What is obviously the most important factor in today’s markets is the move to neg rates amongst sovereign borrowers. The initial read by risky asset investors (SP500, FTSE, DAX and so on) is that this is akin to leaving a middle school class unsupervised and it is felt that a “Goldilocks” environment is occurring with the central banks providing unusual liquidity via low rates and communicating that they are determined to keep rates low, no matter what, using some shibboleth as a factor always will make central to all policy. Trouble is this shibboleth is now changing from quarter to quarter. While at first this shibboleth was employment yet as employment fully recovered in general it then shifted to various subsectors of employment, like labor force participation, and then even further to arcane small groups which while might be of solid societal and worthy objectives is meaningless to the national focus of a central bank, but perhaps for gaining PR to keep an ever intruding congress at bay. But as it is impossible to find any monetary concern with employment now in the US – in Europe there is an ongoing crisis in unemployment, but that is a completely different concern as given below, and Japan there will always be full employment given the deliberate racist xenophobic national policy which combined with more of my thoughts below has generated a negative aging demographic rate.
So the concern now, or the empowerment, of the central bank policy is an inflation rate not being at an assumed rate which is required for maximum growth of the economy as being part of the NGDP – which is real GDP plus inflation. This NGDP is daily “priced” as a natural rate, which is not clear until often years after the fact but the central bankers take a stab at it and say it is “here” which as far as I can gather is intuitively arrived at by a wise old woman. It smacks of the failed “P* “ of Greenspan just that the Hayek/monetarist Greenspan equation on the right side is replaced with a “New Keynesian” Woodford based equation with Wicksell replacing the Fisher ideas on the short rate. The idea is that if the central bank keeps Fed Funds or the central bank rate below this ‘Neo- Wicksell” (Woodford) rate, the “spread” accumulates in the banking system in a “cumulative” cumulative way but in an account or accounts that is really not known or measured. But Yellen carries on in good faith knowing this accumulation is adding up, somewhere, and sooner or later banks will just gotta lend the money out and we break the “stickiness” of the wages to output gap or employment. Prosperity then returns to the like of Yellen’s honest dad back in the day Brooklyn, wages go up and everyone is happy. The problem with this idea is that there is about 2 ¾ trillion excess reserves in the system that has driven M2 to record levels and velocity (GDP/M2) to record lows. So this Wicksell accumulation has a long wait before it is ever required or even identified in the system, and as Japan shows may never see the light of day if there is substantial QE overhang. The other problem with Wicksell is no one knows the Wicksell “natural rate” which the CB rate must be below to build that accumulation and so most of the CBs, and stated as such by Yellen, is to spice it up with a dour acceptance of “secular stagnation” thesis. This combination of placing faith in the cumulative Wicksell policy with the secular stagnation drop in the innate GDP of the nation creates a bad loop for as the accumulation never can be seen, certainly not in increased bank loans, the answer is drop the natural rate lower until the wall of negative rates is reached, or zero rates – the ZLB or ZIRP – and the secular stagnation thesis is used to drop the “natural rate” lower and lower. This is in the short a sketch of the NeoFisher ideas of the negative loop of dismal long term GDP such as Japan has experienced for 17 years now.
But be that as it is – and there is a debate about whether I have a grip on the things above – the inflation rate is the last remaining variable which central banks can use to explain their current policy.
And I use central banks in plural as there is obviously either a “conspiracy of commission” or a “conspiracy of omission” amongst all the major “independent” central banks to explain what is either by happenstance or by coordination in lock-step. This now allows the central banks to add the international “uncertainty” as an added concern to explain their “perma-zero” policy. And uncertainty is terrific as it is impossible to debate what uncertainty is as it is a “know it when I see it” variable. Actually it is not an uncertainty but a quality that is faith based. We have to have faith that Yellen can discern uncertainty which is a national serious concern. “Faith based” monetary policy.
I will not go much further into whether or not the “Neo Wicksell” or this binding of the worlds larger central banks into an extra-national entity outside the oversight of their governments. Add the IMF into the pot and you have the true Bilderberg Group – only these folks do have massive power, make policy, and implement.
The problem is there are not shared characteristics between these central bank’s national characteristics such that even if their coordinated action was a virtue, the results are guaranteed to end in rancor. Sooner or later one of the central banks will have to split ranks and to achieve their new objective will have to surprise their now brethren and shaft them terribly so they can achieve escape velocity from this coordinated action. They will have to do this as they realize via national results that the coordinated action is a detriment to their specific countries. If they stay in the group, they will go over the falls and all of them can stay in touch after they are dispatched to the academic penal colony they will be sentenced to by their people.
So it is worthwhile to consider the very large differences and what will be the motives for this central bank brawl that is surely to come.
Japan’s problem has nothing to do with an output gap or employment or even inflation or disinflation. Japan is a failed mercantilist state which was allowed to rig the Yen to levels such that every American was eager to buy a high quality Japanese good for, from their perspective, was about 1/3 less of a cost that American goods. One could by a Honda Civic which though a compact car, the door would close with a solid thud as if it were a Cadillac in comparison to the tinny J Car or K Car or other dismal post 70s crash products made in the USA. Japan was allowed to jam this product into the US as it was quality stuff and more importantly the US was keen to appease Japan given it was then the US security bulwark against the still threatening USSR. Ironically China had the same status and for the same reason, but their goods sucked. Well as USSR fell apart and given that the US had 40,000 military occupying Japan, the USA under Reagan headed by the tough guys Baker and Schultz, gathering other concerned parties, tool a mere 2 hours during a weekend meeting at the NYC Plaza Hotel to simply decimate Japan’s terms of trade, a destruction that ended with the Yen at lows of 70 Yen. Ever since then, Japan moved production to the USA but that wasn’t effective enough and in 5 years Japanese stocks plunged and never really regained their footing to this day. Japan never really gave up the mercantilist structure to their export led economy to this day as the “phantom Zaibatsu” structure, though weakened, continue to this day. All mercantilists require a savings either in the public or private sector, it is a matter of identities that must occur to maintain the false currency levels required to gain exports. When the UK did this a cheap Sterling was not required as their mercantilism was maintained by power – a British man-of-war would show up in your main port if you would not transact. They then could re-cycle their mercantilist gains as profit as the goods were sold with appropriate true profit and still – to this day – be one of the largest reserves of savings only their “sovereign fund”, since it did not have to be maintained in identity form to keep Sterling cheap was dispersed through the system as per the traders entity into the private sector. Japan had no choice, though they did place the profit in the private sector but in quasi-public sector oversight at the post office or the Zaibatsu banks. And much of the export profit, especially if made during the days of 180 plus Yen, in US Treasurys where they become “Croesus Gold” and as they could not be used they immediately they acquired their true valuation if invested in dollar private sector assets. Since Japan has yet to make the turn to a domestic consumption based economy.
Furthermore Japan has maintained a core racist xenophobia. When my sister had her second kid born in Japan, almost immediately two blue suited government home service guys showed up and made her – still groggy – sign several forms which memorialized that her new born could never be Japanese and had no rights to Japanese citizenship. And given the focus on savings and severe caution by the Japanese citizens the desire to make babies is not there and Japan has a negative population growth. The limitations of the large near SOE have, after access to the US buyers, dropped productivity as the incentive to produce the “Walkman” or the next form of video drive dropped away as the high savings Japanese did not provide incentive. Apple then stepped in and replaced Sony not only in the USA but around the world.
This ends in Japanese low growth and lack of inflation a structural problem which the BOJ policy since 1990 not adding anything but for gumming up the works and adding sclerotic risk. And there is a NeoFisher effect ongoing which given the labor force growth plus productivity adding to a low fractional to one percent potential GDP has the BOJ ease and QE end as disinflationary. The only solution to Japan’s dismal post -mercantilist stagnation is to implement policy that is beyond the powers of the central bank. That would be anything that would shift Japanese population growth plus productivity plus inflation to 3% or so, or a targeted NGDP of 3%. The central bank, once such policy shift is decided upon, must move the bank rate to “catch” this goal which is to raise the bank rate, despite all immediate concern, to 2%. But that can and should be done only when such policy appears. Since such policy changes is anathema to Japan now, such as significant immigration and citizenship granted to those in Japan now, some for generation, Japanese citizenship. And entrepreneurs must appear as they are in Silicon Valley and much larger Gini Coefficent – perhaps by tax credits and the like. Since this means the dismantling of the base to their powers of both parties – I do not think this occurs. Japan is doomed and the above will appear but likely with a resumption of the extreme violence and social unrest experienced in the 20s and 30s and 70s. This may never occur as it is in the interest of the USA to keep the Japanese as they are, deep down a ward of the USA. What is important to the Fed – and this is about setting Fed Funds policy – is there should be no cooperation or coordination between the Fed and the BOJ. Japan as far as monetary policy can via such cooperation and coordination – visits from Bernanke which no doubt end as a Clinton to Lynch private jet chat – all ends up back in Yellen’s office. The only end results of any monetary cooperation with Japan is to be visited by a parasite which will be damn hard to get rid or an actual cost as Japan’s BOJ uses a thoughtless Yellen as a life raft. All interaction of a monetary nature, considering what slow burn crisis state Japan is now, has to be the State Department or the Defense.
The other cabal member – the ECB – has a completely different set of problems that are not at all like Japan’s. So it is an error to see the low ECB rate and their easy policy which is like Japan as any sign that it is the same problem. If Europe is aggregated together without regard to the member country units, EU and the subset EZ is in very good shape. It is the form of the current aggregation which is causing all the problems such that Brexit occurred. Europe in in the midst of a long running constitutional cris, ie there isn’t one. It is impossible for the treaties to be a constitution. Not to get into an description of the current aggregate level of governance is crypto-fascist devoid of representational government or democracy, it does boil down to the fact that the ECB is not a federal empowered institution and no matter how much it is funded it is impossible for the ECB to implement useful monetary policy but only provide a placebo. Kissinger’s quip on who do I call at 200 AM in Europe for an emergency is the same situation for Yellen – any interaction with Draghi is just a feel good moment to confirm that Yellen is a tribal member. Since the ECB cannot impact things like money supply or ever act like a lender of last resort, and all they can do is window dress with small time problems like Greece and Cyprus, Draghi ends as the front man like the bought Senator in the Godfather who says the pretty good things so mendacious unrepresented governance can continue which right now is Germany, all Germany. So the low and neg rates have merely replaced the virtuous effect (for Germany) of the Euro which allowed them to pillage the rest of Europe. Draghi had some windows of opportunity at times when the smaller manageable crisis of Greece and Cyprus would have allowed him in the court of public opinion to shift to a Hamiltonian way and leap past the Target2 fettering of the ECB to be a mere currency board for a confederacy, and become the first true federal body in the EU, and thereby define a nation and gain a central bank’s seiniorage – which now he does not have. But that would require to do as Hamilton did and either convert all EZ debt into a Euro bond pricing all at the same price of par. If that had been done at the time, it is my belief that Draghi would have withstood the rage of the First Ministers (ie Merkel), the EuroGroup, and other current powers of Europe cloaked under the greasy ideas of “competencies”. So the low rates in Europe are not at all similar to the low rate in Japan but like Japan they forecast a failed economy as the ECB has no real power and is not a central bank. It is a constitutional crisis.
The UK is also experiencing low rates but they so seem to be coming out of the crisis and starting to forecast steady and adequate growth. Yet Carney seems to be part of the Wicksell pact and also is quite willing to assume the Home Office job and will use the independence of the BOE to circumvent UK government oversight and stand ready to ease further for the “uncertainty” of events like Brexit. He does seem to be an “internationalist” and I don’t think he agrees with my view that there is distinct very different reasons for the low and neg rates specific to each country. SO by seeing a common Wicksell reason he is willing to coordinate and cooperate with the other central banks and accept the thesis that there is one common problem. A “tell” is his high regard to the international banking community, for the IMF and the ECB.
Finally, even before Fischer but especially after him, Yellen either perceives common cause with the other central banks or she has no problem to use this international problem shared by all to now be the key explainer to her maintaining emergency powers and apply extraordinary emergency measures, for she has run out of justification to keep this powers as there is clearly no emergency and no need for extraordinary rates and policy.
So this stiches together about 60% of the world’s GDP into one synchronized rate structure that varies only by small differences in yield. It then gives the appearance of a global economy and such coordination and thereby never stronger or more influential central bankers to claim new powers or keep the extraordinary powers recently granted. This is a grave danger to all these economies for a major bulwark to contagion and general global depression is that the world’s central banks pursued a policy that was strictly based on the specific domestic economy or their homeland.
If this is more about maintain powers of the central bankers and keep themselves in the limelight than reasonable monetary policy then sooner or later the realities of the US economy will blow this group party into shards. For in the end the US economy is all about corporate profit as it is a capitalist market based economy where savings and net worth and even annual revenue dwarf the Federal Reserve. But for a long time, especially if in cahoots with the other central banks, the rates can stay low or even go lower.
The large spectra overhanging the market is the thesis of the NeoFisher school of thought which says that there is feedback, a system where if rates are held for long in proximity or at ZLB, the Fed Funds rate will end being the NGDP for that immediate time based on the straight forward Fisher Rate of real GDP plus inflation equals NGDP or in instantaneous space, the Fed Funds rate. That is s as long as the true NGDP doesn’t shock or cusp jump the Fed Funds rate no matter what the Fed wishes to the equilibria Fed Funds. Right now that is the Taylor Rule 2%. Being a jump that means sudden explosive reshaping of the US Treasury curve.
While I think the USA can withstand this shock as if it occurs it is based on explosive real growth and an inflation jump due to excessive liquidity of this extremely low Fed Funds rate on the search for this mythical Wicksell natural rate.
So all neg rates and low yields are not at all there for the same reason, even though central banks are relaying it is a shared reason. But for Japan, all these low rates are due to a setting which thoughtful women and men can rewrite and change literally over a weekend, just as the Plaza Accord changed all. Japan though is mired in racism and xenophobia and become inured to chronic de facto slow burn depression.
And the NeoFisher thesis could allow Yellen to perceive of explain that there is a secular stagnation condition. She already has for 2 years now. Her pursuit of the Wicksell “natural rate” has ended as – I hope – a short term crisis which has curtailed NGDP by about 2% for two years, or a cumulative 4% of NGDP or about 800 billion and about 1% to 2% unemployment.
So why are all the world dates low or even negative? Well Japan are racists, ECB is a façade as there is a raging long running constitutional crisis in Europe, because Carney wants to be chic and stay in power in the UK and for the USA because Yellen is one of the most susceptible to peer pressure of any high ranking US office holder or she is a rascal. What is certain is all the reasons that are behind low rates could all leave swiftly and the root cause is imposed coordination of the central banks.