This is an abbreviated post from our subscription series at Credit Writedowns Pro. I would make the case that monetary policy is wholly inappropriate as a tool for steering against cyclical ups and downs exactly because it only has a secondary impact on the real economy and must act through the credit markets. As such, monetary policy is always about […]
Tag: asset-based economy
The 2014 BIS Annual Report warns again about the perils of ultra-easy monetary policy as it did in the lead-up to the Great Financial Crisis. I think the BIS could prove a Cassandra here and will explain below. Nevertheless, many refuse to heed its warnings because of the concern with the sluggishness of the real economy in developed economies and the worry about becoming the next Japan. The problem, as the BIS states, is debt. But the answer is not restrictive policy and structural reform as the BIS argues. Rather it is an acceptance of fiscal policy outcomes as mostly endogenous.
The title here is a bit provocative I know. But it is really something I stole from an article about Stephen Roach’s view that I will use as a jumping off point for my Friday review.
I am not impressed with macro policy that is managed purely to give a cyclical boost to the economy at the expense of secular sustainability. That makes it hard to look at what’s happening with macro policy now without scepticism and criticism. I would like to say that the upbeat near-turn forecasts are something to celebrate. But I can’t because they are predicated on unsustainable secular trends. A few brief thoughts below
Expect the ECB to do something in June, but not QE
Ukraine is the top geopolitical risk
Rotation into defensive names in the US is worrying
China is exporting deflation
Easy money is causing a reaching for yield
I believe investors are reaching for yield and there are multiple signals indicating such. This is a direct outgrowth of easy money policies by central banks as nominal yields are at record lows and real yields are negative. Investors, particularly pension funds, are having a hard time adjusting to the new monetary regime of financial repression and low nominal returns. […]
I have been off since Thursday due to the Easter holiday. But I want to write my traditional Friday post today with a grab bag of different issues I am seeing. I actually just want to focus on the US this time.
In the wake of the financial crisis, some US policy makers understood that the economics profession had erred in not taking debt aggregates and financial stability into account when conducting macroprudential regulation and making economic policy. As a result, increasing research and policy focus has been directed at how to maintain financial stability. Yet, not everyone gets it. Some people want the Fed to continue down the path of loose monetary policy and easy money that created the crisis and completely disregard financial stability.
On Friday, I read a post on the New York City housing market that got me to thinking about how we view interest rates and their effect on credit markets. Traditionally, we view higher interest rates as a net tightening and slowing of the economy, while interest rate cuts are a loosening that should aid the economy. But is this really true? I say no. Tightening into frothy markets produces more froth. Some thoughts below
In the links today, I had a number of good posts that focused on the issue of fiscal policy versus monetary policy. There are a number of ways to look at the issue, economically and politically. However, I think the overriding takeaway politically is that fiscal policy will remain constrained irrespective of growth. Monetary policy will be used if growth undershoots. This will have consequences.
Now that Europe is on the mend, the initial phase of the financial crisis is clearly in the rearview mirror. Equity prices, bonds prices and house prices have risen by leaps and bounds even before this economic recovery was clear. Yet, the recovery itself is tentative, making plain the vast gulf between asset markets and the real economy.
The global economic recovery continues as all of the most important economies in the world are on track for growth. Europe is the laggard and the tepid recovery there could still stall out. Below are some brief ideas on where this is headed and why.