We find ourselves in an era where central bankers wield enormous power. There is something of an irony in this. They were given the ability to set monetary policy as a way of taking power out of the hands of politicians.This led to talk of “independence” as they set interest-rates to achieve an inflation target usually but not always of 2% per annum. Actually this is the first falsehood because we are regularly told this.
The ECB has defined price stability as a year-on-year increase in the Harmonised Index of Consumer Prices (HICP) for the euro area of below 2%
They could also tell me the moon is full of cheese but I would not believe that either. I am amazed how rarely this is challenged but price stability is clearly an inflation rate of 0%, The usual argument that this stops relative price shifts collapsed when the oil price fall of 2015/16 gave us inflation of around 0% as plainly there was a relative price shift for oil and indeed other goods. Perhaps the shrieks of “Deflation” were a type of distraction.
Next has come the way that claimed independence has morphed into collusion with the political establishment. This moves us away from the original rationale which was to take monetary policy power out of the hands of politicians to stop them manipulating it for the electoral cycle. What had apparent success which was technocratic control of interest-rates has morphed into this.
- Interest-Rates around 0%
- Large-Scale purchases of sovereign bonds
- Large-Scale purchases of private-sector bonds
- Credit Easing
- Purchases of equities ( for monetary policy and as a consequence of exchange-rate policy)
- Purchases of commercial property so far via Exchange-Traded Funds or ETFs
Not all central banks have gone all the way down the list with the Bank of Japan being the leader of the pack and who knows may go even further overnight at its unscheduled meeting? I should add as people regularly look at my back catalogue that by the time anyone in that category reads this we may see many central banks at step 6 and maybe going further. But back to my collusion point here is some evidence.
I also confirm that the Asset Purchase Facility will remain in place for the financial year 2020-21.
This is almost a throwaway sentence in the inflation remit from the Bank of England but it is in fact extremely important in two ways, and in tune with today’s theme neither of which are mentioned. The Chancellor Rishi Sunak is reaffirming that Her Majesty’s Treasury is backing the QE ( Quantitative Easing ) policies of the Bank of England which currently are steps 2 to 4 above. Next comes the issue of the amount which is huge even for these times.
The Committee voted by a majority of 7-2 for the Bank of England to continue with the programme of £200 billion of UK government bond and sterling non-financial investment-grade corporate bond purchases, financed by the issuance of central bank reserves, to take the total stock of these purchases to £645 billion.
The 2 dissenters voted for “More! More! More!” rather than less and I expect the extra £100 billion they voted for to be something sung about by The Undertones.
Happens all the time
Its going to happen – happen – till your change your mind
Its going to happen – happen – happens all the time
So we have a doom loop for supporters of independence as the politicians via backing any losses from QE become the masters again and the central bankers become marionettes. As so often we see Japan in the van by the way the Abenomics of Shinzo Abe appointed Governor Kuroda to the Bank of Japan pretty much as they would appoint a minister. It is the most exposed in terms of monetary policy via its 31.4 trillion Yen of equity holdings with a break-even it estimates at around 19,500 in terms of the Nikkei 225 index. Also of course an individual company in which it holds shares could fold.
Forward Guidance
This had a cacophony of falsehoods as we were promised interest-rate rises which failed to happen. In my own country it became laughable as an unemployment rate of 7% was highlighted and then unemployment rates of 6% and 5% were ignored. Then at Mansion House in June 2014 Governor Mark Carney said this.
There’s already great speculation about the exact timing of the first rate hike and this decision is becoming
more balanced.
It could happen sooner than markets currently expect.
In fact a bit over 2 years later he cut them whilst promising to reduce them further than November to 0.1% before economic reality even reached Threadneedle Street and the latter was redacted. It is hard to believe now but many were predicting interest-rate rises by the ECB in 2019 based on Forward Guidance. Of course the US Federal Reserve did actually give it a go before retreating like Napoleon from Moscow and as we recall the role of President Trump in this I would remind you of my political collusion/control point above.
Negative Interest-Rates
This area is littered with falsehoods. In Beatles terms it took only a week for this.
Bank of Japan Governor Haruhiko Kuroda said he is not thinking of adopting a negative interest rate policy now,
to become this.
The Bank will apply a negative interest rate of minus 0.1 percent to current accounts that financial institutions hold at the Bank.1 It will cut the interest rate further into negative territory if judged as necessary.
As Hard-Fi put it.
Can’t believe it
You’re so hard to beat
Hard to beat
The new Governor of the Bank of England seems to be on the same road to Damascus. From Sky News yesterday.
Mr Bailey told MPs it was now studying how effective that cut had been as well as “looking very carefully” at the experience of other countries where negative rates had been implemented.
On the prospect of negative rates, he said: “We do not rule things out as a matter of principle.
Curious because that is exactly what people had thought he had done several times in this crisis.
Comment
There are other areas I could highlight as for example there is the ridiculous adherence to the output gap philosophy that has proved to be consistent only in its failures. But let me leave you via the genius of Christine McVie the central bankers anthem.
Tell me lies
Tell me sweet little lies
Tell me lies, tell me, tell me lies
Oh, no, no, you can’t disguise
(You can’t disguise, no, you can’t disguise)
Tell me lies
Tell me sweet little lies
Me on The Investing Channel
Notayesmanseconomics's Blog 
Hello Shaun,
amazing , despite all the GIGO the plates appear to be still spinning ….
or have I suffered a “Jedi mind trick” ?
Forbin
PS: on the subject of propaganda I see Reuters and the BBC have a lead on Sweden having the highest per capital death rate – and they did not have a lock down! Bad Sweden!
except of course if you look at the data . pick a week to make it look worse than it is – cherry picking – kinda thing we see all the time in current modern economics ( look through this inflation BS !! hah! )
Forbin, the same misleading article is running in several ‘papers’, such as Times and Telegraph. Comments on the article I note are full of obvious ‘plants’, its dangerous territory. The government controlled sources must have been in overdrive feeding the same stuff to one and all, presumably as part of the ‘covering arse’ exercise. Of course Sweden has the sixth highest death per million in Europe, not that much more than say the Netherlands and Switzerland, and less than half of Belgium.
Hi Forbin,
Here are the figures i.e deaths per million of population and up to date, note we have just overtaken Italy, that’s how bad it is, but of course, as with all statistics, you have to trust the source, and having done a lot of research, I know that there is massive overcounting in all countries with doctors being told to record the cause of death as Covid when there were many other factors involved,(died with Covid not because or exclusively from it), so like inflation or GDP, just ignore the numbers – they are all garbage
https://www.statista.com/statistics/1104709/coronavirus-deaths-worldwide-per-million-inhabitants/
thanks
Propaganda fake news, deception life doesn’t change it happened during the second world war, it happens all the times in politics during elections and its now happening during the pandemic.
All countries guilty of it no one knows the true death rate in any country and no one knows what will happen in the future.
Hi, Forbin. The two European countries with the highest number of deaths, Italy and the UK, are also the only two countries with direct flights to Wuhan. (Russia is only partly in Europe.) I don’t think it’s a coincidence.
Fabulous article Shaun. Would have liked a little bit more (for the layman) as to what central banks are hoping to achieve with negative rates and why they are all heading in that direction. What I will take from the article is that a central banker is definitely not to be taken at his/her word…..
why ?
herd mentality and that they are not worth their collective salt.
They really have run out of ideas….. reality is at fault in their minds.
Its not that they have ran out of ideas, its more the case they keep on repeating the same ideas that have ruined the economy.
More printy printy in its varying forms and ever lower interest rates.
What are they hoping to achieve? To maintain these grotesque bubbles that they have inflated by stealing savers money to subsidise their rotten corrupt system.
“Sumner: Right, so we started with a basic principle that the Fed has two ways to boost aggregate demand or nominal spending and those are increasing the supply-base money and reducing the demand for base money. So QE is the most famous example of a program that increases the supply of base money. And in terms of reducing the demand for base money, you can do that in a number of ways. One is reducing the interest rate on bank reserves, even if necessary making a negative.”
https://www.mercatus.org/bridge/podcasts/05202020/scott-sumner-governments-response-covid-19-and-future-level-targeting
Thanks for the link, postkey. So Sumner is calling for a level target based on a 4% increase in nominal GDP, which would, with luck, work out to a 2% inflation rate and a 2% growth rate, but might, if unlucky, work out to a 0% growth rate and a 4% inflation rate. He also would accept level targeting based on prices but that also risks a temporary rise in the implicit inflation target rate.
Yes they can never tell the truth in case the sheeple wake up and realise how they have been conned into accepting such an impossible system that can only work by enslaving them with ever more debt, that results in them, like a hamster on a wheel, however fast it runs, never ever gets ahead, and likewise we never ever get ahead no matter how hard we work or save as the interest from their debt is never created when the loans are taken out and has to be provided by inflating the money supply thus reducing the currency’s buying power and value over time, governments also are caught tin their web, since they run endless deficits to pay for welfare(that disguises the fact the economies are bankrupt by paying people to do nothing) and warfare(against threats that do not exist) and whatever party promises to give the voter the most money always wins, ensures goverments never spend responsibly – imagine the shock to the economy if the UK government had to balance its budget every year!.
You will never ever be allowed to have your own debt free money, you are a debt slave to banks and politicians who will ensure their control over economies and countries is never taken away from them.
Hi Kevin
You get your ideas pushed forwards if you tell politicians what they want to hear. So we had Kenneth Rogoff the cash enemy and fan of negative interest-rates. They now need something else so we are getting a sort of MMT lite.
The ordinary person gets ignored as for example the expanded Congestion charge in London has hit one of my neighbours hard. She works at St.Thomas’s hospital and I think most would approve of her being charge and parking free as she was for a bit but now she has to pay £15 per day to drive to work and drop her daughter at nursery. He has a business where he works a lot at weekends and now has to pay the charge then. Over a year add that up…
When does that ever happen to the banks?
As a postscript, I was taught music by Christine McVie’s father who used to tell us stories about the band, he played violin for the City of Birmingham Symphony orchestra and was a spitting image of Colonel Sanders(KFC)!!!
Hi Kevin
I bet he did have some stories to tell about them! She is a great songwriter who got swamped a bit by the BuckinghamNicks furores, although I think it is also true that she is happy to be out of the limelight. I saw them back at their live peak and at the end of the show Songbird was just a perfect chill after the rock and roll 🙂
Hi Shaun
Great article as always.
I think yesterday someone mentioned that negative yielding bonds have been sold by the boe. Will the instituitions which buy them require a greater fool to sell them on at a profit. And would that fool be another department of the boe? aka the taxpayer?
Thanks
Anteos, most of them will be bought by pension funds, so the greater fools will be the pensioners/workers who wake up one day when this crazy system finally implodes and is replaced by the next one,and finds their pension has gone.
I would like the central bankers to explain exactly how they believe that lowering interest rates from what they are now, to lower levels is going to stimulate the economy. I am not posing this as a criticism but a genuine question as I am puzzled as to what mechanism they expect to kick in and what benefits such a tiny move will have?
If applied to savings then I would expect a drop in spending by the consumer, as they feel that they will have even less money to spend. Even quite a small negative rate would have a huge psychological impact making people feel even worse off than they are now.
The BofE is talking about negative rates without explaining the rationale – as far as I can read. I can’t see that loans will be more forthcoming and given the impact on banks profitability, it may do the opposite.
Can anyone explain what the logic is ( without too much sarcasm!,,)
Hi Pavlaki
The rationale is that lower interest-rates generate more borrowing by businesses and from Mortgages and thus boosts the economy. Also as savings is less attractive people will save less.
Actually the evidence for the latter is the reverse people save more as there is little or no interest to add on. Also the lending bit to business is more dubious too. I remember quoting a US Federal Reserve paper that stated that but cannot remember the exact detail.
Putting it another way a blocking ball is placed by the way banks are unwilling to put negative rates on ordinary deposits. They fear a bank run….
Low rates also mean the economy is in trouble, so people will become anxious and save more. Several of us here have pointed out that higher rates would generate the belief that the value of savings can be preserved and so, in the same effect, people will save less and so, spend more. It really is pretty basic stuff.
“Abstract
The rate of interest – the price of money – is said to be a key policy tool. Economics has in general emphasised prices. This theoretical bias results from the axiomatic-deductive methodology centring on equilibrium. Without equilibrium, quantity constraints are more important than prices in determining market outcomes. In disequilibrium, interest rates should be far less useful as policy variable, and economics should be more concerned with quantities (including resource constraints). To investigate, we test the received belief that lower interest rates result in higher growth and higher rates result in lower growth. Examining the relationship between 3-month and 10-year benchmark rates and nominal GDP growth over half a century in four of the five largest economies we find that interest rates follow GDP growth and are consistently positively correlated with growth. If policy-makers really aimed at setting rates consistent with a recovery, they would need to raise them. We conclude that conventional monetary policy as operated by central banks for the past half-century is fundamentally flawed. Policy-makers had better focus on the quantity variables that cause growth.
Reconsidering Monetary Policy: An Empirical Examination of the Relationship Between Interest Rates and Nominal GDP Growth in the U.S., U.K., Germany and Japan”
https://www.sciencedirect.com/science/article/pii/S0921800916307510
I should add that I have read about the theory that people hoard money to wait for lower prices in future but have also read that this has never happened or is likely to happen so I can’t believe that the BofE is considering something so vague and unproven – hence my question about their logic.
Hi Pavlaki
I am no great believe in that. Look at smartphones where there has been enormous disinflation. Yet people still rush in numbers for new phones etc…
Shaun, a few observations and comments on todays Blog
Price Stability and zero interest rates
The theory is OK but in practice impossible, most people feel left behind in some organizations, its never ending, the BOE trying to maintain a 2% interest rate is thought to be the best way of maintaining some kind of growth/inflation to satisfy all quarters.
Forward Guidance
In a stable world economy it may be possible but there are too many variables with world global trading it only needs something to go wrong in a major economy and the theory collapses we have now learned that in a bad way with the pandemic which stemmed from China and there are many examples in history.
Negative interest rates.
Many readers and posters don’t like talking about this nether a supportive of this, but I have said a number of times, there has been no history of negative rates above 1% therefore no one knows what impact rates going negative of -1% -2% -3% and even higher.
Bear in mind I am not saying I am supportive of this at all, I am just stating the obvious no one knows what the impact would be.
However there have been many analysts who have suggested it could make a more equal society by transferring some wealth from the rich to the poor. However even theory is flawed as the rich then plough their money into other assets, shares, Gold and Art.
Interestingly I don’t know whether anyone read Crispin Odey talking about Gold yesterday/recently and intimated governments could make it illegal for private investors to buy gold?
https://www.cityam.com/crispin-odey-governments-may-ban-private-gold-ownership/
All things are being considered recently apart from negative rates, the world has changed and the governments desperate to prevent their economies collapsing. Its now been ruled out by the UK that we will not have a UK V shaped recovery, even my simple understanding of economics knew that.
In conclusion I have little faith in governments, the UK are in a mess with their plans on lockdown and in dispute with teachers, they tell everyone they can go anywhere for a car ride and now the best destinations gridlocked with no toilets open its a fiasco.
If the above happened in China the public would be shot no wonder they got a handle on the pandemic.
Hi Peter
The problem is that the 2% inflation target is effectively cheating people as it is a type of soft default for debt. Also it is a bigger issue with wage growth so low and indeed sadly likely to go negative for a while.
The rich seem to keep getting richer don’t they?
I did read the Crispin Odey story as firms I have worked for have done business with him although not me personally. If gold is confiscated wont they also confiscate his gold holdings too? So I am not sure where he was going with that view.
I wasn’t sure where he was going either his fund increased his holdings in Gold. However he did indicate making private holdings illegal so he may have had a different game plan in mind.
I am glad Shaun has written a wide-ranging post on the CBs. As regular readers will know, I am convinced that they are gripped by the spirit of (the albeit still alive and touring) Steve Priest. For newer readers, he is the bass guitarist in The Sweet and his key line was in Blockbuster:
Either that or some kind of weird Groupthink had taken hold of them, just to prove Einstein’s famous definition of insanity.
Pavlaki has picked up a couple of points. The first I mentioned the other day too, namely why doesn’t someone, esp a financial journo stand up and say: “It has not worked for twelve years, so why do you think more will have the opposite effect?
Then it dawned on me. While these people did grow up with Steve, it is what their careers have taught them and so, none of them have any idea about how to change or challenge anything. When they were at university, Chicago monetarism had taken a deep hold after a decade of failed 70s socialism. Economies grew until the credit expansion got out of control, up went rates and we had the 92 recession. Just need to beat that (ahem, Gordon Brown) boom and bust by keeping people spending and all would be okay.
Some years ago, I was talking to a rec con and I asked why there had been no repeat of the 92 chuckout after the 2008 crash. He said there was a folk memory of what followed in 92, namely a costly process of reemploying the same people on contracts. There is also this supposed 18 year cycle in housing where people forget the previous bust. That is especially important for the current crop of CBs and journos as they were starting to earn in the late 80s when that period of growth was not only fuelled by cheap credit, but a massive expansion of credit as greater multiples were allowed on mortgages and you could actually take the higher value from your house and spend it. Gone were the days of a 25year mortgage at 3 times your income. This was less likely in Europe, which is why they are still fumbling about and following the US approach.
So, this Groupthink has seized a generation and really become a ruling theory, within which all other events are interpreted. Just expand the money supply, demand will pick up and all will be okay. New Monetarism became the vogue in 2009 as a bizarre reversal of Chicago Monetarism. Then they forgot the liquidity trap – the point at which additional money goes into assets, esp houses – or maybe they took a false reading from Japan in the 90s and thought the trap was ZIRP, when it is really about 2.5% and I would argue, nearer to 4% in the U.K. for cultural reasons.
Add in policies, which since the mid-80s have rewarded buying the biggest pile of bricks you can afford and sitting in it, while taxing enterprise and skills, and it is easy to see how the whole sector has become convinced that cutting rates will raise consumption demand and thus GDP. It is obvious why it has not happened – if you have to pay much more for your pile of bricks and are not incentivised to be more productive, you will have less money for that consumption demand, on which most private sector jobs ultimately depend.
So, as Pavlaki implies, what is wrong with deflation – is it that delayed purchase? Well, actually, there is nothing wrong with deflation. Most of what we buy we consume quite quickly and it is only white goods, cars and -of course – houses we might put off. But you still need to store food, travel and live somewhere, so you have ongoing costs if you don’t buy a new one.
I was struck by Erhard’s Prosperity through Competition, where he makes precisely these points. After the 1949 currency reform, there was some inflation due to surplus money, but that demand was met with supply and thus prices fell to a new equilibrium. He mentions the delay effect of deflation, but points out that it had no effect. Indeed, being able to buy something more cheaply gives you money for something else, which you can supplement by increased earnings through productivity. There was no German house price bubble until the ECB went below the liquidity trap level. He also says that you can beat boom and bust by keeping a rein on credit during the initial upward move and then, if you are productive, you can earn the extra to pay off the credit while engaging in the same level of consumption.
So, maybe a copy of Prosperity through Competition for all these clowns and a few straightforward questions? Alternatively, maybe they are gripped by The Ghost of Your Memory by Godhead:
A feeling like you’re left behind
The door is closed and you’re confined
To everything you’ve done a thousand times
You’re getting weaker every day
The room is filled to your dismay
It’s getting harder to convey just what you’re living with
Trapped alone
Burning out from the inside
Overthrown
By the lies of your self pride
You kick your feet to run away
But all your effort goes astray
You feel as though you’re made of clay and dirt
….
Terror is here beyond your fear
A ghost of your memory
Desperate dreams can’t intervene
The ghost of your memory
Good post and comment – tks
Great blog, Shaun, as usual.
Oddly enough, the lower inflation rates brought on by the pandemic create an incentive for the central banks to push up target rates going forward. The Canadian monthly inflation rate for April was -0.9%, and the annual inflation rate was -0.2%, the first time the annual inflation rate went negative since 2009. (The inflation rate is, of course, a little dicey, as a lot of categories, e.g. travel tours, weren’t available in April. But it is still the inflation rate the Bank of Canada is committed to.) If our central bank opted to adopt a price-level targeting regime faced with a recession it would require a 3.1% inflation rate over the period April 2020 to April 2022 to hit the price level target consistent with a 2.0% inflation rate over the period April 2019 to April 2022. If accomplished, there would no doubt be calls to keep the 3.0% target rate in place so as not to imperil the recovery or the expansion as the case may be. Given the Bank of Canada is committed to a 2.0% target rate until the end of 2021, actually carrying out such a policy might be difficult, but the math is indisputable. Other central banks, including the Bank of England, are in essentially the same situation, if not quite so dramatically. For people who believe in a lower target rate of inflation it is disturbing, since there is a case, at least on a temporary basis, for a higher one.
Hi Andrew and thank you
Thanks for the Bank of Canada update. Your departing Governor has been in the news today.
“OTTAWA — Canada’s top central banker says adding an income-support measure like the Canada Emergency Response Benefit to the government’s tool kit could help the country more quickly respond to sudden shifts in the economy.
More than 8.1 million workers have applied for the $2,000-a-month benefit since it became available at the beginning of April, with payments now totalling over $38.4 billion.
Bank of Canada governor Stephen Poloz says a program like it would help because the central bank will likely have less policy room to manoeuvre when the next shock rolls around.” ( CTV News )
It seems that like many central bankers he seems to be concentrating on fiscal policy these days.
Because they’re evil, not stupid.
I presume ‘you’ mean the ‘evil’ plutocrats. If not, ignore the following!
So the ‘plutocracy’ {which, through its control of the media, and the political process eg J. Corbyn in the UK?, remains unchallenged?} deliberately {or at the request of W.H.G.?} makes thousands of young people unemployed?
And,
“Less obviously – but far more dangerously – actions which are being taken by governments around the world today threaten huge food shortages in the autumn.“
https://consciousnessofsheep.co.uk/2020/04/07/getting-the-economy-wrong/?fbclid=IwAR3Rml1S0lwcrTO1WkBXw_WzAKm1T_a0_VqAND4iWOr-t34zdTAJDvREbf4
Insurrection anyone?