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short article linkTo note, from a portion of the article: "Economists fear that the self-reinforcing spiral of falling prices would weigh on growth and hurt banks and borrowers. That has led central banks in Denmark, Sweden and Switzerland
to set negative rates, in effect taxing the money that banks hold rather than lend to the real economy. The European Central Bank, in its own fight against deflation, is also using negative rates.
Sweden’s bond-buying program, while small compared with the 60 billion euros, or about $63.5 billion, the European Central Bank has said it will buy each month until September 2016, is intended to drive down bond yields, in theory restarting lending and helping the economy to grow faster. The policy, known as quantitative easing, has also been employed by the Federal Reserve in the United States, the Bank of England and the Bank of Japan, with mixed results."
Global 10 year yield data
Comments
It certainly may at the corporate/institutional level, but will most likely not at the consumer level. Either way, none of this creates sustainable growth. The concern is that this sort of financial engineering becomes to some degree the "new normal" in order to keep things going. Pulling forward demand from tomorrow again and again.
I had posted this in another thread a short while ago, but it's surely relevant to this discussion also:
"The fact that there are so many completely contradictory monetary theories, both historical and current, from so many experts, scholastic and financial institutions suggests to me that the exact mechanism at [the Federal] level is still somewhat of an unknown.
It obviously isn't as straightforward as "creating money also creates inflation", as some would have us believe, or inflation would now be roaring. Equally obvious is that the mere "creation" of money certainly isn't the ultimate answer to universal prosperity.
I believe that the world-wide financial maneuvers that we are presently experiencing will probably add significant knowledge of the actual working mechanisms in this area, as this unique period is analyzed in the future. Things are rarely so simple as some would have us believe, and perhaps I might also say, things are rarely as the simple would have us believe."
The easiest monetary policy in history and you're struggling to maintain 2-3% GDP growth, which the Fed just downgraded its outlook on? If that's sustainable, satisfactory growth after throwing trillions of QE at the problem, then mission accomplished. It should be entirely clear that GDP is not exactly reaching takeoff velocity and doesn't seem as if it's about to. NIRP is not the answer for a number of European countries, either, but they'll find that out on their own time.
" Equally obvious is that the mere "creation" of money certainly isn't the ultimate answer to universal prosperity."
It isn't? It sure seems to some that whenever these sorts of policies do not create the desired result, it is NEVER because it didn't work, it is ALWAYS because "it wasn't enough."
Perhaps it has to do with the psychology of money? Perhaps it has to do with the fact that this government has not a clue as to help the economy beyond the age-old "make asset prices go up", because that plan always works out well in the end. Like when people were happy because they thought house prices could never go down.
I'm not going to get into the whole roundabout debate because it will go nowhere - people have their view and I have mine and that's fine. Personally, my view is that this period does not end well.
"I believe that the world-wide financial maneuvers that we are presently experiencing will probably add significant knowledge of the actual working mechanisms in this area, as this unique period is analyzed in the future. "
I'm just thrilled to have been able to participate in what is effectively an enormous financial experiment by a bunch of economists with a questionable track record that includes countless mistaken, over-optimistic predictions, completely getting wrong 2008 (but at least they could laugh their asses off throughout that year - http://blogs.wsj.com/economics/2014/02/21/the-2008-fomc-laugh-track-gallows-humor-at-the-federal-reserve/) and more than a few one liners ("Subprime is contained.")
Yes and yes. The central banks are still truly worried about dis-inflation or worse, the "D word" of deflation......when spending could begin a slow march downward.
Bonds from the open, indicated a basic no change in current Fed. policy. Unless very big profit takers move into the market late in the day; there will be few sectors in any amount of "red" today.
We continue to play the game, looking over our investment shoulder; and still wondering about the outcome(s). Perhaps summer time will trip the sell lever; but it appears full ahead for now with the equity game, both here and foreign.
Note: for the first time since the melt in 2008, we have continued to increase our exposure towards Europe for the past two months. Latin America may even start to move to the positive.....
Take care of yourselves,
Catch
Personally, I'd just stick with that. I still believe in emphasizing needs over wants long-term and health care continues to have a number of tailwinds.
I'd be cautious on Latin America - Brazil is a disaster. I feel like you're going to see a washout in Latin America sooner than later and that's when I may take more of a look at it.
Quite true, but let's examine the overall context: I submit that it's quite possible that without the "easiest monetary policy in history" the question might very well be how to reverse the -5% GDP fall.
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"Personally, my view is that this period does not end well."
Again, quite possible, but also again: how would "the great recession" have ended without the good-faith attempts which have been made?
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"I'm just thrilled to have been able to participate in what is effectively an enormous financial experiment by a bunch of economists with a questionable track record that includes countless mistaken, over-optimistic predictions, completely getting wrong 2008... and more than a few one liners ("Subprime is contained.")"
I agree- no rational person would be "thrilled" to participate unwillingly in this "experiment". Once the recession started though, based upon proven monetary theory, your suggested alternative would have been... what, exactly?
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"The central banks are still truly worried about dis-inflation or worse, the "D word" of deflation......when spending could begin a slow march downward. "
Yes they are, and also quite possible. But if it weren't for the Fed actions taken so far it's all but guaranteed that we wouldn't have to worry about "could begin", because we would have begun quite some time ago.
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"We continue to play the game, looking over our investment shoulder; and still wondering about the outcome(s)."
Yep, that's about it. My point in all of the above is simply that I do not believe that there exists any proven monetary theory that allows continuous and predictable monetary control in any and all circumstances. I make no reference to the blame or culpability of various actors in getting us into this; I merely observe that once it happened something had to be done and the Fed has given us their best shot. They are damned by some for that, but those doing the damning have absolutely no proven alternative.
Thank you for your comments. I always enjoy your input.
And yes, I/we don't have the gift of "what if" if central bank actions had not been put in place here; and the Fed "help" to many other country's central banks, at the time, too.
I could bitch and complain about everything related to central banks and related; but as with other subjects and topics placed before me, I am in no position to suggest that I know better. I do not.
Thus, this house's method is to determine the best path(s) to take with investments based upon what we think we understand and witness.
I still recall several phone calls from folks I know as to whether they should pull their money from bank accounts. This was during the very dark days of the 2008 melt and into early 2009. These folks were not investors and normally did pay attention towards anything that had to do with financial markets; but these people were scared about wht they saw on the news.
Take care out there,
Catch
I'll throw this into the opinion pile as much as you noted my discussion of sustainability was an opinion. I'm sure the Fed loves the discussion of that the world would be Mad Max if they weren't continuing to do what they do, as it validates them and their power, despite the fact that they've missed one overly optimistic projection after another. And really, apparently they weren't that concerned in 2008 because they were cracking jokes at FOMC MEETINGS even into the depths of the crisis.
Yellen in 2008: "As a final anecdote, a banker in my District who lends to wineries noted that high-end boutique producers face a distinctly softening market for their products, although sales of cheap wine are soaring. [Laughter]"
Apparently the Federal Open Market Laughter Committee wasn't that concerned in 2008.
http://www.zerohedge.com/news/2015-03-05/no-laughing-matter-fed-laughed-bubble-burst
I'm sure the next crisis they'll have twice as much power put in their laps. I'm sure Senator Schumer will once again say, "Get to work" to Yellen because heaven forbid he lift a finger.
"Again, quite possible, but also again: how would "the great recession" have ended without the good-faith attempts which have been made?"
Want my opinion? Would have been worse for a time, but rot would have been out of the system, lessons would have been learned, we wouldn't still have TBTF and banks getting fined left and right because they now believe they're above rules and regulations due to their ability to suggest armageddon if someone were to try and break them up. We would have had a far more sustainable path forward. It would have ended and we would have moved forward (and I don't even think it would have taken this long, mind you) with something resembling a clean slate.
Banks have failed before in this world and the sun still rose the next morning. I think you'd actually have far more confidence in the long-term for this economy right now had we actually allowed the rot to be cleared from the system in 2008 and had the Fed as supportive rather than having everyone scream at them to paper over problems as fast they possibly could, which has now lead to how many years of easy money? You had the crisis in 2008 and the one and only way that the real underlying problems of the economy have been addressed is "how fast can we make asset prices go up?" What % of households don't own stocks?
How much has been spent on buybacks? How much have companies spent on hiring and building plants and the like and doing things that would help the economy and the average person vs how much have they spent buying back stock?
No politician wants to face pain, no politician wants to be a real leader anymore, no politician wants to make an unpopular decision. So, as far as I'm concerned, it's probably not the last we've seen of QE given that I'm sure people will be screaming for it next time the market goes down 15-20%. And you know what? They'll get it because it's far easier to throw money at problems than it is to actually make decisions on how to fix them in a lasting fashion. And if they aren't fixed, politicians figure it'll be someone else's problem.
And "make asset prices go up" is popular. Until they don't and then it's not and we're back to something resembling square one, still with lousy infrastructure that no one bothered with that because people were more concerned about the Shake Shack IPO.
And we have had several years of ZIRP and QE and being told that any problem is deemed "transitory". It's complete and utter BS.
We've created a completely addicted market that still continues to like bad news because it means more money from the Fed. It's not about anything anymore - as far as I'm concerned - aside from what Yellen says. I mean, look at the absurdity of today, with a market hanging on and analyzing every syllable of what Yellen says. WOOOO Fed downgraded the economy, +200 points. Wow, what a healthy reality that is.
We have an economy that I'll contend still hasn't reached takeoff velocity, is completely addicted to stimulus and that will throw an utter bleeping tantrum at any hint that that is not going to be the case. (OMINOUS MUSIC) WILL YELLEN REMOVE "PATIENT" AT THIS MEETING OR THE NEXT ONE? The Fed is a drug pusher who's surprised that the customer (market) has turned into an addict after several years of this.
...but that's my opinion.
You talk about what would have happened if the Fed didn't do what they did (and did and did and did and did), but you say nothing about the fact that after the sheer scope and length of what the Fed has done, their forecasts still are continually downgraded (yet again today) and growth is mediocre. "Pump assets" has not been a sustainable strategy throughout history (it's not as if there hasn't been a hundred and one bubbles throughout history that prove my point) and it doesn't even begin to address the many underlying problems in this economy.
@Catch22: Hi there Catch- Yeah, your observation pretty well sums it up. That's just the point- I'm in no position to to suggest that I know better, either. But grossly simplifying the monetary policy choices available to the Fed, I suppose we could reduce them to three: tighten policy/do nothing/loosen policy. There's pretty good evidence from past and present experience that the first two don't work. Certainly no evidence that the third choice will turn out to be wonderful either. But it's not as if there were a whole lot of other options available. So far, it seems to me, the US is doing as well as or better than anyone else around. That ain't great, but it's something, at least.
Take care and try to stay warm-
OJ
http://www.zerohedge.com/news/2015-03-18/fed-growth-cut-unleashes-panic-buying-everything-dollar-plunges-most-2009
Also, too bad for anyone who listened to Yellen when she said biotech was overvalued a year or so ago.
The one 'proof' inevitably given as to why we should fear falling prices is, of course, the Great Depression. This is, in my opinion, a matter of mistaking effect for cause. It was the Depression that caused the sharp deflation, not the other way around (a parallel: for thousands of years, all the finest medical authorities considered fevers to be the causes of disease. That they might be the effects of infections was a thought unworthy of polite company). A Monetary History of the United States by Friedman and Schwartz is the standard work on the subject. It shows that the Unites States prior to the existence of the Federal Reserve in 1913 enjoyed deflationary conditions (on the order of 2% a year) as the norm, interrupted only by sharp inflations during and in the immediate aftermaths of wars. Rather than "deflationary spirals" impeding growth, the U.S. grew from virtually nothing into the most powerful country in the world in not much over a century.
It did so with no proper central bank, and often nothing like a central bank at all, while on a bimetallic standard (gold and silver). We got the Great Depression under the auspices of the Federal Reserve (which is not to imply that no one else was at fault for it). The most depressing thing today is that when a Fed apologist objects to any serious suggestion for monetary reform by saying that it's politically unfeasible (pie-in-the-sky or completely unrealistic or something like that), I could hardly disagree with them. I'd call a serious monetary reform some plan that would wring loads of the financial leverage out of the system (as opposed to waiting for some financial Apocalypse to do the job), but that would inevitably cause pain for bankers and borrowers ('borrowers' today being mostly a euphemism for governments), which would seem to be the opposite of the Fed's twin mandate (their twin mandate is to enhance and protect the wealth and power of bankers and governments, isn't it?). Still, there is some sport in seeing how long they can cause dull deterioration in economies before provoking an actual crisis.
But hey, so long as we're in a bull market, who cares?
Well, Friedman and Schwartz evidently overlooked a few recessions, panics, and depressions during that time frame. From Wickipedia:
Panic of 1792, New York
Panic of 1796–1797, Britain and United States
Panic of 1819 – pervasive USA economic recession w/ bank failures
Panic of 1837– pervasive USA economic recession w/ bank failures; a 5 yr depression ensued
Panic of 1857, a U.S. recession with bank failures
Panic of 1873 – pervasive USA recession w/ bank failures, known as the Long Depression
Panic of 1884, United States and Europe
Panic of 1893, a U.S. recession with bank failures
Panic of 1896, acute U.S. recession
Panic of 1901, a U.S. economic recession
Panic of 1907, a U.S. economic recession with bank failures
"Rather than "deflationary spirals" impeding growth, the U.S. grew from virtually nothing into the most powerful country in the world in not much over a century."
The above citations pretty well address the subject of "deflationary spirals". With respect to "the U.S. grew from virtually nothing into the most powerful country in the world in not much over a century", the following observations would seem relevant:
The settlement of the United States was unique. With the exception of much-smaller Australia, it was the only time in the history of the world that an entire undeveloped continent was laid bare for exploitation by a civilization equipped with the powerful mechanical advantages and tools of the industrial revolution. Unlike every other older advanced civilization, an immense selection of virgin resources lay here for the taking. There was no question of "running out" of anything- if things started to get a little tight there was always more of everything just over to the West.
In a manner of speaking, I personally saw that stage of our development come to a symbolic end in San Francisco, when the last undeveloped sand dunes running to the Pacific Ocean were converted to housing tracts. I played in those sand dunes as a child. No more, for sure.
To suggest that the "U.S. grew from virtually nothing into the most powerful country in the world in not much over a century" without taking those factors into consideration is ridiculous. Claiming that the bimetallic gold and silver standards provided any deterrent to financial misbehavior, or any insulation from financial disaster, is insupportable. You might read The Power of Gold: The History of an Obsession, by Peter L. Bernstein, as listed above under "Resources, Books" so as to be more informed in this area.
Why doesn't South America count as "an entire undeveloped continent laid bare for exploitation by a civilization equipped with the powerful mechanical advantages and tools of the industrial revolution"? If "virgin resources laying there for the taking" are the key then why has Russia long been so much less developed than Germany or France or Great Britain? Within the last century, how did Japan and Hong Kong, almost entirely lacking in virgin resources, manage to develop into two of the most advanced societies on earth?
Should I go over the litany of every panic/depression/recession we've seen since the Federal Reserve came into existence? Off the top of my head: 1920-1921, either 1929-1940 or maybe 1929-1932 and 1937-1938 depending on how you look at it, 1946 (allegedly, which can be said for several of your Panics), 1958-1959, 1973-1974, 1980-1982, 2000-2001, 2008-? depending on how you look at it. What does this prove? That the Federal Reserve is "insupportable"?
Hey Crash, what else would you call it?