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Stephen Roach Derides Central Bankers' Mass Delusion
Authored by Stephen Roach, originally posted at Project Syndicate,
The world economy is in the grips of a dangerous delusion. As the great boom that began in the 1990s gave way to an even greater bust, policymakers resorted to the timeworn tricks of financial engineering in an effort to recapture the magic. In doing so, they turned an unbalanced global economy into the Petri dish of the greatest experiment in the modern history of economic policy. They were convinced that it was a controlled experiment. Nothing could be further from the truth.
The rise and fall of post-World War II Japan heralded what was to come. The growth miracle of an ascendant Japanese economy was premised on an unsustainable suppression of the yen. When Europe and the United States challenged this mercantilist approach with the 1985 Plaza Accord, the Bank of Japan countered with aggressive monetary easing that fueled massive asset and credit bubbles.
The rest is history. The bubbles burst, quickly bringing down Japan’s unbalanced economy. With productivity having deteriorated considerably – a symptom that had been obscured by the bubbles – Japan was unable to engineer a meaningful recovery. In fact, it still struggles with imbalances today, owing to its inability or unwillingness to embrace badly needed structural reforms – the so-called “third arrow” of Prime Minister Shinzo Abe’s economic recovery strategy, known as “Abenomics.”
Despite the abject failure of Japan’s approach, the rest of the world remains committed to using monetary policy to cure structural ailments. The die was cast in the form of a seminal 2002 paper by US Federal Reserve staff economists, which became the blueprint for America’s macroeconomic stabilization policy under Fed Chairs Alan Greenspan and Ben Bernanke.
The paper’s central premise was that Japan’s monetary and fiscal authorities had erred mainly by acting too timidly. Bubbles and structural imbalances were not seen as the problem. Instead, the paper’s authors argued that Japan’s “lost decades” of anemic growth and deflation could have been avoided had policymakers shifted to stimulus more quickly and with far greater force.
If only it were that simple. In fact, the focus on speed and force – the essence of what US economic policymakers now call the “big bazooka” – has prompted an insidious mutation of the Japanese disease. The liquidity injections of quantitative easing (QE) have shifted monetary-policy transmission channels away from interest rates to asset and currency markets. That is considered necessary, of course, because central banks have already pushed benchmark policy rates to the once-dreaded “zero bound.”
But fear not, claim advocates of unconventional monetary policy. What central banks cannot achieve with traditional tools can now be accomplished through the circuitous channels of wealth effects in asset markets or with the competitive edge gained from currency depreciation.
This is where delusion arises. Not only have wealth and currency effects failed to spur meaningful recovery in post-crisis economies; they have also spawned new destabilizing imbalances that threaten to keep the global economy trapped in a continuous series of crises.
Consider the US – the poster child of the new prescription for recovery. Although the Fed expanded its balance sheet from less than $1 trillion in late 2008 to $4.5 trillion by the fall of 2014, nominal GDP increased by only $2.7 trillion. The remaining $900 billion spilled over into financial markets, helping to spur a trebling of the US equity market. Meanwhile, the real economy eked out a decidedly subpar recovery, with real GDP growth holding to a 2.3% trajectory – fully two percentage points below the 4.3% norm of past cycles.
Indeed, notwithstanding the Fed’s massive liquidity injection, the American consumer – who suffered the most during the wrenching balance-sheet recession of 2008-2009 – has not recovered. Real personal consumption expenditures have grown at just 1.4% annually over the last seven years. Unsurprisingly, the wealth effects of monetary easing worked largely for the wealthy, among whom the bulk of equity holdings are concentrated. For the beleaguered middle class, the benefits were negligible.
“It might have been worse,” is the common retort of the counter-factualists. But is that really true? After all, as Joseph Schumpeter famously observed, market-based systems have long had an uncanny knack for self-healing. But this was all but disallowed in the post-crisis era by US government bailouts and the Fed’s manipulation of asset prices.
America’s subpar performance has not stopped others from emulating its policies. On the contrary, Europe has now rushed to initiate QE. Even Japan, the genesis of this tale, has embraced a new and intensive form of QE, reflecting its apparent desire to learn the “lessons” of its own mistakes, as interpreted by the US.
But, beyond the impact that this approach is having on individual economies are broader systemic risks that arise from surging equities and weaker currencies. As the baton of excessive liquidity injections is passed from one central bank to another, the dangers of global asset bubbles and competitive currency devaluations intensify. In the meantime, politicians are lulled into a false sense of complacency that undermines their incentive to confront the structural challenges they face.
What will it take to break this daisy chain? As Chinese Premier Li Keqiang stressed in a recent interview, the answer is a commitment to structural reform – a strategic focus of China’s that, he noted, is not shared by others. For all the handwringing over China’s so-called slowdown, it seems as if its leaders may have a more realistic and constructive assessment of the macroeconomic policy challenge than their counterparts in the more advanced economies.
Policy debates in the US and elsewhere have been turned inside out since the crisis – with potentially devastating consequences. Relying on financial engineering, while avoiding the heavy lifting of structural change, is not a recipe for healthy recovery. On the contrary, it promises more asset bubbles, financial crises, and Japanese-style secular stagnation.
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Quoting a Chinese "Premier" doesn't exactly do Stephen service.
Soon the quote will be in Mandarin. Get used to it....
Stephen Roach has a better global perspective than most having spent a good part of his career in Asia. So it is significant that he is turning on the Banksters, especially as he is one of them and was in the inner circle.
He is no different from the Bernank or any of the other destructors.
He's just rewriting history a bit as he sets up an alibi for himself so he can seek leniency the day the levee breaks.
philipat wrote,
I am plenty used to the corruption of man. If you think China is going to make it out of this mess you got another thing coming.
Time will tell, of course but China has little external debt and official reserves of the equivalent of $4 Trillion plus an additional unknown amount of physical Gold as opposed to "Gold and Gold equivalents". Which gives it an advantage compared to other countries which have nothing but officially acknowledged debt and multiples more in contingent liabilities and off-balance sheet liabilities? The Chinese people are industrious and natural entrepreneurs with no social welfare programmes, no food stamps and Obamaphones and a laissez-faire business environment.
But, as I said, time alone will tell.
What, then, is debt when the instrument of exchange is itself a debt?
the poor farmers may once again find they have the essential asset.
No worries, we have the article translated in Chinese as well here : http://www.project-syndicate.org/commentary/japan-monetary-policy-reform-by-stephen-s--roach-2015-04/chinese :D
Let me tell you a story about a man named Jed. A poor mountaineer, barely kept his family fed, and then one day he was shootin' at some food, and up from the ground came....
Satan's chariot piloted by Lady Gaga and Beyonce Kardashian?
more regurgitation.
what i wanna know is who/why the survey monkey offin' in mexicali.
Everything is cool when you're part of a team
Everything is awesome when we're living our dream
Everything is better when we stick together
Side by side, you and I gonna win forever, let's party forever
We're the same, I'm like you, you're like me, we're all working in harmony
Everything is awesome
Everything is cool when you're part of a team
Everything is awesome when we're living our dream
(Wooo)
3, 2, 1. Go
Have you heard the news, everyone's talking
Life is good 'cause everything's awesome
Lost my job, it's a new opportunity
More free time for my awesome community
I feel more awesome than an awesome possum
Dip my body in chocolate frostin'
Three years later, wash off the frostin'
Smellin' like a blossom, everything is awesome
Stepped in mud, got new brown shoes
It's awesome to win, and it's awesome to lose (it's awesome to lose)
Everything is better when we stick together
Side by side, you and I, gonna win forever, let's party forever
We're the same, I'm like you, you're like me, we're all working in harmony
Everything is awesome
Everything is cool when you're part of a team
Everything is awesome when we're living our dream
Blue skies, bouncy springs
We just named two awesome things
A Nobel prize, a piece of string
You know what's awesome? EVERYTHING!
Dogs with fleas, allergies,
A book of Greek antiquities
Brand new pants, a very old vest
Awesome items are the best
Trees, frogs, clogs
They're awesome
Rocks, clocks, and socks
They're awesome
Figs, and jigs, and twigs
That's awesome
Everything you see, or think, or say
Is awesome
Everything is awesome
Everything is cool when you're part of a team
Everything is awesome when we're living our dream
Thats pretty good Capt Jack....
this can go on a long time as the foundation of the asset book erodes away. corporations are levering up to buy back shares. everyone seems to think it is because rates are low. imo they are doing this because they are absolutely convinced that rates will be even lower in the future. they know damn well there will be no economic expansion or revenue growth within the foresseable future. in the same way projections for us gubbermint interest payments are wildly exaggerated due to the faulty assumption that rates will rise.
Keynesians are doing anything and everything to the economy to try and prove their they are not full of shit. They're losing badly.
Neo-Keynesians n ot Keynesians.
Contemporary economists have bastardized Lord Keynes economic philosophy.
Great steve- now go back into the matrix and serve your masters
Here are some more signs of a coming recession.
http://michaelekelley.com/2014/12/20/leveraged-loans-predict-crash/
http://michaelekelley.com/2015/02/20/fed-warns-of-two-bubbles/
http://michaelekelley.com/2015/02/24/would-you-pay-39-more-than-asked/
Here is how to prepare yourself.
http://michaelekelley.com/2014/10/16/8-things-to-do-when-recession-happens/
Good luck!
Well Mikey, since you are going to pimp your own blog here, how about a question? The "8 things" you propose in your last link were correctly called out by commenter Dominic with no response from you. Have YOU learned anything at all from ZH or elsewhere? Suggesting GLD during the next "recession" is absolute idiocy (he was polite - you ignored him - you bring that shite to Fight Club?). Buying levered bear ETFs after the market starts bucking? Good luck getting paid on any of that crap when the debt superstructure topples. Your next "recession" is the big one pal, as CBs are all in and Mr. Yellen is balls to the wall.
Wake up
"it seems as if its leaders may have a more realistic and constructive assessment of the macroeconomic policy challenge than their counterparts in the more advanced economies."
Everyone has a plan until...
Mr Roach glosses over the all important malevolent intent part.
The central banksters are in this to enrich their shareholders and associate banks, no one else.
Interestingly, this is exactly how it's all working out.
Yep, bubbles burst and those at the top enjoy the benefits of consolidation and control. Seems to be working to me......
Controlling others is not fun, it is intensive labor that destroys the soul.
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I say this every time I see an article like this. The Federal Reserve is executing a political agenda. Does nobody get this? Federal Reserve policy is working perfectly. The people who are confused are the ones who think this has anything to do with economic theory.
James Quillian, Common Sense Economics, http://quillian.net/ p { margin-bottom: 0.1in; line-height: 120%; }
I'm reading Richard Werner's "The Princes of the Yen" and he makes exactly the same point - the Central bank (BOJ) used its independence to prosecute a social agenda of change via blowing a bubble and letting it burst. Where have we heard that before...
It's like a slip and slide for fiscal procrastination for those who don't want to be fiscally responsible with the taxpayers mula. Instead take all that good faith and credit of the American taxpayer (recently referred to as the enemy) and roll in the Monopoly money of disfunction for endless funds of slush funds going out all the back doors except to promote more lies for more slush funds based on disasters needed more for the money of never getting fixed as then the endless disfunction bloody moneys would never stop flooding in....
Eventually they run out of the taxpayers money.
Which they already have....
They need more time to do things behind the scenes which is destroying the economy as the crony fascist barbarians think they can rob peeps of everything just to sell it back to them. Like that's gonna work.... The complete destruction of ones customers or population.
Whatever... It will matter once we all have been robbed of everything when everyone will understand the mocking down the endless hole to hell for hypocritical judgement day!
Just in time to train the rapebots.....
I have been taking pics of the Atlanta fed GDP and we have a lower dot that last Thursday's pic which had only the .9 upper dot. What's that .7 now?
https://www.frbatlanta.org/cqer/researchcq/gdpnow.aspx
http://stockcharts.com/h-sc/ui?s=%24BDI
Baltic dry index worth the watch here and looksie
Indeed, notwithstanding the Fed’s massive liquidity injection, the American consumer – who suffered the most during the wrenching balance-sheet recession of 2008-2009 – has not recovered. Real personal consumption expenditures have grown at just 1.4% annually over the last seven years. Unsurprisingly, the wealth effects of monetary easing worked largely for the wealthy, among whom the bulk of equity holdings are concentrated. For the beleaguered middle class, the benefits were negligible."
And if Greece's forthcoming default (and it will default...within a few more days) doesn't finally set it all off, a fed-up working class, especially as we grope toward the campaign season, will likely throw down the gauntlet before the candidates seeking their vote.
That's if we make it through Greece and a long hot summer...
Mark my words, what's left of the western middle class won't endure another hard-up holiday season listening to endless lies about a bullshit recovery that never was. At some point soon, I expect the masses to start raising hell.
The fact is, folks have been patient long enough with the obviously-wrong prescription for what ails us; everyone is growing older and not better able to fund the lives they used to know. Retirements for the future, and basic living expenses of the present need to be funded with more than half of a paycheck. Working people see the imbalances and the corporate games (like share buybacks in lieu of healthy, earned raises and capex/R&D to fund their future paychecks), and are growing very fed up with them.
This ends this year, one way or another.
I become more certain of this each day.
m
Time will tell, Md4. If you are correct I invite you to remind us of your previous forecast with a gloaty "I told you so!"
All I know is that it's been a long time coming.
"Mass delusion?" Ever heard of 9/11? Fractonal banking? Have you ever met their wives? Bankers have mass delusion for breakfast.
Fuck me I just gotta know one thing is REM a respectable musical group or just some pop junk band out for the babes and mula
Too many people still seem to assume that the central banks actually try to do something good for the economy. They are all about funneling wealth from the normal people to the elite (and right now also about crashing the petrodollar system and introduce something new). Analysts assuming the central bankers are stupid but benevolent will never get it right.
Exactly! They aren't missing the target. Most people are just looking at the wrong target.
Just to point out that the entire world is ALWAYS in the grips of a dangerous delusion. There has NEVER been a time in all of human hystery, when it wasn't.
Not sure it's always been "dangerous" historically. We are much further off the rail and into truly "dangerous" territory today than at many other periods of history. Do we always tend to delude ourselves? Probably. Has it always been this dangerous? I don't think so. Leverage and financial market valutions are today where they've been only a few times in history. Those all ended badly. Of course, this time is different.
Stephen, you're 100% wrong. Pretending that these people are stupid only gives them cover to continue their destruction of, followed by the total control of, the world's resources and economies.
Let's face the facts that the globalists are going to bring the entire system to its knees and then, using all the fake money that they've printed to buy our politicians, take full control of everything.
They're not stupid, just psychopaths.