QE - Who wins? Who loses?

[Temperament]

http://conversableeconomist.blogspot.sg/...s-who.html
http://www.mckinsey.com/insights/economi..._and_risks

What will happens if QE taper? Pay attention to capital market behavior lol, as recommended by conclusion.
Will stock markets around the world affected by capital fleeing back to Uncle Sam?
Be prepared!

Also, QE (at least to me) is like "Robbing Peter to Pay Paul". Not only that someone keep the excess "Looting from some of the people too".

[greengiraffe]

Mission accomplished

Geoff Winestock
1331 words
25 Oct 2014
The Australian Financial Review
AFNR
English
Copyright 2014. Fairfax Media Management Pty Limited.

Quantitative easing The radical experiment to rescue the US economy is almost over – but was it worth it? Geoff Winestock considers the evidence.

Barring a last-minute surprise, the unique economic experiment in the United States known as quantitative easing – or "helicopter drop" monetary policy – will end next week. The reference to helicopters goes back to Nobel laureate economist Milton Friedman, who speculated 50 years ago that if interest rates fell to zero but economic growth was still dangerously low, one answer might be for central banks to send a helicopter to drop dollar bills on a community.

For decades, no one paid much notice. The received wisdom was that central banks could always adjust interest rates to fine-tune the economic cycle and government stimulus spending could chip in, too.

But Ben Bernanke, then chairman of the US Federal Reserve, dusted off his Friedman during the global financial crisis, when interest rates had been cut to zero but the US economy was still tanking. Political deadlock and debt concerns meant the federal government could not spend.

So Bernanke threw away the central banker tool kit and bought a helicopter. He went on an unprecedented buying binge, purchasing mostly US government bonds and mortgage securities from private investors. At its height, the US Fed was buying $US85 billion of stuff a month.

The Fed is now the biggest investor in the world, holding more than $US4 trillion ($4.6 trillion) of bonds, compared with less than $US1 trillion before the crisis.

The amount the Fed buys has been grad­ually falling, to only $US15 billion a month now. Bernanke's successor, Janet Yellen, has foreshadowed that she will likely decide at the Fed's meeting next week to stop buying bonds altogether.Judgment day ahead

Quantitative easing pushed up the Australian dollar to painful levels but, arguably, we benefited from the US recovery. The flood of Fed dollars has gone into AAA-rated Australian banks and perhaps even contributed to the rise in house prices here.

In a speech this week, Reserve Bank of Australia deputy governor Philip Lowe complained that investors were happy to use cash from QE to buy existing assets, such as houses and blue-chip shares, but not to invest in new ventures, which is what really creates jobs and growth. "It is this latter part of the transmission channel that is proving frustratingly slow in many countries," Lowe said, suggesting governments should invest more in infrastructure.

The radical experiment in monetary policy appears to be over. But a final assessment of QE is still ahead. Some question whether history's biggest government intervention in financial markets was worthwhile and what will happen next. QE has blurred the difference between ­fiscal and monetary policy and handed unelected central bankers a role usually played by governments.

Some of the criticisms have almost ­certainly been proved wrong. When Bernanke launched QE in 2008, conservatives screamed it would cause hyperinflation not seen since Weimar Germany. Wrong. Inflation in the US has stayed low, despite QE.

It turns out that printing money only pushes up consumer prices if people actually spend the cash. But in the past seven years, people have been very tight-fisted.

There has been criticism of QE from the left side of politics, too. Some have argued that QE just pushed up the price of equities and houses in the US, which helped only the rich. Indeed, a senior Fed official, James Bullard, recently had to parry this charge. It was true, he said, that QE had raised equity and house prices, which are mostly owned by older, richer people.

But this was necessary because asset prices had been abnormally low in the wake of the financial crisis. Over the medium term, it all evened out. "Income and wealth distribution . . . is only as good or bad as it was before the crisis," Bullard wrote.Consider the counterfactual

The question of how effective QE has been in boosting the economy is hard to answer because the tactic is still so new.

Sceptics say it has been a waste of time. Seven years after the GFC, the US economy is still growing below trend and unemployment has only just fallen below 6 per cent. But Peter Downes, director of Outlook Economics, says no one ever asks what would have happened if nothing had been done. "It could have been a lot worse."

The theory of QE is that a central bank buys assets – in the Fed's case, mostly US government treasuries or bundles of mortgages – which then encourages investors to use the money to invest in other stuff such as shares and corporate bonds. That then makes it easier for companies to raise money and for consumers to refinance mortgages at lower rates, which eventually boosts the economy.

Equally, some QE cash will go overseas, chasing a decent return and driving down exchange rates. Arguably one of the biggest benefits of QE for the US economy is that it has kept the US dollar lower. Now that QE is ending, the greenback is rising.

Doomsayers argue that a new financial crisis looms as both the US and the world economies are weaned off the methadone of free money. It's a view that was encouraged by RBA assistant governor Guy Debelle in a speech this month, warning that too many investors were placing big bets on the basis that money would always be easy to borrow at low rates.

But some will get caught as QE is withdrawn. "The exits tend to get jammed unexpectedly and rapidly," Debelle said.

On the other hand, the formal end of asset purchases by the Fed expected next week is not necessarily that big a deal. Purchases have been winding down for a year and most of the bad stuff happened in May 2013 when Bernanke first said he was thinking of tapering QE purchases. During the so-called "taper tantrum", investors dumped risky assets, especially in developing countries.Slow process of tapering

What people have understood in the 18 months since then is that the process of unwinding QE could be very slow. The Fed was not going to dump its $US4 trillion of assets on the market overnight.

Instead, over the next five or 10 years, as the US government bonds and mortgage bonds on its balance sheet mature, the Fed will gradually be repaid. That will remove liquidity from the economy but hopefully by then other sources of growth will appear.

Moreover, while the Fed is exiting QE, others are not. The Bank of England still has its own large QE program. Japan has used QE on and off since the late 1990s, and the European Central Bank is considering its own very large QE program, although it faces political opposition led by Germany.

Furthermore, while QE is ending in the US, there could be a very long delay before the Fed starts lifting interest rates – which is the next big step in getting the world's biggest economy back on course. Yellen would frighten markets if she talked next week about raising rates, but she has barely even hinted at a date yet.

Markets are not expecting US rates will rise until the middle of 2015, and recent data suggests it will be later rather than sooner. Inflation in the US is low because of the fall in the price of oil. The recent rise in the US dollar is slowing the economy.

There are also concerns about the European and Chinese economies and geopolitics. Some in the Fed have even suggested QE itself should keep going past next week.

Shane Oliver, chief economist for AMP Capital, says that markets have fretted for years that QE would cause inflation or asset bubbles, but they have been wrong. "The reality is that it hasn't happened," he says.

The QE helicopter seems to have become a key weapon in the central bankers' arsenal.


Fairfax Media Management Pty Limited

Document AFNR000020141024eaap0004u

[greengiraffe]

CHRISTOPHER JOYE
Why capitalism is not doing its job
PUBLISHED: 5 HOURS 48 MINUTES AGO | UPDATE: 2 HOURS 47 MINUTES AGO

Why capitalism is not doing its job
The biggest threat facing contemporary capitalism is democracies rejecting its key feature: the “creative destruction” imposed by freely functioning markets, which is the main driver of productivity. Photo: Andrew Harrer
CHRISTOPHER JOYE

The biggest threat facing contemporary capitalism is democracies rejecting its key feature: the “creative destruction” imposed by freely functioning markets, which is the main driver of productivity.

The prices we see today for equities, bonds and housing are not remotely near their true market “clearing” levels.

They are fake prices – to borrow a phrase used by Australia’s Matthew McLennan who manages $80 billion for First Eagle Investments – that have been artificially lifted by governments spending trillions of dollars buying assets in a misguided bid to maintain their values.

There is no historical precedent for the massive interference in Western markets since the global financial crisis.

In the past, governments would seek to mitigate recessions by easing short-term interest rates, spending money on productive “public goods” like infrastructure, and chiselling taxes to encourage consumption. Markets were otherwise left to do their job of signalling which businesses should rise and fall.

There is absolutely a role for governments to vouchsafe a minimum level of liquidity when markets temporarily shut tight in crises. I argued this in March 2008 apropos the securitisation market, which the government ended up (very) profitably supporting with $15 billion.

Yet seven years after the GFC central banks continue with their unrelenting campaign to reject market prices and impose their own false values through buying government bonds, bank bonds, corporate bonds, asset-backed bonds and, amazingly, direct equities.

While the US Federal Reserve has announced that it will stop its $2.4 trillion asset purchase program, the European Central Bank and the Bank of Japan will more than compensate with their own attempts to bolster asset prices.

The ECB is expanding its balance sheet by between $1.4 trillion and $4.2 trillion through investments in asset-backed securities, bank-issued covered bonds and possibly corporate bonds. These outright purchases are on top of the ECB’s long-term lending facilities, where banks can borrow hundreds of billions of euros at just 0.15 per cent.

Last Friday the Bank of Japan shocked markets with the announcement that it will boost its purchases of Japanese government bonds to $800 billion each year. It also increased its annual investments in Japanese exchange-traded funds (equities) and listed property trusts to $30 billion and $900 million, respectively.

Around the world stocks and bonds soared on the news. Central bankers are combining these investments with near-zero short-term cash rates, which has lowered the cost of borrowing to the cheapest levels in history. Any asset-class that relies on leverage has consequently been a major beneficiary.

In most countries you can borrow more against residential property than other investment categories. It should be no surprise, therefore, that house prices in Australia, Britain, Canada, New Zealand and the US have been surging on the back of the most attractive mortgage rates borrowers have seen.

My concern is that these policies are making the problems that existed prior to the GFC worse. Most agree the crisis was triggered by excessive debt, cheap money, and overvalued investments. But today we have more debt, even cheaper money, and dearer asset prices.

The shock that erupted in 2007 was a clear market signal that we needed to reallocate scarce people and capital, which had become overexposed to financial services and other leveraged assets like housing, to more productive activities.

By preventing markets from clearing, we are fundamentally undermining the creative destruction that has powered prosperity for a century.

Today Goldman Sachs, Morgan Stanley and the four major banks are worth more, not less, than they were before the GFC. And investors appear to have become addicted to the drug of false markets and the downside protection afforded by the central bankers’ “put option”. Every time there is a correction, governments – threatened by shrieks from financial oligarchs – embark on more taxpayer-funded asset purchases while kicking the interest rate “normalisation” can further down the road.

If market prices are fictitious, what should investors do? Remain very risk-averse. You are in unusual times when the Reserve Bank’s assistant governor, Guy Debelle, says: “I find it somewhat surprising that the market is willing to accept the central banks at their word.”

I would get long the security provided by cash, avoid fixed-rate bonds like the plague, and hedge naked equities risk via “market neutral” funds.

The Australian Financial Review

BY CHRISTOPHER JOYE
Christopher Joye
Christopher Joye is a leading economist, fund manager and policy adviser. He previously worked for Goldman Sachs and the RBA, and was a director of the Menzies Research Centre. He is currently a director of YBR Funds Management Pty Ltd.

@cjoye

[greengiraffe]

Fed's Powell: Easy policy affecting risk-taking at home, abroad
15 Nov6:29 AM

[WASHINGTON] A top Federal Reserve official warned on Friday that loose US monetary policy may have fueled increased risk-taking through leveraged borrowing in the United States and syndicated loans abroad.

Fed Governor Jerome Powell said the US central bank must be mindful of how its policies affect the bets made by investors at home and in other countries, though he said market volatility was unlikely to have "important implications" for US policy. "Some pockets of increased risk-taking by banks and other investors are observable in domestic markets," he said at a conference on central banking. "And on the international front, there has been a notable increase in syndicated loan originations." Powell's remarks suggested Fed officials were concerned that these markets could shift abruptly once the US central bank begins tightening monetary policy. The Fed has held benchmark US interest rates near zero for nearly six years, but it is expected to begin bumping them higher in 2015.

Last year, when then-Fed Chairman Ben Bernanke hinted at an eventual end to the US central bank's stimulative bond buying, emerging markets went into a tailspin - an episode Powell alluded to in his remarks.

He said that while US investors did not appear to be taking "worrisome" risks when it came to their holdings of emerging market bonds, even small shifts in huge US holdings could shake smaller developing nations. "We take the consequences of such spillovers seriously, and the Federal Reserve is intent on communicating its policy intentions as clearly as possible in order to reduce the likelihood of future disruptions to markets," he said.

REUTERS

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Capital rules limit cash rates, says BOE chief Carney
THE AUSTRALIAN NOVEMBER 17, 2014 12:00AM

David Uren

Economics Editor
Canberra
Mark Carney
Bank of England governor Mark Carney in Brisbane. Source: News Corp Australia

CASH rates will be very slow to rise and won’t return to pre-crisis levels as central banks take account of the cost of new rules on the rates charged to customers, according to Bank of England governor Mark Carney.

Mr Carney warned that although the rate moves would be gradual, volatility was likely to increase in world financial markets as banks started placing a premium on liquidity.

He told The Australian that even with rates at zero and quantitative easing in many countries, monetary policy could not be described as “easy”.

“The ease or not of monetary policy is determined by where activity goes and where inflation goes,” Mr Carney said.

“The lesson of the last five years is that central banks have largely calibrated their monetary policies correctly in terms of their core mandates of achieving their inflation targets.

“The issue is not overshoot of the inflation target; the issue has been undershoot.”

He said that the slow eventual adjustment of interest rates partly reflected the fact that monetary policy was not loose now.

“How can it be that in the UK, where the economy has been growing at 3 per cent for the past year and a half years, that interest rates are at half a per cent?” he said. “There is still slack in the labour market in the UK.

“We’ve got downward pressure on inflation from past depreciation of sterling. We’ve got huge disinflationary forces coming from our trade partners, particularly in Europe, and commodity prices have gone down quite sharply.

“In fact, it takes us three years to get inflation back up to 2 per cent on our forecasts.”

Mr Carney said the central banks would set rates to take account of what banks ultimately charged their customers.

“The reforms we’ve made to capital and liquidity will mean that spreads in our view will be higher in the medium term,” he said.

At present banks were not charging customers for liquidity because with all the central bank action, it was plentiful, he said.

“That’s going to change when policy moves. Just through that dynamic, we think spreads are going to increase and volatility is going to increase.”

Mr Carney said an increase in volatility was more than just a possibility, it was likely.

“Now it is low because interest rates are as low as they can go, there’s a lot of excess reserves in the system and there are perceptions of central bank policy that may not be fully warranted.”

Mr Carney said it would be big news when rates started to lift and volatility spread, but it was part of the process of normalisation.

“We’re going to move to a world in the medium term where banks have to hold liquidity, hold more capital, do less proprietary trading and less market making.

“There will be more volatility in markets and more discipline around risk taking and liquidity management. As a central bank, when you get to that point, you take that into account.”

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US Federal Reserve’s easing blamed for weakening of investment

• THE AUSTRALIAN
  
• NOVEMBER 09, 2015 12:00AM
  

0

David Uren
[Image: david_uren.png]
Economics Editor
Canberra

[b]A policy brushfire has broken out in the US sparked by an article claiming that the extraordinarily easy monetary policies of US Federal Reserve are partly to blame for the weakness of business investment.[/b]
Cutting interest rates is supposed to help investment not hurt it, but an article in theWall Street Journal by Nobel prize-winning economist Michael Spence and former Federal Reserve board member Kevin Warsh contend that all the central bank’s actions have done is encourage a boom in asset prices.
Reserve Bank governor Glenn Stevens has also been worried about this. Financial risk-taking has increased, driven by investors’ increasingly difficult search for a steady income stream, while risk-taking by companies on new projects and business expansion has been much rarer, he says. Companies are happy to sit on stockpiles of cash or are returning it to shareholders rather than investing in new projects.
It is a global problem. In Australia, investment by non-resource companies has dropped to a record low of 3.5 per cent of GDP, far below the 5.2 per cent touched during the recession in the early 1990s.
Stevens does not accept that monetary policy is to blame — changing interest rates only ever influences demand across the economy by altering financial prices and asset values, so it is doing all it can. “Lowering interest rates doesn’t just conjure up demand through some process of immaculate conception,” he told an audience in London earlier this year. The problem, as he sees it, sits with company boards and their lack of confidence.
The bank’s decision on Tuesday to leave rates steady was driven by its belief that a revival in confidence is building. Stevens is encouraged by the strength of employment and business surveys showing the outlook for sales and profits is improving. But the lift in investment remains elusive with the latest Deloitte Access survey showing all major industries have less work planned or under way than was the case a year ago. The bank’s monetary policy statement on Friday concluded that the shrinking pipeline of non-residential building work that is yet to be completed and business surveys show that “a pick-up in non-­mining investment is not in prospect in the near term.”
In the US, the question is being asked whether the quantitative easing policies under which the world’s major central banks have sought to pull down long-term ­interest rates as well as the short-term cash rates they directly ­control, which have been slashed to zero, are having perverse effects.
Spence and Warsh argue that business managers are worried about what will happen to the economy when extraordinary monetary policies are unwound, and believe investments in financial securities like shares will be easier to get out of when that time comes than investments in new factories. They suggest that while flooding markets with cash has ­reduced financial volatility, it has increased risks in the real ­economy. “Public policy shouldn’t bias ­investments to paper assets over investments in the real economy,” they say.
Their article has brought heated responses from economists such fellow Nobel laureate, Paul Krugman, and President Barack Obama’s former economic adviser Larry Summers, who has argued, on the contrary, that the problem is that the Federal Reserve is not doing nearly enough to stimulate an economy that has sunk into a “secular stagnation”. Summers says the proposition advanced by Spence and Warsh would not pass an introductory economics class.
But the impact of ultra-low ­interest rates on the preferences of savers — think about the plight of self-funded retirees — is often overlooked in the monetary policy debate. Investors dependent on a fixed income are not going to start punting on growth stocks when interest rates fall — they will look for alternative investments that provide them with the best steady flow of income they can find.
Goldman Sachs chief economist Tim Toohey says the companies that have been doing best in the sharemarket are those that deliver steady income flows, much like ­investing in a bond. Utilities and infrastructure companies that would look dull at any other time have investors flocking. Company managers and boards across the economy get the message: their ­investors want a nice steady flow of dividends. The average share of profits paid out to shareholders has risen from two-thirds to three-quarters. There’s not much money left over for investment, but that is not what shareholders are looking for.
The Reserve Bank acknowledges the asymmetric impact which its rate cuts are having on savers and borrowers. Borrowers are using rate cuts to get ahead on their repayments, rather than increasing spending. Savers, particularly retirees, are cutting spending by more than expected.
The net result is that rate cuts are less effective in getting the public to bring-forward consumption than they were.
The bank still believes cutting rates is effective. Although it may not be encouraging people to spend more and save less, the lift in house prices has boosted construction while rate cuts have also helped to lower the value of the currency. Even if low rates had contributed to the global stagnation, it is not obvious that raising rates would help.
The Reserve Bank made clear last week that it stands ready to cut rates if conditions weaken. “Were a change to monetary policy to be required in the near term, it would almost certainly be an easing, not a tightening,” Stevens told the Melbourne Institute and The Australian’s Economic and Social Outlook Conference last week.
A pivotal assumption is that household consumption will grow at an above-average rate from 2016 onwards. “Low interest rates and further growth in employment are expected to continue to support a pick-up in household demand, and the household saving ratio is expected to decline gradually,” the bank’s monetary policy statement released on Friday says. The bank acknowledges that this depends on whether households see the depressed wages growth to be temporary or persistent.
Should the boost to consumption fail to materialise, a further rate cut is unlikely to get savers spending again.

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Central banks risk becoming economic wreckers

• THE AUSTRALIAN
  
• NOVEMBER 14, 2015 12:00AM
  

0

Alan Kohler
[Image: alan_kohler.png]
Editor-at-large, ABR
Melbourne

[Image: 478635-bdfccf38-89bd-11e5-a54c-e349400b8874.jpg]
The world is in the grip of a demographic shock, as ageing begins to increase dependency ratios for the first time in 45 years. Picture: Norm Oorloff Source: News Corp Australia
[b]After Thursday’s stunning employment figures for October, the chances of another rate cut in December have disappeared. Or at least they should have.[/b]
That there remains the chance of a further rate cut in Australia, despite clear evidence that the economy doesn’t need it, is a reflection of the modern paradox and problem of central banking: low and falling inflation.
Central banks everywhere have switched from fighting inflation to ardently desiring it. In the process, they are in danger of becoming economic wreckers.
At the moment the average base interest rate for savings at an Australian bank is 2 per cent, reflecting the low RBA cash rate. The core inflation rate is 2.2 per cent. That means anyone who is worried enough or crazy enough to save instead of spending their money now is going backwards in real terms.
In Europe, it’s much worse. The European Central Bank’s deposit rate is actually -0.2 per cent. And following a “dovish” speech on Thursday by ECB President Mario Draghi, the market now ­expects another cut in the deposit rate to -0.4 per cent!
The interest rate on savings at Deutsche Bank, at the moment, is “up to” 0.03 per cent — effectively nothing. Soon that could be minus as well — that is, the bank will charge customers to hold their money. And bond rates are ­negative already, especially ­following Draghi’s speech, when the German benchmark bund yield fell to a record low of -0.32 per cent.
Interest rates are meant to ­protect lenders and savers against the uncertainties of the future. Negative interest rates — nominal, as in Europe, or real as in ­Australia — imply that the future is more certain than the present, which is plainly ridiculous.
It’s much the same for longer- term savers — those saving for their retirement. Ultra-low cash rates have reduced long-term bond rates to multi-decade lows which, in turn, have lowered returns from all asset classes to the point where it’s almost not worth doing. Might as well just go on the pension.
Such is the price of stimulating the economy: savers are being asked to sacrifice their future living standards for the greater good.
Actually, they’re not being asked. The world’s poor, who have a higher propensity to save than the rich, are being dragooned into sacrifice by central banks in the name of John Maynard Keynes, the man who invented the central management of aggregate demand and who still dominates economic thinking.
Keynes called for the “euthanasia of the rentier”, betraying a low opinion of savers, which was perhaps understandable during the Great Depression. In a growing economy, as we have now, ­savers and savings are essential to fund growth. (A rentier is someone who lives off their savings — that is, they don’t work — it’s a pejorative.)
In fact, monetary policies everywhere are not only destroying the meagre savings of the world’s poor, they are acting as a dead weight on economic activity. Keynesian monetary stimulus, so beloved of politicians and central bankers as well as the Left, is not only not working, it’s making things worse at the same time as oppressing the poor.
In fact, central banks are fighting the wrong war. Global inflation is falling for reasons that have nothing to do with them and they can’t do anything about. They can only influence demand, and even then not very much these days. But inflation is falling for four other reasons:
1. Falling commodity prices, caused by excess supply
2. Technology bringing down costs
3. Excessive debt
4. Population ageing
This week two leading central bankers broke ranks for the first time and expressed doubts about what they are doing. The head of Germany’s Bundesbank, Jans Weidmann, and governor of the Reserve Bank of India, Raghuram Rajan, who has also just been appointed vice-chairman of the Bank for International Settlements (the central banks’ central bank), were speaking together at an event in Germany.
Rajan said: “I worry more about the consequences of staying in the ultra accommodative world. If everyone is doing it, you won’t get much benefit out of it.”
Weidmann then backed him up: “I share the concerns regarding monetary policy that is too loose for too long.”
Moreover, Keynesian fiscal policies that have resulted in large budget deficits are forcing governments to raise taxes on the poor through flat rate consumption taxes since the rich, and global corporations, are so easily able to avoid income taxes these days.
The supposedly Keynesian policies of negative real — and nominal — interest rates and fiscal stimulus are not only a disaster for the world, they are gathering catastrophe for the world economy. And the funny thing is that Keynesian economics is meant to be left wing; the other day opposition Treasury spokemsan Chris Bowen proudly declared himself to be a Keynesian. Most socially progressive politicians do the same. In fact, the ideas they ­promote end up robbing the poor and transfer wealth to the rich.
Why is Keynesian manipulation of aggregate demand so popular with politicians and central bankers? Because it conveys the notion that they are omni­potent, and can control events.
As one of the world’s leading anti-Keynesian economists, ­Steven Kates of Melbourne’s RMIT University wrote in his book, Free Market Economics: “Today, there is no aspect of an economy’s structure that governments do not believe themselves capable of making a positive ­contribution towards. … Such ­actions are not undertaken with a sense of dread at the possible ­unintended consequences. They are undertaken with a confidence that is simply unwarranted …
“To believe that some central agency can plan ahead for an entire economy is one of the major fallacies often associated with economic cranks. No single person, no central body, no government agency can ever know anything remotely like what needs to be known if an economy is to produce the goods and services the community wants, never mind being able to innovate or adjust to new circumstances.”
But the main thing is that in the end, monetary policy doesn’t work. In normal circumstances raising and lowering interest rates does serve to regulate the economy by encouraging, or discouraging, borrowing and delaying, or bringing forward, consumption.
But in the post-GFC world this is not working to either increase the inflation rate or boost activity for four reasons: first, global debt has increased since 2007, not decreased; second, the world is in the grip of a massive demographic shock, as ageing begins to increase dependency ratios for the first time in 45 years; third, the digital revolution is bringing down both costs and prices so that inflation remains persistently low; and fourth, commodity prices are falling because of a supply shock, in part caused by technology (fracking and horizontal drilling for oil).
Debt weighs on inflation ­because it leads to overproduction by firms trying to service their creditors, less spending by consumers and governments as they try to reduce debt.
The disinflationary impact of the world’s increased debt load is being exacerbated by digital disruption and automation, as well as the ageing of the population.
The central banks’ solution to this is … more debt! Or rather, low interest rates to encourage it.
They are convinced that the problem is a shortage of demand leading to “secular stagnation”, the only solution to which is to encourage demand for goods and services by first encouraging the demand for credit. But what you actually get is just more debt.

[greengiraffe]

• Nov 14 2015 at 6:18 AM 
  

Negative rates lessen need for inflation reset, says Bank of Canada

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NaN of
[img=620x0]http://www.afr.com/content/dam/images/1/1/a/c/v/u/image.related.afrArticleLead.620x350.gkyv9e.png/1447442315774.jpg[/img]The bank said more analysis was needed on whether negative rates are a viable tool over an extended time, and also on how low rates can go. FDC
The newly found ability for central banks to have negative policy interest rates diminishes the need for them to raise their inflation targets, a Bank of Canada discussion paper concluded on Friday.
The article was released simultaneously with a speech by the bank's senior deputy governor, Carolyn Wilkins, in which she reiterated the stance that Canada's inflation-targeting framework was working well, "so the bar for change is high".
The text of the speech made no reference to current monetary policy and the paper noted that the views do not reflect its official bank policy.
Next year, the central bank and the Canadian government will renew the bank's five-year inflation-targeting mandate, which currently tries to keep inflation at 2 per cent.

Wilkins said given reduced growth potential, the neutral rate of interest is lower than before the global financial crisis. This suggests it is more likely now that policy interest rates will fall to zero if the inflation target is kept at 2 per cent, limiting the margin for conventional monetary policy.
But the Bank of Canada research paper, to which she referred in her speech, found that negative policy interest rates restore some manoeuver room.
"To the extent that policy interest rates can be reduced meaningfully below zero temporarily with limited costs to financial stability, arguments that the inflation target should be raised in response to a lower neutral interest rate become less powerful, particularly given the costs that permanently higher inflation poses," the paper said.
However, analysis was needed on whether negative rates are a viable tool over an extended time, and also on how low rates can go, it said.


It therefore remained an open question as to whether the ability to have negative policy rates, effectively charging banks for their deposits, can sufficiently compensate for the decline in the neutral interest rate, the paper said.
Wilkins said the research found that transmission of negative policy rates through the exchange rate channel "might be particularly important". That was a reference to negative rates weakening the domestic currency.
In a separate Globe and Mail newspaper interview, Wilkins referred to a lower Canadian dollar helping a Canadian recovery, aided also by US growth and past rate cuts.
"What we are seeing is the rebound in the second half [of 2015] that we were looking for," she said.

Wilkins also told the Globe she expected a soft landing for the heated housing market.



Reuters