Apparently, the other central banks of the world have not all necessarily gotten Ben Bernanke’s memo about transparency. Some folks still must read tea leaves rather than transcripts. The Financial Times’ Alice Ross and Claire Jones recently noted: “Traders of Japan’s currency became unusually fond of the Tokyo night air last year. Long after their colleagues had gone home, the traders left the grand investment houses that dominate the skyline of the Marunouchi financial district and strolled north for a block or two.
On the other side of the world, transparency took another step backwards. “The Bank of England will prevent members of its interest rate-setting committee from publishing individual opinions on the economy despite a review of its procedures calling for greater transparency,” wrote Phillip Inman, economics correspondent for the Guardian. “The Bank said a ‘collective forecast’ will remain the centrepiece of the monetary policy committee's monthly reports, effectively barring members from explaining their own views on the likely path of economic growth, inflation and unemployment.
A few days later, the Telegraph’s economics editor Philip Aldrick reported on some steps forward on transparency: “Responding to three reviews into its operations last year, the Bank pledged ‘to provide quantified information about the key central judgements underlying the forecasts’. The new information is expected to be disclosed for the first time when the Bank updates its outlook in the August Inflation Report.”
As foreign reserves pile up in central banks, noted the Financial Times, secrecy continues to reign. “ Little is know about the reserve managers at the BoJ and their counterparts in central banks around the world, buy. Trying to fathom what secretive central banks do with their huge forex reserves – Japan, the second-largest reserves holder, had its $1.28tn at the end of last year – has long been a headache for traders and investors.”
That is the elephant in the room. And it is the elephant that continues to grow along with that pile of hay called quantitative easing.
Bubble, bubble, toil and trouble. The stock market is up. The reason is clear. The London Telegraph’s Jeremy Warner wrote about the recent run of “central bank money printing. This may or may not have prevented a much deeper economic collapse, but it has certainly put a rocket under asset prices.
We know from the experience if prior irrational exuberance that what goes up...can come down.
Transparency is good. Indeed, central bank transparency is a mantra these days. Back in spring of 2012, Narayana Kocherlakota, president of the Minneapolis Fed observed: "While I think that we should all take great pride in the recent improvements in FOMC communication, there is still more that can be done...Communication, while always important, is especially so today."
So consider the minutes of the FOMC meeting in January: Several participants emphasized that the Committee should be prepared to vary the pace of asset purchases, either in response to changes in the economic outlook or as its evaluation of the efficacy and costs of such purchases evolved. For example, one participant argued that purchases should vary incrementally from meeting to meeting in response to incoming information about the economy. A number of participants stated that an ongoing evaluation of the efficacy, costs, and risks of asset purchases might well lead the Committee to taper or end its purchases before it judged that a substantial improvement in the outlook for the labor market had occurred. Several others argued that the potential costs of reducing or ending asset purchases too soon were also significant, or that asset purchases should continue until a substantial improvement in the labor market outlook had occurred. Got that.
The Economist's Free Exchange columnist, Ryan Avent, apparently didn't. He subsequently observed: "It is hard to think of an organisation more vocally committed to clear communication while so manifestly failing to communicate clearly than the Federal Reserve. The latest exhibit comes in the form of minutes to the Federal Open Market Committee's January meeting, which landed yesterday and sent observers everywhere scratching their heads. Minutes are not an ideal means of communication indeed, they are they more for the sake of transparency than for policy implementation. But because the Fed's broader policy framework remains so muddled markets and journalists feel the need to plumb the cryptic minutiae for hints of what is to come."
Although this transparency is intended to help reveal the Fed's intentions and thereby influence the market's expectations, this is all a bit of a shell game because the Fed prefers to have a good impact on expectations even as it is confused about the actual impact of its policies.
While essentially urging the markets not to worry, the Fed s FOMC worries and sends mixed signals about the expected impact of its policies.
Trust us. Watch what we re doing. Just don't expect us to agree about what we re doing. We don't.
That's not a monetary standard, unless you like standard confusion.
Like Charles Dickens’ Scrooge, we have met the Ghost of the Past and the Ghost of the Present. We know what horrors the central bankers and their economist friends have wrecked. “External heat and cold had little influence on Scrooge,” wrote Dickens. “No warmth could warm, no wintry weather chill him. No wind that blew was bitterer than he, no falling snow was more intent upon its purpose, no pelting rain less open to entreaty."
What we don’t yet know is the future, because unlike Scrooge, we have not yet met the Ghost of the Future. "Ghost of the Future," exclaimed Scrooge, "I fear you more than any spectre I have seen. But as I know your purpose is to do me good, and as I hope to live to be another man from what I was, I am prepared to bear you company, and do it with a thankful heart. Will you not speak to me?"
We know not the future, but we do know what the future might post for us were we to return to the gold standard.
As Dickens wrote: "Again the Ghost sped on, above the black and heaving sea – on, on – until, being far away, as he told Scrooge, from any shore, they lighted on a ship. They stood beside the helmsman at the wheel, the look-out in the bow, the officers who had the watch; dark, ghostly figures in their several stations; but every man among them hummed a Christmas tune, or had a Christmas thought, or spoke below his breath to his companion of some bygone Christmas Day, with homeward hopes belonging to it. And every man on board, waking or sleeping, good or bad, had had a kinder word for another on that day than on any day in the year; and had shared to some extent in its festivities; and had remembered those he cared for at a distance, and had known that they delighted to remember him."
As it did for Scrooge, the time has come for us to change direction. “Lead on!” said Scrooge. "Lead on! The night is waning fast, and it is precious time to me, I know. Lead on, Spirit!"”
A short way down the Allée de la Robertsau from the Conseil de Europe in Strasbourg, France, is a pretentiously named drug store: La Pharmacie de Europe. Mario Draghi and his EU colleagues seem to regularly visit the drugstore to fill prescriptions to “cure” the Great Double Dip Recession. It would seem they have been using the same tried and useless patent medicines.
The lure of a quick shot of quantitative easing has now spread to the euroskeptics in Briain. The London Telegraph’s Liam Halligan has predicted “the Bank of England is softening us up for yet more ‘money-printing’, perhaps as early as next month. The Bank is currently in the midst of implementing another £50bn of "asset purchases", taking the overall total to £375bn, a process that won't be completed until November.”
But the minutes of the Monetary Policy Committee's September meeting, published last week, described the demand outlook as "subdued and uncertain", with some MPC members judging that more quantitative easing "was more likely than not to be needed in due course".
My long-held view, as regular readers will know, is that QE is deeply counter-productive. A "backdoor bail-out" for politically connected banks, this ridiculous and historically unprecedented policy will ultimately bring only higher inflation and much steeper future borrowing costs. Reducing what you owe your creditors via a combination of deliberately-created inflation and currency debasement seriously harms any sovereign borrowers' long-term reputation. Yet we are continually told that QE is "positive" and "growth-boosting", all of which is total nonsense.
As the Economist noted in July: “When credit booms show up in inflation, central banks are typically quick to react. But consumer prices often remain tame, because rising exchange rates and imports fill the gap between expanding domestic demand and supply. That allows the booms to grow dangerously large. Selim Elekdag and Yiqun Wu of the IMF have identified 99 ‘credit balloons’, episodes of fast credit growth over the past 50 years in rich and emerging economies alike. Of these balloons, 44 popped badly (resulting in a banking crisis, currency crisis or both) and another 13 very badly, with a 9% contraction of GDP on average.”
Raghuram Rajan has written in Foreign Affairs that economic “demand was bloated in the years before the great Recession, thanks to unsustainable borrowing by governments, households, and the financial sector, with the importance of each varying by country. Bloated demand also distorted the supply side, which fed back into demand. In the United States, as more people bought houses financed with easy credit, home prices increased, and people borrowed against their homes to buy washing machines and cars.”
Economist Karl Smith noted, also in Foreign Affairs, that “before the crisis, central banks committed themselves to keeping inflation low in an effort to promote growth. They succeeded in that goal, but in so doing, they rendered useless their most important tool: the power to set the rates at which banks loan money to one another. That is because once central banks had shoved inflation down as far as it could go, they ran out of room to lower the real interest rate – that is, the market interest rate minus inflation – and thus stimulate investment. In the United States, because the Federal Reserve has already hovers around two percent, there is nothing central bankers can do to push real interests rates further down below negative two percent.”
Mario Draghi, Ben Bernanke and their colleagues are using the same quack medicine – whose efficacy has been proven to be limited at best – to treat the European and American patients. Might not another economic regime be more effective, doctors? You’re killing the patients.