Watching Sweden

Watching Sweden’s monetary policy is important. It tried to do the right thing in 2010 and in 2011. Growth and inflation came down. Got pilloried by the likes of Paul Krugman and Lars Svensson (Bernanke’s former colleague at Princeton). Bernanke wrote a blog post in April 2015 too holding up the Swedish Riksbank as an example of what not to do. Of course, curious readers would have noted the comment by Per Jansson, deputy Governor at the Swedish Riksbank., below Bernanke’s post. His speech, delivered in December 2014, is here. Still worth reading.

Now, Sweden’s GDP growth has rebounded but the policy rate is at -0.35%. GDP growth at 3.9% in 2015 must be the envy of many Western governments. But, its housing bubble should not be a source of envy but worry. When it bursts, all the GDP growth of the last few years induced by unconventional and loose monetary policy will be dialled back. Back to square one. OF course, Lars Svensson, Paul Krugman and Ben Bernanke will not only be unrepentant would continue to peddle their theories for hefty fees. I doubt if Krugman took Per Jansson’s advice here seriously. FT will feature them prominently. Depressing.

Misplaced or diabolical?

The ‘Financial Times’ cleverly exploits the protest of construction workers criticising the Federal Reserve for raising rates as a opening ruse in its long column on the Federal Reserve rate hike of 0.25% from 0.0% in December 2015. If the comments are any indication, most readers have seen through the FT trick. That is very heartening. The FT should be embarrassed if not ashamed. This comment by one Tim Young is well worth a read:

Let’s be honest about this.  The Fed’s credibility is not at stake here at all; arguably the opposite.  Credibility is about whether an individual or organisation can be expected to fulfil an advance commitment when to do so is costly to them.  To argue that the Fed’s present actions are damaging its credibility is like arguing that the fact that a glutton is sticking to a diet even after they have dipped below their weight target means that they are more likely to relapse and put weight back on – it is nonsense.

No, what this is all about is the never-ending subversion of all central banks by the financial, political and metropolitan establishment, who are desperate to sustain the present overvaluation of asset prices relative to consumption prices and incomes.  The financial industry likes inflated prices of assets, especially risky assets, because they make more money from trading and managing them; politicians like inflated prices of popular assets like houses and stocks, and bonds for the implied low cost borrowing for themselves, and the metropolitan establishment, including senior academics and media types, are comfortable with the present position of advantage being enjoyed by them and their progeny.  The left wingers calling for easing now and always are just useful idiots with misconceptions about creditors being rich people, whereas in fact really rich people hold most of their wealth in real assets like property and stock.

This unholy alliance began its subversion with the Fed, cheerleading Greenspan’s put and appointing Bernanke who had advertised his willingness to print money, captured the BoE with a succession of dovish appointments (leading to the present parade of “easing tarts” hinting about raising the inflation target, offering “overt monetary financing” or even abolishing currency, in a bid for career advancement via the MPC), seized upon German weakness to install an Italian at the ECB who has indeed proved as loose as Bild warned, and has further debauched the BoJ via Kuroda.  And so far, the plan is working out fine for the establishment in terms of sustained asset prices; sadly, however, with little or no improvement in the flow or quality of economic activity for the rest of us.

The saving grace of US monetary policy, while I deplore their politics generally, has been the influence of conservative politicians like Rick Perry, who made it difficult for Bernanke to be as easy as he might have liked.  Hence the Fed has emerged as the most likely central bank to err towards merely normal (never mind tight) monetary policy.  I hope the Fed ignores the siren calls from the establishment to change course, and makes a start towards unwinding the dangerous dislocation of asset prices and consumption prices / incomes that is perhaps the defining economic threat of our times.

The middle paragraph on how the elites have managed to place its apparatchiks in Europe, in Washington, D.C,  and in Tokyo is brilliant.

Negative interest rates in Japan

Somewhat unsurprisingly, Martin Sandbu (‘Free Lunch’ in FT) had cheered the move towards negative interest rates (difficult to explain in one sentence – see here) in Japan.  For good measure, he concluded with an exasperation that it took them so long time to get there, eliciting the following reaction from me:


Yes, we are all exasperated with different things for different reasons. Some of us are exasperated with commentary such as the above. When the consequences are factored in, we will be asking the question as to why they abandoned their last vestige of discretion, prudence and common-sense rather than asking the question of why it took them so long.

There are two iron-laws of public policy: one is the law of unintended consequences and the other is that the road to hell is paved with good intentions. It needs humility to accept them.

Negative interest rates might work as one could say about 0.0% interest rates if ‘other things are not equal’. Other things are not equal.

In theory interest rates = compensation for postponing consumption + inflation premium (for relative scarcity of goods over money, over time).

The first component is mostly a constant through time. Hence, if the LHS goes to negative, what is happening is that the second component of the RHS goes deeply into negative. In other words, the message goes out that there is no need for inflation premium and that there won’t be a relative scarcity of goods over money.

With that message, there is no reason nor incentive to invest. The opposite of what central banks say that they are trying to achieve!

Few days ago (January 25), you wrote about the Swedish central bank review and cited two ‘erudite’ policymakers in support of your piece – Lars Svensson and Bernanke. I think Krugman was missing from the honours list in this post.

A tweet by Steve Hanke in October contains a chart that gives a good picture of what Sweden’s monetary policy had achieved thanks to the misguided evangelicism of Lars Svensson blessed by Ben Bernanke, the high priest of the bible of ‘monetary policy über alles’ despite its failure to achieve anything useful to the economy and society.

It won’t, for the reason cited above. Other things are simply not equal. The policy has created asset bubbles, will continue to do so, will prevent bubbles from popping and hence further drive chasm between economic fundamentals and asset prices.

Your steadfast refusal to even acknowledge the possibility of the folly of your ways, theses and prescriptions is simply breathtaking.

Most FT journalists – barring a few – are doing a great disservice to public welfare by their advocacy and cheerleading of mindless policy interventions or policy interventions of the wrong kind.


Separately, I am not quite sure as to what BoJ policy would achieve. It just takes the currency war to the next level. A society of retirees and old people cannot do much with negative interest rates. Law of unintended consequences will operate. But, to reiterate, it is currency war by another name.


Mr. Kuroda, the Governor of the Bank of Japan advised China to adopt capital controls so that it could have domestic policy freedom. Perhaps, he had calculated that China would adopt capital controls and avoid depreciating the yuan, thus leaving the recent competitive gains of the yen intact. Alternatively, he might have calculated that China would do the opposite of what he proposed, thus inviting retaliation from the rest of the world. What is your guess?

Weekend links – 30.01.2016

India Links

A good piece by R. Jagannathan on the Lordship’s Over-reach on Jallikattu, etc. Who will bell the cat?

The Supreme Court is hearing the petition on Hindustan Zinc Limited, for the third time. The Court, in 2012, had dismissed the petition already! Sunil Jain who wrote this Edit should know that his suggestions made to Arun Jaitley in Feb. 2015 are practical non-starters.

A very insightful piece by Swapan Dasgupta on National Identity vs. Constitutional Patriotism. In the Indian context, I agree with his preference for National Identity.

Extracts from Manjul Bhargava’s brilliant address to the students and faculty at Sanskrit College in Chennai earlier in January.

Ila Patnaik argues for a tight fiscal and loose monetary policy. I would argue for the opposite.

Andy Mukherjee shows that India’s corporate leverage problems are only marginally better than that of China’s.

Financial Markets

Alan Blinder’s shockingly sloppy piece tries to make sense of recent stock market action and comes up short.

The story of Portuguese debt, good bank, bad bank, credit event, ISDA, compensation. Fascinating.

The headline says it all: ‘How Wall Street Finds New Ways to Sell Old, Opaque Products to Retail Investors’

JP Morgan pays USD1.42bn to settle most of the claims that it siphoned off cash illegally from Lehman Brothers before its collapse.

Are macroprudential measures here to stay because they are effective in curbing asset prices?

Carney says US rate rise made a contribution but not fundamental to the market turmoil of 2016.

Keynes’ investment performance could be, well, better.


European leaders are considering a two-year suspension of Schengen rules. It could be big, if it happens.

Ross Douthat in NYT on why Merkel must leave.

China links

Why capital flight from China will be a long-standing affair

Record low business confidence index and employment index from Sales Managers’ Index in China.

China’s capital outflows reach an estimated USD1.0trn in 2015

This WSJ article leaves it to us to decide if the chart shown is a sign of China’ GDP overstatement and overstatement of its energy appetite in the years ahead. It is both.

Is real restructuring coming for China’s steel industry? No time-frame specified.

Tom Mitchell and Gabriel Wildau in FT try to explain or ‘defend’ China’s policies and their communication. The answer may lie in something else. For that, one must read this, very perceptive piece from Andrew Browne in WSJ: investors are not shorting yuan but China itself.

The Conference Board in the US is officially going with an alternate growth estimate for China and the growth rate is 4%.


Four days after ruling out negative interest rates, Bank of Japan’s Kuroda will now ask banks to pay a small fee for keeping excess reserves with the central bank, thus ushering in negative interest rates. It is a bit more complex than that. Pl. see here.

Bank of Japan Governor Kuroda-san advises China to deploy capital controls. But, given his flip-flop on negative interest rates, will China take him seriously? Or, will they do the opposite? If so, is that what he actually was aiming at? Intriguing.


Zika virus set to spread across Americas, spurring vaccine hunt.

Bountiful non-sense

Faced with evidence that corporate profits, industrial production and stock markets are signalling a recession ahead in the US, this Wall Street Journal (WSJ) journalist is looking for arguments why this time is different! If oil sector misfortunes should be excluded from corporate profit and industrial production trends, then were they excluded when the mining sector was booming? Did analysts warn that the index was simply too rich and expensive, if one excluded the oil sector profits boom? Second, if oil undermined corporate profits and industrial production, was it not supposed to elevate consumer spending?

How little we change! Will the Fourth Industrial Revolution make a difference to our attitudinal and pathological weaknesses in reason and thinking?

Greg Ip of WSJ blasted away on his laptop that the market panic was incongruent with economic reality. I would like to know whether he wrote too that the market euphoria of the previous six years was incongruent with either economic growth reality or corporate topline reality.

Another WSJ article that has a wrong header: ‘Why has the Fed spooked the stock market?’. Wrong question to ask. The right question to ask would have been: ‘Why did the Fed put help the stock market to spike?’. An overly expensive market only needs excuses and not real reasons to correct.

A breath of fresh air and common-sense thinking. Tracy Alloway excerpts from the investment newsletter of Jeff Bahl, former head of US high yield trading at Goldman Sachs. Now, he is a portfolio manager at Bahl & Gaynor. The full letter is here.

Blind(er) spots

A former colleague had sent me an Op.-Ed. by Prof. Alan Blinder who had also served in the Federal Reserve. He is commenting on the gyrations in the stock market and calling them unnecessary, in effect. I could not believe it. How could a learned Professor set up his own strawmen and knock them down.

Stock markets begin to decline when their valuations become utterly indefensible. They need some trigger or excuse. It is utterly wrong and ignorant to try to link specific news as triggers for the market correction. The US stock market is not correcting because of China or because of lower oil prices.

If lower oil prices are supposed to be helping US consumption spending, the question to ask is why it has not done so far. Are there other factors at work? Second, given that the oil industry boom played such a big role in driving US investment spending and employment growth, a learned professor would try to take into account both the downside and the upside of the collapse in the price of crude oil. If his students wrote what the PRofessor wrote, they would lose marks for an incomplete and partial evaluation of facts.

US stocks are richly valued. The Russell 2000 index has a P/E multiple of over 100. The S&P 500 index has a P/E multiple of over 21. The median Price/Sales Ratio of a S&P 500 stock is higher than it was in the year 2000! Some people prefer to see this ratio than the conventional P/E ratio because earnings are so wildly manipulated so as to be utterly devoid of content.

Recall the recent words of the Oppenheimer analyst on the Citigroup results. See here.

The high-yield bond market (junk bonds) had been screaming problems in Corporate Revenue and Earnings quality for some months. Stock markets usually remain in denial for long and wake up only when it is too late. Stock markets take long excursions away from fundamentals. That is why in short to medium horizons they resemble a random walk. Given sufficiently long horizons, they return to their senses.

Probably, after six years of living in a lah-lah or cuckoo land, stocks are beginning to price in the reality of low growth, high debt, low and falling earnings. For an occasional market pundit to tell investors that there is nothing to fear at this late stage of both the market and economic cycles is nothing short of preposterous.

Lagarde is no laggard

It looks like Ms. Lagarde will win a second term as the President of the International Monetary Fund. That is a pity. Her reappointment would be a setback to the promise of changes to the governance of international institutions that was promised in the aftermath of the global financial crisis of 2008. She was chosen on 28th June 2011 for a five-year term. At the time of her appointment, it was argued that an European (as per convention) was needed as a IMF President since Europe was in crisis. Of course, the argument could have been made that, to avoid conflict of interest and to take an unbiased view, a non-European would have fitted the bill better.

The most notable achievements in her five-year term – as far as I can recall – are to call up on the Federal Reserve not to raise interest rates from 0.0% to 0.225% and to anoint the Chinese yuan as one of the currencies in the SDR basket somewhat prematurely.

I do not think that the Fund distinguished itself in its handling of Greece.

So, it is quite disappointing to read that European nations have closed ranks behind her reappointment and endorse her for a reappointment.

Of course, it must be added that emerging nations – including China and India – have lost much of their moral rights post-crisis. They have fared no better. They have allowed their economies to suffer the worst side-effects of the global stimulus efforts without much independent economic thinking. Nor have they made their own countries better governed and better insulated from the vagaries of global finance. Their private sector has gorged on foreign currency debt without much thought for foreign currency risk. Productivity has contracted. Economic growth is a big question mark in China and Brazil. In India, it is stagnant at best. Russia is not in the reckoning thanks to West’s congenital suspicion of Putin. South Africa and Turkey seem to have whimsical Presidents, to put it mildly. Their economic management appears to be  in need of considerable improvement too.

So, in fairness, in the years between 2011 and 2016, emerging nations have not bolstered their case. Their case has become weaker. So, in short, in the eyes of the Western world, nothing needs to change in international governance architecture.

Indeed, post-2009, much of the efforts of the Western world seems to have been geared towards ensuring that the global balance of economic power did not shift towards emerging economies. It has to be admitted that they have succeeded to a considerable extent.

Let us see who remains standing after the next financial crisis that has probably already started to unfold.