This should appeal to all of the fans of macroeconomics. Here is a blog from The Economist on monetary policy in the U.S. from last week.
Some questions to think/comment about: How low is too low with regards to interest rates? Are low U.S. interest rates really just the Fed's fault? Is the Fed setting the U.S. economy up for even more problems in the long-term with it's persistent low interest rates and quantitative easing?
Sound off below!
Monetary policy usefulness is dead at present, the low rates have shown that downturns are inevitable and need to occur after prolonged bull markets.
ReplyDeleteI would suggest the misalignment between monetary and fiscal policy has two potential avenues in the future we have seen before... one is recent events in Europe with the monetary policy being useless in the case of multiple fiscal policies and the other is a potential Japan-like event of prolonged deflation/recessions.
I think the best avenue for governments is to educate their voters on long term objectives and instigate those. The current short term views of governments are the only components of the governments proposals voters are giving full credence. The voting public needs to align to good economic practice that things don't correct overnight and wealth generation is a journey, not a destination.
I think the biggest problem with monetary policy is that it needs to be implemented through commercial institutions (banks). We see at the moment that the Fed is making cheap (basically free) money available to banks, but they're not lending it on to the consumers and SME's who desperately need it. Instead, they've used the proceeds of QE etc to push the dow to new heights (little to no benefit for the ordinary american there!) and to invest in bonds. Why risk when you can earn a percent or 2 risk free?? I think the current mechanisms available to central bankers to put more money into (wider) circulation are like pushing on a string - if the commercial institutions don't play ball the process stops.
ReplyDelete@Brett - I thought central banks were made independent from government precisely so that they could take a long term view? Unless you are suggesting that their stimulatory policies (record low rates) are being counteracted by austerity focused fiscal policy? If so, aren't those pro-austerity policies being championed by the central banks?
In my opinion, the entire nature of the monetary system and the mechanisms available to both central banks and governments seem to favour Wall Street at the expense of Main Street! Instead of continuing to give free money to the very banks that caused the current downturn and subsequently received massive bailouts courtesy of the tax payer so they can use it to make (arguably) risk free investments rather than allow it to flow into the greater (productive) economy, perhaps we could look at a mechanism that would allow the central bank or (dare I say it!) the government to give or lend this money direct to consumers and SME's.
In fact, why weren't the bailouts used to directly pay off troubled homeloans, rather than being used to purchase the toxic assets off banks? Was it to prevent the richest amongst us from having to take a 'haircut'?
I may have gone slightly off topic, but the interconnectedness of decisions made over recent years, from bailouts to QE infinity, cannot be denied, and empirical evidence continues to show that current monetary policies are benefiting the so called 1% at the expense of the rest of us!
I just read this article, which seems to support my argument perfectly!
ReplyDeletehttp://www.counterpunch.org/2013/03/12/dow-sets-record-on-feds-qe/
Any thoughts? Feel free to attack my leftie views, I can handle it!
Mez, your argument seems quite convoluted, perhaps this is indicative of the political persuasion you follow. Only joking. Nonetheless, I will continue.
ReplyDeleteThe primary goal of the Fed is to lower the unemployment rate in the US. The tool that is currently being used is Quantitative Easing (QE). This is, in essence, where the Central Bank buys longer dated government securities to flatten out the yield curve that many banks use to price longer dated products (i.e. mortgages). Consequently, through various laws of economics, this will increase employment and stimulate the economy.
This QE seems to be working at the moment with declines in the unemployment rate and new record highs in the DJIA (of which, many American's will have in their super). However, the problem arises in the unsustainable growth of the Fed's balance sheet; currently standing at around $US3.1tn (a 3-fold increase since 2008). When the Fed needs to tighten, as a result of the economy recovering (if it ever does), this will result in zero remittances to Treasury. In layman's terms, it means that the Fed cannot pay its bills outright and must print money to do so (http://www.federalreserve.gov/pubs/feds/2013/201301/201301pap.pdf). Time will tell whether or not this has an economic effect.
I agree with Brett D about the Japan-like-deflation-era. And I have a suspicion that the Fed is conducting QE with this in mind rather than the stated goal of reducing unemployment. After all, deflation will kill off any idea of reducing the stock of debt currently outstanding on the US credit card.
Matthew, I appreciate the reply. I understand the nature of QE in the sense that you've described, however you have not commented on the point I made about the effect that commercial banks willingness to 'play along' has on the effectiveness of said policy.
DeleteThere are numerous statistics available online (I'll post some links tomorrow when I have time) that showcase the difficulty that SME's and low & middle class borrowers are having with accessing credit. Not so much for the large corporations, who have been able to take full advantage of the cheap money offered by QE, in part to undertake record share buy backs using increased leverage (with record low interest rates). These buy backs are (at least in part) helping lift their share prices, and thus the Dow index as a whole.
As for the argument you've put forward about reduced unemployment, a large group of American economists are arguing that recent employment statistics may well be flawed due to the mechanisms used to measure unemployment (particularly noting that the long term unemployed are not adequately counted as they fall off the time limited social security system in place there, and thus off the official unemployment records).
Also, the idea that the average American has much wealth in their 401K's (their version of super) or in the share market in general is optimistic! A quick search revealed the following comment on the Washington Posts website (http://www.washingtonpost.com/business/economy/as-stocks-rise-so-do-the-number-of-millionaires/2013/03/14/ff940344-8cdb-11e2-9f54-f3fdd70acad2_story.html)
"In a paper released in November, Edward N. Wolff, a New York University economist, pointed out that stock ownership is highly concentrated among the affluent. In 2010, he found, the wealthiest 1 percent of Americans owned 35 percent of households’ stocks, including retirement accounts and mutual funds. The next 9 percent of wealthiest households held 46 percent of stocks."
With regards to my political leanings, I'm not ashamed to say that I'm a bit of a leftie. What may interest you however is that I started my economics study as a business owner with a penchant for heterodox (even somewhat laissez-faire) economic theory but have since started to seriously doubt their effectiveness based on the empirical evidence that continues to present itself (which the models we're now taught seem to do a poorer job of explaining than classical economics was able to do).
One thing that is certain - since the start of the crisis the wealth (and wages) of most low and middle income Americans has declined by almost any measure used, whilst that of the wealthiest few percent has risen. If that was the aim of central bank (monetary)policy, then job well done. However, if their aim was/is to produce results for a large percentage of the population, then so far the results have been a spectacular failure.
I look forward to hearing your thoughts!
Thank you all for the great discussion! Be sure to invite your friends to participate in the blog and we can keep the conversation going.
ReplyDelete@Mez, correct me if I am wrong, but I believe one of your views is that the commercial banks should be passing on the interest rate cuts in full? Let me delve into this a little further.
ReplyDeleteCommercial banks are currently forecasting their future beliefs about the market and view tough times ahead and are putting in place cuts which align with these expectations. The laws of supply and demand ensure that these banks will do the market equilibrium rate cuts as there is plenty of competition in the Australian (and other G20's) market. Your comment to access to credit, I draw on these two stats.. US. credit card debt = $775Billion, AUS $40.4Billion. (http://australia.creditcards.com/credit-card-news/australia-credit-card-debit-card-statistics-international.php; http://www.nerdwallet.com/blog/credit-card-data/average-credit-card-debt-household/). These stats show that the western world should not have access to credit so easily, as they have racked up such a debt with a average of 20% interest. If any one of these persons who has this level of credit card debt also has any investments at all is irrational as no sane person could conclude any of your investments will outperform these 20% rates they are being charged.
The central bank is meant to be detached from the government yes, however, who gets first use of the money they provide? Government.. a tax through inflation. Now what is the government doing with this easy money? building infrastructure? No.. they opted for a "quick fix" which was a pure injection of money into the economy. Monetary policy is dead in the western world unless fiscal does what it was designed to do, and that is be a complimentary component to monetary.. not drive the usefulness of monetary into the ground by handing cash out left right and centre (yes i know the bonus was mainly fiscal (2-3% monetary).. but future inflation values could change that).
The main outcome of the dilemma the entire western world is in at present is living beyond their means. You get what you pay for in life, and you receive what you earn. The western world has not worked hard enough for the lifestyle it receives and future generations will notice this, unless future driven policies come into play.
Re comment on wealth; Ownership will always been lopsided in all wealth.. I could show you many statistics showing 25% of all persons under 30 don't know their super provider and 40% don't open their annual statements.. It is not the job of anyone but yourself to create your own wealth, unfortunately modern society has people believe this is not true.