represent high wages. Up is the new down that sort of thing! Although I can almost agree with this bit “the benefits were hidden.”
Missing also is a confession that in fact Japan is getting benefits from lower inflation as opposed to the higher inflation that people like Adam are always so keen on.
No not in Japan yet but no doubt Adam will be along soon. This has appeared in the UK where a group of 35 economists have written a letter to the Guardian.
Instead of policies designed to fuel asset price bubbles and increase household debt, the Treasury and the Bank should co-operate to directly stimulate aggregate demand in the real economy.
So the sound of RAF Chinooks getting ready to take off to deliver Helicopter Money can be heard. Could they play Ride of the Valkyries like in the film Apocalypse Now? Also as the world moves on perhaps the cash could be delivered by drone and outsourced to Amazon! Here are some more details.
A fiscal stimulus financed by central bank money creation could be used to fund essential investment in infrastructure projects – boosting the incomes of businesses and households, and increasing the public sector’s productive assets in the process. Alternatively, the money could be used to fund either a tax cut or direct cash transfers to households, resulting in an immediate increase of household disposable incomes.
Has nobody told them that group letters by economists to newspapers have a dreadful track record? Anyway let us move onto what they expect from this.
In any of these policy scenarios, new money will be directly introduced into the real economy, stimulating aggregate demand and boosting employment, investment and spending.
Do you note the use of the word “real” relating to economy? You see they completely miss or choose to ignore the likelihood of inflation from such a move. The one clear example of something along these lines came from Ghana a couple of years or so ago. In response the Cedi went south and drove inflation higher.
Also there is not much democracy in an elected government submitting all its economic policy to an unelected panel of technocrats at the Bank of England.
it would remain a decision for the monetary policy committee as to the timing and size of any future stimulus.
I am not sure that bit was thought through as it would require legislation which I suspect would struggle to get a majority in the House of Commons. Frankly it shows signs of not being well thought through. Also there is an issue which is that such a policy is a response to an economic depression and the UK has done this we are told.
In Quarter 2 2016, GDP was estimated to have been 7.7% higher than the pre-economic downturn peak of Quarter 1 2008.
What would they propose for Greece which has actually seen an economic depression? i do hope none of our 35 were supporters of the policies applied there.
Meanwhile at The Outer Limits.
Interest rate and Vat cut needed as economic data “horrible” says DannyBlanchflower,
A 5% cut in VAT. Perhaps things like different from a New England perspective.
There are three strands to my thoughts here. Firstly as I have pointed out earlier we were promised that monetary policy would work and instead we got “more,more,more” whereas now past supporters of this seem to be rushing for whatever you might call an intellectual exit. Sadly the world economy is left with the side effects.
Next we have the issue that the countries for which a fiscal stimulus are being proposed are ones which have in fact carried them on. For example the UK borrowed some £75 billion in the fiscal year that ended in March and Japan borrowed some 5.2% of GDP in 2015 according to the IMF. Are we back to “more,more,more” being our only strategy?
On the other side of the ledger is that it is currently amazingly cheap for governments to borrow with Japan having many negative yields and UK Gilt yields very low for an inflation prone nation. So there is scope on that basis but my suggestion is that we start from the more micro level than the grand macro plans which have so let us down in the credit crunch era. Rather than money looking for projects let us go the other way and look for projects that we feel would genuinely be beneficial. I am open to suggestions but as I discussed only on Friday the UK’s power infrastructure seems to have plenty of scope for ch-ch-changes and improvement to me.
I did an explainer yesterday on TipTV Finance.