It was only yesterday that I was analysing the way that the Bank of England Governor was playing a game with the media. Today I wish to look at another issue where so many of those who told us that we needed ever more extraordinary monetary policy measures have changed their tune. For example a couple of years or so ago Governor Carney was assuring us that monetary policy was not “maxxed-out” but now he seems to be shuffling in that direction. Recently the Bank of England produced a working paper on itself which concluded it had been doing a good job.
It finds reasonably strong evidence of QE having had a material impact on financial markets, generating a significant loosening in credit conditions. There is also evidence of QE having served to boost temporarily output and prices, in a way not associated with other central bank balance sheet expansions.
Yet there is little sign of balance as the bad bits are simply ignored and put at the back of the darkest cupboard they could find.
This leaves to future research important issues such as the impact of a reversal in QE policies and the distributional consequences of QE.
Actually the Bank of England has suggested that the distributional consequences of QE are the responsibility of government as it sings along to Shaggy.
It wasn’t me……It wasn’t me
However there are a litany of issues here. Firstly the very concept of QE had fiscal elements to it. These were that it required treasury permission and that it made it cheaper for governments to borrow and loosened fiscal policy for them via lower bond yields.
Indeed you could argue that elements of what has been called monetary policy is simply a transfer to companies or another type of fiscal policy. For example this from the ECB (European Central Bank).
Corporate bonds cumulatively purchased and settled as at 28/10/2016 €37,815 (21/10/2016: €35,886) mln
Or this from this morning’s statement from the Bank of Japan.
The Bank will purchase exchange-traded funds (ETFs) and Japan real estate investment trusts (J-REITs) so that their amounts outstanding will increase at annual paces of about 6 trillion yen and about 90 billion yen, respectively.
It is fast becoming the Tokyo Whale.
A Further Shift
Now rather than elements of fiscal policy being tucked away in monetary policy it is now emerging blinking into wider media exposure. Sadly there is virtually no challenge made about the fact that all the extraordinary monetary measures were supposed to rescue us. Below are the words of the former IMF Chief Economist Olivier Blanchard on the subject/
I think there is fiscal space in nearly every country.
Sadly they do not ask why as part of the IMF he applied fiscal austerity to places like Greece and Portugal and then did a complete U-turn on the subject. But there is something almost as extraordinary.
Take a country like Spain. They have a 100% debt-to-GDP ratio, a bit more. Investors don’t seem to be very worried. They think that is sustainable. Now suppose Spain decides to do a really big public investment program. So they decide to spend 2% more of GDP for two years. This is big. This is major fiscal expansion. With the multipliers, GDP goes up, so in fact spending 2% more, they get 1% in revenues so this increases the debt-to-GDP ratio from a 100% to 103%. Do you run for cover? No, I am quite sure they do not.
There are a whole litany of issues here. Firstly the economic news from Spain is very good right now with annual GDP growth at 3.2% so why does it need public investment as well? Spain had lots of investment pre credit crunch which led it to trouble and an economic cul-de-sac which our latter-day Dr.Pangloss ignores.
So the whole issue is whether governments spend the money right.
A bit like Portugal’s roads to nowhere. Also it is extraordinary that “Investors don’t seem to be very worried.” was unchallenged as the main new investor now is of course the ECB which has bought some 126.4 billion Euros and rising of Spanish government bonds.
Oh and on the subject of another crossover between monetary and fiscal policy I think he was right first time.
Yes. Initially I thought the proposal by [Harvard Professor] Ken Rogoff, among others, to basically eliminate cash was insane. But maybe it is less crazy than I thought.
World Economic Forum
This has entered the fray today with this from Chatham House ( originally written in September).
It is time for fiscal stimulus to gradually assume more of the burden of propping up a global economy that still looks worryingly fragile.
Really why? That seems to be missing. All we get are some political statements including an implication rather rare in these times that Donald Trump may be on one right track. What is missing is any analysis of why we are here?
The Bank of Japan (BoJ), which in 1999 became the first central bank to cut rates to zero, looks set to be the first to signal that monetary policy is approaching its frontier.
In the “lost decade” period Japan has had a lot of fiscal policy and is adding to existing stimulus as it has run fiscal deficits so we are back to “More, more, more” with no explanation of why it will work this time when it has not done so before.
For a man who is apparently just about to raise interest-rates the Vice Chair of the US Federal Reserve spends a lot of time discussing stimulus measures! I have written before about how frequently he denies that he has any plans to introduce negative interest-rates. Well now he seems to be advocating expansionary fiscal policy.
Over the years, many economists–some of them textbook authors–have noted that expansionary fiscal policy could raise equilibrium interest rates. To illustrate this possibility, the next two bars on the slide show the estimated effect on interest rates of two possible expansionary fiscal policies, one that boosts government spending by 1 percent of GDP and another that cuts taxes by a similar amount. According to the FRB/US model, both policies, if sustained, would lead to a substantial increase in the equilibrium federal funds rate. Higher spending of this amount would raise equilibrium interest rates by about 50 basis points; lower taxes would raise equilibrium rates by 40 basis points.
So we see a shift towards fiscal policy here too. Will this Stan be like the one described by Eminem?
Well, gotta go, I’m almost at the bridge now
Oh sh*t, I forgot, how’m I supposed to send this sh*t out?
[car tires squeal][CRASH]
.. [brief silence] .. [LOUD splash]
The fundamental point is that we were led into a trap by those who argued for extraordinary monetary polices. Nearly eight years down the road there has been so little progress that we are seeing much more additional easing than any reversal or tightening. The US Federal Reserve opened 2016 hinting at “3-5” interest-rate rises this year and now we maybe will get one. Yet the same establishment moves like the “Slippery People” sung about by Talking Heads onto fiscal policy and claims that will work.
The problem here is that quite a few countries have been seeing expansionary fiscal policy. Japan for example had an attempt at reining it back with the 2014 consumption tax rise but now adds ever more and the UK is a lower scale example but similar in principle. Germany has taken the other path and managed to apply it to some of the weaker Euro area economies but deficits have continued. So we are told stimulus is a good idea but we get no explanation of why it has not worked so far.
Meanwhile we get the occasional flicker from the bond vigilantes as bond yields rise but lets face it even 1.27% for a ten-year UK Gilt is historically very cheap and compared to inflation prospects may well be not far off insane.