Monetary policy has dominated our thoughts in financial markets for longer than I care to remember now, at first no one really knew what quantitative easing was. Then slowly but surely we all learnt that all it simply meant was that the FED and respective central banks around the world were prepared to underwrite risk in order to calm the waters and hopefully propel us out of what was a financial shock of large magnitudes.
To not give the central banks any credit in actually providing a very meaningful safety blanket in a time of great stress is to be at the very least lacking in imagination. It’s true we cant say for certain what would have happened had the US banks not been “saved” or if AIG’s liabilities had not been explicitly underwritten. To say that the market would have cleared and found a way is in a way half true – it would have …….eventually – but no one has any kind of idea what kind of wrecking ball would have obliterated the global economy had these ostensibly civil servants not stepped in.
How it was managed in terms of fairness was of course horrible, you could count on one hand the amount of bankers who can be easily accused of largesse and ignorance whose lives are worse now than they were back then. The public did bail out the institutions and those in charge of those institutions paid very little in terms of penalties excluding Iceland.
But, eight years on we are still dealing with the hangover from the Global financial crisis GFC, but in my opinion things are a lot BETTER than they “could” have been. Had these civil servants not stepped in you can assume that we would still be in the eye of the storm of the credit crunch.
If you remember what the credit crunch was, as it is not mentioned much nowadays – it was a large scale withdrawal of people & institutions circulating or “lending” cash to those with ideas for how to put that cash to work. It was a point blank reversal of the economic engine that spurred growth in the first place. On the contrary now we are in a position where liquidity is probably the highest its ever been yet no one wants to borrow.
No one wants to borrow is of course a silly thing to say – companies will borrow but sadly for appallingly wrong reasons, money is cheap now relative to history, when something is cheap in my opinion it has lost its value or more importantly it loses its power. Money has always been power and therefore borrowed money was usually put to good use, to generate more money and therefore more power. Now money is cheap and abundant – so why not just piss about it with it. Using borrowed money to fund buybacks or any kind of financial engineering to bloat your share price is the largest manifestation of this. Not only are you putting money to work in a very inefficient way but you are also wasting the opportunity to invest and grow.
So QE although in theory should be credited with at least a very valiant attempt by central banks to free up funding for the whole economy to function properly in practice it had unintended consequences that almost rendered it useless. Maybe you could say that in practice it delayed the market clearing process and that remains to be seen.
How did QE help the average man on the street however, or more important how did monetary policy help the average man on the street? Well for starters a lot of the people who were laid off through the GFC have been hired back. US employment numbers are back to where they were roughly before the GFC. This is not to say that all those who were laid off have been re-employed on similar terms, maybe they are under employed or maybe they are simply working for flat or lower wages than before. When I look around for other signs of benefit to the economy their is only one real sector where i can see a standout benefit.
Zero or close to zero rates have helped in allowing the consumer in the US in particular to get themselves back on track. US auto sales are performing considerably stronger than normal. A lot of US autos are sold on finance agreements, its considerably easier when rates are near zero to tempt in buyers with better deals now than before, also when those zero % finance deals are complimented by cheaper gasoline prices it gives the consumer a lot of confidence that they can afford this new car over the next X period of years. See below chart in blue the 25y average sales per month of autos, and now see 2016, on average its a 14% pickup in demand, over the 5y average its even bigger.
FYI today’s sales numbers are approx 25% higher than during the period of the cash for clunkers programme enacted by the US govt to in an effort to help the US auto industry back in ’09.
What has monetary policy done for you lately though? We are all sitting here obsessing over if/when the FED will next raise rates. This is doing no one any good. The FED’s communication policy has become a little redundant and now working counterfactual to its original intentions. Instead of giving businesses and consumers guidance on the path of rates and clarity of thought we now are stuck in this “will they wont they ” scenario that feels never ending.
What all this is saying is that our obsession with monetary policy is coming to an end, it is in fact the only exit strategy I can think of and that is a sharp transition to fiscal policy. The timing couldn’t be better – for better or worse whether you like either candidate or not the US will have a new president in circa three weeks. It’s time for some shock and awe tactics from the so called leader of the free world.
In such a divided and frankly bizarre election campaign the only real takeaway message has been that its time governments started listening to what the people want. In any normal realm DT would not have got this far and certainly Bernie Sanders could not have threatened the DNC leadership by advocating ostensibly socialism. Certain candidates have done very well to get this far by using just usual standard political gesticulating. HRC’s message has not been particularly radical but by hook or by crook she is where she is. DT has got there by going full populist and appealing to the base desires of the electorate, promising a return to days of old for the american worker.
None of this will happen without FISCAL POLICY. Its time to think big, go big or go home.
QE for the people is a bad terminology and advocates in its simplest form a straight deposit of cash into the public’s bank account. I couldn’t think of a more useless or fruitless endeavor. People may think they just need extra money in their bank account but really they will just do what companies have shown to do and that is piss it up against the wall on a larger tv or a new set of curtains etc etc. none of which is creating anything of value.
In order to make something stick people need to see money being spent around them, this starts a process of creativity and engineering a new economy. People need to be exposed to the potential for opportunity in order to take risks. Fiscal policy can be described as easily as employing someone to dig up a hole and fill it in again, but when you embark on large scale infrastructure projects or at the very least in the US cases regenerating and repairing previously built infrastructure you set in motion a chain reaction of mini economies or micro businesses popping up to take advantage or service the grand plan.
Look at Apple and its IOS infrastructure- they created the infrastructure and the people generated a micro economy around it, sure apple probably benefits the most but so have hundreds and thousands of other people who have piggybacked onto the infrastructure to create a living for themselves.
Why is the timing right? Regime change always helps, commodities in general – the building blocks for large scale infrastructure are back to lowest levels in quite some time, see the Bloomberg commodity index (heavily weighted by oil obviously) which by the way will change fierce quick if something like this got announced ( be long base metals).
In Summary not just because I’m bored of hearing about it or talking about it, Monetary policy has had its day in the sun and will always remain relevant but its certainly time for us all to think FISCAL policy. If half the pressure that was put on central banks over the years to “do something” was applied to your local or federal government I wonder how the world will look by the time the next presidential cycle rolls around.