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"Monetary Policy Has Lost Any Semblance Of Discipline," Stephen Roach Slams "QE Lemmings
Submitted by Stephen Roach via Project Syndicate,
Predictably, the European Central Bank has joined the world’s other major monetary authorities in the greatest experiment in the history of central banking. By now, the pattern is all too familiar. First, central banks take the conventional policy rate down to the dreaded “zero bound.” Facing continued economic weakness, but having run out of conventional tools, they then embrace the unconventional approach of quantitative easing (QE).
The theory behind this strategy is simple: Unable to cut the price of credit further, central banks shift their focus to expanding its quantity. The implicit argument is that this move from price to quantity adjustments is the functional equivalent of additional monetary-policy easing. Thus, even at the zero bound of nominal interest rates, it is argued, central banks still have weapons in their arsenal.
But are those weapons up to the task? For the ECB and the Bank of Japan (BOJ), both of which are facing formidable downside risks to their economies and aggregate price levels, this is hardly an idle question. For the United States, where the ultimate consequences of QE remain to be seen, the answer is just as consequential.
QE’s impact hinges on the “three Ts” of monetary policy: transmission (the channels by which monetary policy affects the real economy); traction (the responsiveness of economies to policy actions); and time consistency (the unwavering credibility of the authorities’ promise to reach specified targets like full employment and price stability). Notwithstanding financial markets’ celebration of QE, not to mention the US Federal Reserve’s hearty self-congratulation, an analysis based on the three Ts should give the ECB pause.
In terms of transmission, the Fed has focused on the so-called wealth effect. First, the balance-sheet expansion of some $3.6 trillion since late 2008 – which far exceeded the $2.5 trillion in nominal GDP growth over the QE period – boosted asset markets. It was assumed that the improvement in investors’ portfolio performance – reflected in a more than threefold rise in the S&P 500 from its crisis-induced low in March 2009 – would spur a burst of spending by increasingly wealthy consumers. The BOJ has used a similar justification for its own policy of quantitative and qualitative easing (QQE).
The ECB, however, will have a harder time making the case for wealth effects, largely because equity ownership by individuals (either direct or through their pension accounts) is far lower in Europe than in the US or Japan. For Europe, monetary policy seems more likely to be transmitted through banks, as well as through the currency channel, as a weaker euro – it has fallen some 15% against the dollar over the last year – boosts exports.
The real sticking point for QE relates to traction. The US, where consumption accounts for the bulk of the shortfall in the post-crisis recovery, is a case in point. In an environment of excess debt and inadequate savings, wealth effects have done very little to ameliorate the balance-sheet recession that clobbered US households when the property and credit bubbles burst. Indeed, annualized real consumption growth has averaged just 1.3% since early 2008. With the current recovery in real GDP on a trajectory of 2.3% annual growth – two percentage points below the norm of past cycles – it is tough to justify the widespread praise of QE.
Japan’s massive QQE campaign has faced similar traction problems. After expanding its balance sheet to nearly 60% of GDP – double the size of the Fed’s – the BOJ is finding that its campaign to end deflation is increasingly ineffective. Japan has lapsed back into recession, and the BOJ has just cut the inflation target for this year from 1.7% to 1%.
Finally, QE also disappoints in terms of time consistency. The Fed has long qualified its post-QE normalization strategy with a host of data-dependent conditions pertaining to the state of the economy and/or inflation risks. Moreover, it is now relying on ambiguous adjectives to provide guidance to financial markets, having recently shifted from stating that it would maintain low rates for a “considerable” time to pledging to be “patient" in determining when to raise rates.
But it is the Swiss National Bank, which printed money to prevent excessive appreciation after pegging its currency to the euro in 2011, that has thrust the sharpest dagger into QE’s heart. By unexpectedly abandoning the euro peg on January 15 – just a month after reiterating a commitment to it – the once-disciplined SNB has run roughshod over the credibility requirements of time consistency.
With the SNB’s assets amounting to nearly 90% of Switzerland’s GDP, the reversal raises serious questions about both the limits and repercussions of open-ended QE. And it serves as a chilling reminder of the fundamental fragility of promises like that of ECB President Mario Draghi to do “whatever it takes” to save the euro.
In the QE era, monetary policy has lost any semblance of discipline and coherence. As Draghi attempts to deliver on his nearly two-and-a-half-year-old commitment, the limits of his promise – like comparable assurances by the Fed and the BOJ – could become glaringly apparent. Like lemmings at the cliff’s edge, central banks seem steeped in denial of the risks they face.
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Discipline? But we are playing with others' money!
manipulation of reality is undisciplined. now there's a m************ shocker
people who believe they are the masters of the universe are undisciplined there's another f****** shocker for you
Does m************ = motherfucking? he he heeee
it's f****** voice recognition on my f****** phone hehehe
No shit. The SNB was disciplined while printing money with reckless abandon? What's with these fucking guys? Like the other article regarding the Fed about to make a mistake. No reason to raise rates? Are you fucking kidding me? A CB engaging in NIRP, ZIRP, QE, pegs, whatever is a doubling down on years and decades of a lack of discipline.
How do the cold-warriors who justified their allegience to imperial war and death and abuse throughout the world, by the mantra, "we fought communism. Or we made the world safe for DemoCracy", enjoy their passage of days under the sun? Especially of those devotees to gov't control who are receiving outsized salaries or long-term pensions based on "service". Don't they see that the communists now have a freer form of free enterprise? Don't you see the west's dalliance with mixed economies has slipped into total command and control. Do you see any small or medium sized business organically emerge from the "proletariat". Can you say freedom exists anymore in markets or in the large institutions of the land? Health? Education? Financials? Banking? Gov't? Building? Infrastructure? All have been bagged and tagged. Complete Capture. The old flag captured and the former has ceased forever to be found in the earth.
No, the new world caught the disease of the old. Sold their heritance for a bowl of pottage. A meal prefered over a birthright. A daily calorie over a system of rectitude and absolute uprightness. This experiment of daily innovation of the terms of existence has failed. It was a subtle and well played game of artifice. Early and middle in its terms it could deliver to its promises, but taken as a total system it apportioned unevenly, unfairly, criminally giving and taking without reference to merit. As we enter this profound "renewal" when the system is groaning under the lies and false support which comprise its total being, how can any good come?
The sacrifice of an upright and equally fair system for all for the quick snatch at wealth, the generation first born factoring and consuming the productive life of the last born, what is the ultimate outcome?
It is cyclic. Just as Russia was once the premier wealth centre of Europe and then devastated, just as China was the place to obtain items of high achievement and then crushed into miserable poverty (to rise again), what do you suppose is the flowing plan for the West.
Shall the exorbitant privileges and stations be cast into the fire? Of course, there is no other remedy for that which has gotten too high, too fast and by dishonorable means. Swift becomes the fall.
"Fuck the EU" Some important asshole in the State Department
The Central Bank increased our return on savings again. They raised it from -.5% to -1%.
The shadow of malfeasance has passed.
....6 years late.
what the fuck do they care...the criminal bankers will pay them millions in speaking fee....so what if our kids won't be able to afford to feed themselves!
Oh please, the bears here really like to over-analyze everything. The bankers and politicians saw total economic collapse coming; they were desperate to prevent civil unrest. Being Keynesians and oligarchs, they “knew” pumping up the markets would further enrich the top 10% who own 90% of the assets. They own the factories, the malls, the restaurant chains, hotels, etc. If they could be made wealthy beyond their wildest dreams, they would then hire the little people to build their yachts (trickle-down). The only tools they had was money creation and to slash rates to zero and try to force money into the markets. After five Trillion dollars and 10,000 Dow points, they appear to be pushing on a string.
If Faith in Fed omnipotence is truly a thing of the past, the markets will go down real fast. The wealthy are NOT going to give all those trillions of $ back. Shorts have been long ago wiped out, so no support there. The rich are going to bail and fear will quickly take over.
The Fed bankers desperately want to try to do a couple of 25bps hikes late in the year to give them room to immediately cut again when the markets tank. But, the Fed can never raise rates in this debt-ridden economy, so they will try jawboning instead. When the masses lose hope, it will be shocking to see how fast the illusion evaporates and how ugly reality is. Yield on the ten-year will go below 1%.
We need QE because:
HIGH PRICED OIL DESTROYS GROWTH
According to the OECD Economics Department and the International Monetary Fund Research Department, a sustained $10 per barrel increase in oil prices from $25 to $35 would result in the OECD as a whole losing 0.4% of GDP in the first and second years of higher prices. http://www.iea.org/textbase/npsum/high_oil04sum.pdf
THE PERFECT STORM (see p. 59 onwards)
The economy is a surplus energy equation, not a monetary one, and growth in output (and in the global population) since the Industrial Revolution has resulted from the harnessing of ever-greater quantities of energy. But the critical relationship between energy production and the energy cost of extraction is now deteriorating so rapidly that the economy as we have known it for more than two centuries is beginning to unravel. http://ftalphaville.ft.com/files/2013/01/Perfect-Storm-LR.pdf
PEAK CHEAP OIL https://www.youtube.com/watch?v=0uKihKkx0eY
Steven Roach ... 3 years behind the curve... here's 3 T's for ya Tits, Tats, and Toodle Lou....
Get to work Mr. Bullard!
Long guillotines.