My friend Gulzar Natarajan suggested that I read Andrew Haldane’s paper, ‘Stuck’ – a speech that he delivered in June of last year.
How does Mr. Haldane propose to reconcile Chart 17 and Table 2 WITH Chart 9? Chart 9 shows tear-way equity markets. Table 2 shows cash balances piled up in corporations. Chart 17 shows very modest real investment revival in the developed world. Any policy that seeks to address Table 2 (get firms to spend cash on real investments) is only ending up sending equity prices higher, creating more divergence between the real economy and financial markets.
Why are financial markets, especially in the U.S., on a tear when global real rates are negative, when liquidity/investment ratio is so high suggesting subdued path for future profitability of investments?
How does one explain the US real stock market performance in Chart 9, without recourse to the monetary easing that has been pursued since 2008? That also explains the sentence above and the ‘half-empty’ mindset among the public (economic agents, to be more formal).
Zerohedge captured it well here. What central banks have done will have real consequences for a long time to come:
Asset prices remain primarily supported by excess monetary abundance across the world:
- There have been 667 interest rate cuts by global central banks since Lehman;
- G7 central bank governors Yellen, Kuroda, Draghi, Carney & Poloz have been in their current posts for a collective 17 years, yet only one (Yellen in Dec’15) has actually hiked interest rates during this time;
- Central banks own $25tn of financial assets (a sum larger than GDP of US + Japan, and up $12tn since Lehman);
- There are currently $12.3tn of negative yielding global bonds (28% of total);
- There is currently $8tn of negative yielding sovereign debt (54% of total). [Link]
The reason that monetary tightening had had to be reversed in the past (his Table 3) might probably have to do with the fact that they were kept too loose for too longer – longer than necessary – without allowing forces of creative destruction to play their role.
Indeed, his concluding paragraph could so easily be used against all the monetary policy adventurism, post-2008. The kite (economic growth in advanced economies) might well have come unstuck without monetary policy getting stuck into zero, negative territories and in the skies with helicopters.
It is very surprising – to put it mildly – that Andy Haldane is woefully insufficiently critical of the policies pursued by his institution. The surprise is all the greater since the person who led it has expressed so much scepticism in his book (Mervyn King).
Also, if one perused John Williams’ piece on the low R* world, he refers at least twice to the need for cost-benefit analysis of any new policy move – having a higher inflation target or the pursuit of nominal GDP targeting, etc.
That openness to reckoning with costs is missing from the recent perspectives of Andrew Haldane. That is sadder than surprising.