'..Studies show that the business cycle was less volatile before the Federal Reserve was born..''Major centrals banks claim to be independent, but they are all ultimately under the control of politicians. Many developed countries have tried to anchor an independent central bank to offset pressure from politicians and that’s well and good in principle until an economy or the effects of a monetary policy decision beginning spinning out of control. At zero bound for growth and for interest rates, politicians and central banks switch to survival mode, where rules are bent or even broken to fit an agenda of buying more time.
Just look at the Eurozone crisis over the past eight years: every single criterion of the EU treaty has been violated, in spirit of not strictly according to the letter of the law, all for the overarching aim of “keeping the show on the road”. No, the conclusion has to be that are no independent central banks anywhere! There are some who pretend to be, but none operates in a political vacuum.
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Studies show that the business cycle was less volatile before the Federal Reserve was born. The presence of the Fed means that the implicit backing of the Fed allows excess leverage (gearing), and this has resulted in bigger and bigger collapses in financial markets as each collapse triggers yet another central bank “put” that then enables the next bubble to inflate..
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Meanwhile, the fact that volatility is rising, the fact that we see early signs of the business cycle being activated, is good for the real economy. It’s a sign of money flowing from the 20% QE induced overvalued listed companies to the 80% SME (the real economy) as increases in volatility will lower the expected returns on “paper money” and make it more attractive to invest in tangible assets and real businesses.
The world should be concerned when volatility is too low, as it’s a sign the market is allocating money poorly. The one lesson everyone needs to learn is that for a market based economy to function, you need to allocate capital to activities that provide the highest marginal real return on capital. Not to the most political connected.'
- Steen Jakobsen (
"Endgame for Central Bankers" Says Saxo Bank CIO, January 19, 2015)
'..You cannot cure a deflationary debt hangover by forcing more debt into the system..''Steen is pointing to one of the many factors that can change what we always assume is an inverse relationship between monetary easing and consumer demand.
In the US, monetary easing is almost always positive for consumption and it is almost always inflationary, and so we assume that this is true everywhere, but it doesn't have to be true. There are only two things to remember, but we rarely remember them:
1. Changes in household consumption (which is most consumption) can be fully explained by changes in household income and changes in household savings rates. By the way, when you are looking for the data, some call "household" what others call "personal" -- it's the same.
a) If monetary easing causes household income to rise (by increasing employment), or if it increases household wealth (by increasing the value of equity, bonds and real estate), or if it reduces the desire to save (by reducing the reward for saving, or by reducing the cost of consumer credit), it will cause consumption to rise.
b) If monetary easing causes household income to decline (by reducing the return on bank deposits), or if it reduces household wealth (because most savings are in the form of bank deposits, which now have a lower return), or if it increases the desire to save (by increasing income inequality), it will cause consumption to decline.
c) In the US, monetary easing seems to reduce unemployment, it seems to increase household wealth on average, because most Americans savings are not in the form of bank deposits, it seems to reduce the desire to save, by making credit cards cheaper, and while it may increase income inequality, on average it seems to have a strong positive effect on consumption. In China monetary easing has little effect on unemployment because unemployment is still low, it seems to reduce household wealth on average, because most Chinese savings are in the form of bank deposits, it seems to increase the desire to save, because Chinese households have a target savings amount for retirement or for their kid's university and lower deposit rates force them to save more to meet the target, it makes credit cards cheaper but there is little consumer credit in China, and it may increase income inequality. On average monetary easing seems to have a weak or negative effect on consumption.
2. Monetary easing can cause consumption to rise or to decline, for the reasons above, and it almost always causes production to rise (businesses can borrow more cheaply to expand facilities). If monetary easing causes production to rise faster than consumption, it is disinflationary. If monetary easing causes consumption to rise faster than production, it is inflationary.
My point is about #2. I argue that although monetary easing causes consumption to rise faster than production in the US, it does the opposite in China because most credit goes to production and on average monetary easing seems to have a weak or negative effect on consumption.
Steen is discussing #1. He argues that because Europeans have higher savings than Americans, and because most of it is in bank deposits, monetary easing has a negative effect on consumption in Europe, and not positive as in the US. Changes in consumption, by the way, also affect investment because businesses are unlikely to expand production if consumption is weak.
In short, Steen's point is very interesting and too-often overlooked.
And yes, I agree with your comment that in the US QE “works” mainly by causing debt to rise – in the sense that reigniting the equity and real estate bubble simply encourages households to spend the additional wealth in the form of consumer credit. Instead of inflating bubbles we should either improve infrastructure investment or fix the trade problem.
I suspect the bankers that seem to be driving policy prefer bubbles.- Michael Pettis
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It's easy for many to sympathize with Ritholtz's statement
"It is worth noting that opponents of central bank intervention and deficit spending in the U.S. have issued similar warnings for the past six years -- first inflation, then hyperinflation, then the inevitable collapse of the dollar."However, I was not in that group.
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It was far easier for stock advisors to spot the real estate bubble than it is to spot the equity bubble now because stock advisors are generally not in the real estate business. Still, some missed it, others didn't.
Regardless, here's an obvious fact that most still cannot see: You cannot cure a deflationary debt hangover by forcing more debt into the system. Such efforts may appear to work in the short run (in specific situations as noted above), but it's all an illusion papered over by bubbles of increasing size.
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Lacy Hunt at
Hoisington Management pinged me with this interesting thought: "
Academic research indicates that QE in the US contracted rather than expanded economic activity, just as it did in Japan. Thus, Steen could have made the even stronger case that since it didn’t work in the US or Japan, it will not work in for the ECB."
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Contrary to widespread popular belief, constant meddling in free markets never provides long-term economic benefits.'
- Mike "Mish" Shedlock,
Grand Experiment Failure; Bankers Prefer Bubbles; Europe is not USA; Final Epitaph, January 16, 2015
Context '..ethics in particular .. absolute principle of ethics..' - '..deze fundamentele ethiek..''..monetary knowledge .. of currency reform under difficult conditions you have to go to Carl Menger.'(Haptopraxeology) - '..We have lost three centuries as a result of ignoring our scholars!'A warning from the Bank for International Settlements(Haptonomy - Affectivity) - Praxeology as the Method of the Social Sciences - (Affective) Phenomenology of the Social World'..a truly stable financial and monetary system..''..economics as a science which is always based on human beings..'(Praxeology) - '..typology of monetary objects in line with the subjectivist approach.''..since the destruction of the international gold standard in 1914.''..an effort to expand your study of the Austrian theory..'Oklahoma Recognizes Gold and Silver Coins as Legal Tender - '..promoting sound money..'(Dutch) Haptopraxeologie: Bazaarmodel - Oostenrijkse School, Haptonomie, Plasma Kosmologie (29 mei, 2011)