Global Economy: Central Bankers Are Sick of Rescuing the World Economy Alone - by William Horobin and Simon Kennedy

Global central bankers are again in the driving seat when it comes to propping up the world economy, but many are demanding governments join them in the rescue effort.

Amid slowing global growth, the Federal Reserve, European Central Bank and perhaps even the Bank of Japan are all set to ease monetary policy in coming months. But with less room to act than in the past, their leaders are telling politicians they will need to assist if a downturn takes hold.

The pressure could be applied in person on Wednesday when central bankers and finance ministers from the Group of Seven nations meet for talks north of Paris. They convene at a hazardous juncture for the global economy, as an unpredictable trade war risks precipitating a deeper downturn, and some bond markets hint at a growing possibility of a recession.

G-7 host nation France may even offer a reason to take note. President Emmanuel Macron’s 17 billion euros ($19.2 billion) of support for consumers in response to the Yellow Vests protests may have been contrary to his deficit-reduction mantra, but is proving fortuitous amid a global slowdown. French growth in 2019 is expected to outpace the euro-area average for the first time in six years.

“We are seeing political risks rising everywhere, so addressing the lack of growth that benefits all is quite urgent,” said Laurence Boone, chief economist at the OECD. “That cannot be achieved only through monetary policy.”
 

France’s GDP is expected to be more resilient than peers this year.

While Powell of the US has warned the U.S. fiscal position is unsustainable in the long-run, he said last week it’s “not a good thing to have monetary policy being the main game in town.” 

The U.S. got a boost in 2018 from President Donald Trump’s $1.5 trillion tax overhaul, but that effect is fading.

Read more at: Central Bankers Are Sick of Rescuing the World Economy Alone - Bloomberg

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Monetary Policies: Demystifying Monetary Finance by Adair Turner

Eight years after the 2008 crisis governments and central banks – despite a plethora of policies and approaches – have failed to stimulate enough demand to produce sustained and strong growth. In Japan, so-called Abenomics promised 2% inflation by 2015; instead, the Bank of Japan (BOJ) expects it to be close to zero in 2016, with GDP growth below 1%. Eurozone growth halved in the second quarter of 2016 and is dangerously dependent on external export demand. Even the US recovery seems tepid.

Discussions of “helicopter money” – the direct injection of cash into the hands of consumers, or the permanent monetization of government debt – have, as a result, become more widespread. In principle, the case for such monetary finance is clear.

If the government cuts taxes, increases public expenditure, or distributes money directly to households, and if the central bank creates permanent new money to finance this stimulus, citizens’ nominal wealth will increase; and, unlike with debt-financed deficits, they will not face increased future taxes to pay off the debt incurred on their behalf. Some increase in aggregate nominal demand will inevitably occur, with the degree of stimulus broadly proportional to the amount of new money created.

But the debate about monetary finance is burdened by deep fears and unnecessary confusions. Some worry that helicopter money is bound to produce hyperinflation; others argue that, in terms of increasing demand and inflation, it would be no more effective than current policies. Both cannot be right.

One argument that it might be ineffective stems from the specter of a future “inflation tax.” In an economy at full employment and full potential output, a money-financed stimulus could produce only faster price growth, because no increase in real output would be possible. Any increase in private-sector nominal net worth would be offset by future inflation.

All of that is obviously true – and irrelevant. As I argue at greater length in a recent paper, no “inflation tax” can arise without increased inflation, which will result only if there is increased nominal demand. The idea that a future “inflation tax” can stymie the ability of money finance to stimulate aggregate nominal demand is a logical absurdity.

Accounts of how helicopter money works often implicitly assume a simple world in which all money is created by the monetary authority. But in the real world commercial banks can create new private deposit money and hold only a small fraction of those deposits as reserves at the central bank. In this world, another form of future tax becomes relevant.

To see why, it’s important to note that monetary finance is fundamentally different from debt finance only if the money created by the central bank is permanently non-interest bearing. Effective monetary finance therefore requires central banks to impose mandatory non-interest-bearing reserve requirements.

Doing so is entirely compatible with raising policy interest rates when appropriate, because the central bank can pay zero interest on mandatory reserves, while paying the policy interest rate on additional reserves. But if commercial banks are forced to hold non-interest-bearing reserves even when market interest rates have risen from zero, this imposes a tax on bank credit intermediation – a tax that is mathematically equivalent to the future tax burden that would result from a debt-financed stimulus. A recent paper by Claudio Borio, Piti Disyatat, and Anna Zabai argues that, as a result, monetary financing cannot be more stimulative than debt financing.

Read more: Demystifying Monetary Finance

Central Banks: Helicopter Money: A Disguise For debt Financing - by John Kay

The term “helicopter money” is derived from a vivid image created by the US economist Milton Friedman in which a central banker showers notes on a grateful populace.

 More recently, the notion has been promoted by Adair Turner, the former chairman of the UK financial regulator, in his book, Between Debt and the Devil. It has also won some favour from bond king Bill Gross and even real central bankers such as Ben Bernanke, formerly chairman of the US Federal Reserve, and Mario Draghi, president of the European Central Bank.

 No one really envisages that money would be dropped from a helicopter. What they have in mind is that in a recession government would increase expenditure in a manner that would directly stimulate private sector spending. The ideal format in which to undertake the borrowing required is bank notes, which pay no interest and need never be repaid. That is why the idea of dropping currency from a helicopter has appeal.

 But, of course, even if the lucky recipients of the helicopter drop went straight down to the pub to celebrate their good fortune, the publican would return the cash to the banking system by the end of the day, and the notes would end up back in the vaults of the central bank. The helicopter drop does not give households reason to hold additional notes in their wallets, shops to keep more cash in their tills, or banks to hold more currency in their branches.

 Proponents of helicopter money seem to think government borrowing undertaken in this way does not really count — whether because it is irredeemable, and not really anyone’s liability; or because it is channelled through the central bank. The so-called Maastricht figure for EU government indebtedness, collated by the European Commission, does not consolidate the balance sheets of the zone’s central banks.

 By contrast, the official figure for overall UK government debt does include the assets and liabilities of the Bank of England (as well as the asset purchase scheme, which holds the £375bn of UK government debt that the BoE has purchased in the name of “quantitative easing”).

 If you are not already bewildered, you will be if you want an explanation of how the various negative and positive balances that central banks in the eurozone have with the ECB fit into this picture — or if you want an explanation of how losses the ECB will eventually incur on the doubtful collateral it has taken on to its books will finally be accounted for.

 The mystery of all this arises from the belief that central banks can never be insolvent because they can always print money and that bank notes are not exchangeable for anything but another bank note. But in fact you can redeem them by using them to pay your taxes; and if the central bank prints enough of them they lose their value.

Read more: Helicopter Money: A Disguise For debt Financin

Central Banks: Mohamed El-Erian: ‘Central banks are like doctors’- by Rudyard Griffiths

Mohamed El-Erian

In this report, Rudyard Griffiths, chair of the Munk Debates, Canada’s leading public-affairs forum, who discusses issues and trends just over the horizon with renowned analysts and policy-makers, interviews Mohamed El-Erian, chair of U.S. President Barack Obama’s Global Development Council and also chief economic adviser to financial-services multinational Allianz and author of the recently published The Only Game in Town: Central Banks, Instability and Avoiding the Next Collapse

Q Are central banks becoming a threat to the global economy?

Central banks are like doctors. They will not walk away from their patient, the patient here being weak economic growth. Like a doctor, they will try to prescribe whatever medication they have, even if it simply buys time. So central banks have been prescribing medication that buys time. It doesn’t deal with the underlying weaknesses of the global economy. It simply buys time for the politicians to get their act together. Now, as any patient will tell you, at a certain point when you rely excessively just on pain killers, not only are you not solving the underlying problem but you risk having side-effects. And that is what we’re seeing. We’re seeing the side-effects of excessive reliance on just pain medication. Now that’s not the fault of the central banks, because the providers of the better medicine, our political leaders, haven’t stepped up to the plate. In sum, central banks will continue to treat the patients, even though they know that their medication will not restore perfect health.

Q: What is your take on negative interest rates?

I am worried. You need only look to Japan to see what that danger looks like. The Bank of Japan surprised everybody by following the European Central Bank into negative policy rates. It did that with the hope that, by taking interest rates negative, they would weaken their currency and therefore help their exports, and they would boost their equity market. The exact opposite happened. The currency strengthened and the equity market sold off. Within two days, the officials were dragged into parliament and basically read the riot act. When you take rates negative, you risk not only getting the wrong response out of the economy, because people simply disengage at this point. The sale of home safes has soared because people are saying, “Why should I keep my money in a bank that’s going to take money away from me? I might as well keep it at home in the safe.” People disengage from the financial system. Political outcries become more frequent and the political process starts looking into what you’re doing. I think all this is a warning to central banks to be careful. But the key problem remains, which is they are unable to hand off the task of sustaining economic recovery to our political leaders. Back to my analogy of the patient and doctor, they won’t step away from patients when there is no one else to care for them if the treatment they are providing risks the patient’s health.

@: Will negative interest rates come to North America?

We have built a very sophisticated capitalist system that assumes that nominal interest rates are positive. So the minute you take the negative, things start breaking. For example, banks start turning away deposits. Second, providers of long-term financial protection – pension funds, insurance companies – find it very hard to sell new products. They can still service the old products, but it’s very hard to sell new products if the safe interest rate is negative. So you start creating institutional breakage, and there are no other institutions to step in. It’s not as if you can replace them. You cannot replace something with nothing. So the system starts operating less efficiently. I think that the Federal Reserve realizes this and they would like to avoid. Now they’re lucky because the U.S. economy is in a better place than Europe. But having said that, even if the U.S. economy were in the same place as Europe, I don’t think that they would go to negative.

Q. How should investors protect themselves?

The first thing to realize is, we are living on borrowed returns. The second thing is we’re coming out of a period of artificially low volatility that’s going to give way to unusually high volatility. And the third thing is, because central banks have intervened so aggressively, they have altered the correlation among asset classes.

These are three consequential hypotheses. If you agree with them, then much of the conventional wisdom about investing starts being challenged. The first is that diversification provides for risk mitigation. This is no longer true. If the traditional correlations between asset classes break down, then diversification, while still necessary, is not sufficient. Second is that you should just be a long-term investor. Don’t worry about the short term. But if you’re going to have massive volatility in the short term that can break out one way or the other, you need to pay attention to the short term.

The third assumption is that cash doesn’t belong in a strategic asset allocation. If you read basic investment books, they’ll say have minimal amounts of cash. Cash is a dead asset. That’s no longer the case. In fact, cash is the only way to get protection in the world we’re living in. I tell people, “You have to think about cash being 25 to 30 per cent of your asset allocation.”

At the end of the day, the individual investor needs three characteristics in a portfolio to be able to navigate the challenging period ahead: resilience, the ability to navigate a lot of volatility; optionality, the ability to change her or his mind when you get more information, and agility; the ability to move quickly when others are still like deer stuck in the headlights.

EU-Digest      -    Globe & Mail Canada

Central Banks: Timid central bankers have failed to convince sceptical audience

The job of central bankers more like that of technicians, carefully turning knobs as they fine-tune the economy, or magicians, manipulating the audience into the suspension of disbelief? Most of the time it is the former. Monetary maestros nudge interest rates up and down with meticulous precision.

Yet in extreme cases—such as when economies become trapped in a low-growth rut—central bankers must try to conjure up a change in the public’s economic outlook. Just as uncertain magicians often fail to pull off their tricks, so central banks are finding their audiences in an ever-more sceptical mood.

Economists have long acknowledged the role of mass psychology in business cycles. In 1936 John Maynard Keynes described the “animal spirits” that could drive swings in spending or investment.

The power of an abrupt change in market beliefs came sharply into focus in the early 1980s, when many economies were struggling to clamp down on stubbornly high inflation. Economists at the time worried that using interest rates to rein in inflation would be enormously costly.

Because the public had come to expect high inflation, they reckoned, growth-crushing rate rises would be needed to force down prices and create new consumer expectations. A common estimate at the time had it that reducing America’s inflation rate by just one percentage point would cause economic damage of nearly 10% of GDP.

In this fraught world, central bankers risk falling into what Mr Krugman has called a timidity trap. The longer that knob-turning fails to get an economy out of the zero-rate rut, the less credible markets are likely to find subsequent attempts at regime change. Recent efforts to push interest rates into negative territory seem to have unnerved markets rather than sparked confidence.

Perhaps more importantly, central bankers tend not to adopt major shifts in mandates and targets unless urged to do so by popularly elected governments. It is difficult to muster Rooseveltian resolve without a Roosevelt. Expect growing scepticism about the power of knob-turning until voters choose politicians confident enough to wave a magic wand.
Read more: Slight of hand | The Economist

Global Economic Change: Truly a New Economic Order - by Uwe Bott,

During the past few weeks, global financial markets have reacted with great volatility. The two key drivers are increasingly bad economic  news coming out of China as well as the anticipated increase in U.S. interest rates, the first such rise since 2006.

To cut right to the chase: The Federal Open Market Committee of the Federal Reserve Bank of the United States should not raise intere rates!

Central bankers who favor an increase in U.S. interest rates overlook that they no longer live in their parents’ world economy. As a matter of fact, too many policy makers and central bankers across the globe
still live in the 20th century.

They have not yet realized that we live in a radically altered world economy that will shape the 21st century for some time to come. That tardy realization is not just unfortunate. It is a bad omen.

The acumen of central bankers has to be put into serious question. They celebrated themselves for accomplishing the “great moderation” in inflationary expectations over the past decades or so, even though that outcome had next to nothing to do with central banks’ management ofmonetary policy.

Still, there are many observers who argue that an increase is long  overdue. After all, rates have been near zero since the financial crisis of 2008 and surely the U.S. economy is doing better, even if there is still a lot of room for improvement. Isn’t interest rate policy suppose to be anticipatory in nature?

That statement is both right and wrong at the same time. Yes,interest rate policy is to be anticipatory — and not reactive. But that alone would ignore the fundamental structural changes in the world economy.

During the past few weeks, global financial markets have reacted wigreat volatility. The two key drivers are increasingly bad economic news coming out of China as well as the anticipated increase in U.S.interest rates, the first such rise since 2006.

To cut right to the chase: The Federal Open Market Committee of the Federal Reserve Bank of the United States should not raise interest rates!

Central bankers who favor an increase in U.S. interest rates overlook  that they no longer live in their  parents’ world economy. As a matter of fact, too many policy makers and central bankers across the globe
still live in the 20th century.

They have not yet realized that we live in a radically altered worldeconomy that will shape the 21st century for some time to come. That tardy realization is not just unfortunate. It is a bad omen.

The acumen of central bankers has to be put into serious question. They celebrated themselves for accomplishing the “great moderation” in\inflationary expectations over the past decades or so, even though that outcome had next to nothing to do with central banks’ management of monetary policy.

Still, there are many observers who argue that an increase is longoverdue. After all, rates have been near zero since the financial crisis of 2008 and surely the U.S. economy is doing better, even if there is still a lot of room for improvement. Isn’t interest rate policy supposed to be anticipatory in nature?

That statement is both right and wrong at the same time. Yes,interest rate policy is to be anticipatory — and not reactive. But that alone would ignore the fundamental structural changes in the world economy.

Read more: Truly a New Economic Order - The Globalist

US Economy: Record Global Sell-Off of U.S. Debt Could Trigger Economic Collapse

Foreign governments buy U.S. debt because of the dollar's status as the world's reserve currency – the American economy has long been viewed as a safe place to invest. That's why the amount of U.S. debt held by foreign nations has increased more than six-fold since 2001.

But that's all changing now – events that could spark a U.S. economic collapse are already underway…

The Wall Street Journal revealed this week that China – the largest holder of U.S. investments – is ridding itself of its U.S. government bonds at the fastest rate in history.

In fact, a global sell-off of epic proportion is taking place.

Central banks in China, Russia, Brazil, and Taiwan are selling U.S. government bonds at such a pace that it's caused the most dramatic shift in the $12.8 trillion Treasury market since the 2008-2009 financial crisis.

Foreign official net sales of U.S. Treasury debt maturing in at least one year hit $123 billion in the 12 months ended in July, according to Deutsche Bank Securities Chief International Economist Torsten Slok, reported WSJ. That's the biggest decline since data started to be collected in 1978.

By contrast, foreign central banks purchased $27 billion of U.S. notes and bonds in the prior 12-month period.

Foreign central bankers' massive offloading of U.S. debt sends this dangerous signal…

Read more: WARNING: Record Global Sell-Off of U.S. Debt Could Trigger Economic Collapse