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The Jackson Hole vibe: stimulus or bust

As many of the world’s central bankers and some of the great economists gather in Jackson Hole to compare notes about the state of their own and the global economy, it is enlightening to consider the backdrop to the meeting.

Countries that account for about 60% of global GDP — that is, the US, UK, Canada, the eurozone and Japan — have had their policy interest rates at 1% or less for close to four years. In the case of Japan, it is nearly two decades of zero interest rates.

Government debt in those countries alone is about $US60 trillion (about $US65,000 per person) and none are close to getting a balanced budget.

On top of those quite remarkable policy settings, most of the central banks in question have undertaken a range of so-called “unconventional monetary policy” actions. These have focused on quantitative easing, in other words printing cash, or intervening in bond markets for mortgage and other non-government debt as they strive to push borrowing interest rates lower.

This staggeringly stimulatory economic policy is still in place, yet all of these countries are registering feeble rates of economic growth, have high unemployment and for some reason seem reluctant to deliver a further bout of policy stimulus.

There are almost 30 million people unemployed in these countries, a massive social and economic problem that needs to be addressed. This is where the discussions at Jackson Hole and beyond that talkfest might be enlightening.

So far, these central bankers have resisted the pressure to implement further stimulatory measures to address the dysfunctional economies they help manage. Each central bank no doubt has a few ideologically driven inflation hawks who at every opportunity would argue against monetary policy being eased too far or for the unconventional policies to be too market distorting.

In the US Federal Reserve, there are the likes of Richard Fisher and Charles Plosser, who seem to be arguing for a fight against an imaginary inflation problem. In Europe, there is a long list of ECB officials, mainly from Germany, who think the central bank has done more than enough and that the onus now is on the problem countries to deal with their own economic mess.

These are the people who should bear a significant part of blame for the protracted economic malaise.

Desperate times require desperate policies. To be sure, near zero interest rates, printing money, intervening in bond markets and nationalising banks and insurance companies (at least in part) are radical. They would not have been fathomable five years ago. But these policies, while helpful, have not gained the traction to drag economic growth to a more desirable pace and make lasting inroads into the unemployment rate.

The solution is clear. For central banks, it is more quantitative easing. Buy bonds, push borrowing costs lower. The risk of inflation is low and given the current degree of malaise, a little bit of inflation would be no bad thing if it were to emerge. And an inflation blow out, were it to occur, could be dealt with later.

It is encouraging to see the European policy makers warming to the notion of QE.

French President Francios Hollande has boldly noted that it is within the European Central Bank’s mandate to intervene in the bond market. ECB President Mario Draghi, who said earlier this month that the ECB would do “whatever it takes” to keep the eurozone together, will next week outline the extent of the bond buying program. Other ECB officials have been increasingly outspoken in support of bond market intervention but most make the point that strict conditions, usually linked to fiscal austerity, be maintained in return for the bail out policies being implemented.

The need for new policy action has been brought into focus with a further run of poor economic news. The European Commission’s estimate of eurozone consumer confidence fell to a fresh three-year low of -24.6 points. This is around the level reached during the depths of the 2008-09 crisis.

For Fed chairman Ben Bernanke, who will be delivering the keynote address in Jackson Hole tonight Australian time, there is the reality that GDP growth is locked in below 2%, the unemployment rate has stopped falling and remains above 8%, that consumer spending remains subdued and inflation is low.

Overlaying all of this is the slump in commodity prices as the Chinese economy loses more momentum. Iron ore prices have fallen by more than 30% in the past few months, while coal and energy prices are also well off their peaks.

The slowdown in China is spreading through Asia with South Korea limping along, Vietnam slowing and the Japanese economy remaining weak.

At the most basic level, stimulatory policies are needed, not only in Europe, but also in the US, the UK and throughout Asia. This means extra quantitative easing for those who cannot cut rates to below zero per cent and rate cuts for those who have room to lower them further, including our own Reserve Bank.

*This article was first published at Business Spectator

6
  • 1
    John Bennetts
    Posted Friday, 31 August 2012 at 4:30 pm | Permalink

    Here we read again of a supposed slowdown in China, but is it a slowdown?

    I have heard repeatedly that it is a slowdown of the rate of growth.

    In other words, China is not slowing down at all; it is speeding up. What has changed is that the rate at which it is accelerating has decreased.

    Of course, if a writer really does have evidence that China’s economy is slowing down, how about making that the subject of a real story? Plus a link, of course, to source of the data.

  • 2
    j.oneill
    Posted Friday, 31 August 2012 at 5:39 pm | Permalink

    The crisis the world is facing is not one to be resolved by debates about quantitative easing, or stimulus packages or any other esoteric variations. The latest crisis began in earnest four years ago, although the genesis goes back at least to the Reagan years.. Three decades of deregulation, de-supervision by the regulatory authorities and de facto decriminalisation of criminal conduct by the financial industry has had the inevitable consequence of rampant criminality for which the taxpayers are expected to pick up the tab.
    Despite massive criminality there has not been a single prosecution of the people who brought us the current crisis. As William Black among others have pointed out, if there are no consequences for such conduct then one cannot be surprised that it occurs and will reoccur.
    As recent developments in Iceland, Spain and Greece have shown, the people are beiginning to fight back. That is the real story behind the Jackson Hole meeting, although on their track record thus far the participants are unlikely to address it. Rather they will no doubt be working on ways to carry on with their predatory conduct, enriching themselves in the process, secure in the knowledge that for them personally there will be no adverse consequences.

  • 3
    CML
    Posted Friday, 31 August 2012 at 7:27 pm | Permalink

    @ J.ONEILL - Whilst I do not understand much about the global financial mess Europe is in, what you say makes a lot of sense. It also begs the question, why haven’t the people in Greece, and maybe other countries, risen up against their leaders? Where is the revolution????

  • 4
    Liamj
    Posted Sunday, 2 September 2012 at 8:23 am | Permalink

    Let the banksters continue to loot/print money, their cowardice and greed is ensuring the extinction of the growthist suicide cult. I hope some survive, for the show trials.

  • 5
    GLJ
    Posted Sunday, 2 September 2012 at 3:34 pm | Permalink

    Those that are not in power [in government] always claim that they have a solution to GFC or they simply deny it exists as in the case of Abbott & cohorts. When in government the battle to keep the ship afloat becomes real & the windbaggery of opposition begins to look clearly like the cheap shots that they were.

    There is no easy exit from the world forces. Neither Austerity nor stimulus can right the ship “SS Sanity” in a storm like this one within a few months or even years of new improved politics.

    This is a tough time and the cheap shots of those clawing for power in the opposition are as empty as Spanish gigolo’s pockets.

    Democracy is being surely tested in these interesting times.

  • 6
    Owen Gary
    Posted Monday, 3 September 2012 at 2:05 pm | Permalink

    J.Oneill,

    Thats pretty much a hole in 1.

    CML

    The market system hegemony controlled by the banksters is slowly being digested by some of the worlds population, thats why the revolutionary reaction is slow. Although there are some positive signs in Greece & Spain.
    We are being routed by the same regimes here in Australia yet as George Carlin said “nobody seems to notice, nobody seems to care”

    Many believe as do I that the system is being brought to collapse to usher in a more tyranical era of governance by the much touted NWO, but this can go 2 ways but that depends on those who react & I guess that timing is also critical to the end scenario.

    One things for sure the capitalist market system controlled by those who would be king has gone way past it’s use by date and is unsustainable especially when the “corpse” are running riot. For the system to suddenly crash would bring on a global food panic, that is why a transition from the current hegemon to community based co-ops would be a far more desired model. We would once again be eating food produced in localities rather than this tightly controlled WTO monopoly of poisoned produce, which only serves to keep the big Pharmaceuticals in business.

    We are entering what is tagged the age of enlightenment, but that remains to be seen as the Coal Seam Gas industry is destroying the aquifers & waterways that irrigate those crops needed to sustain us all, this is happening worlwide. Is this an attempt to cause death disease & famine by means of lack of availability of unpolluted tracts of arable land & water supply or is this merely another coincidence????

    Certainly here in Australia the CSG & mining industry seems to be targetting all the food bowl & arable land locations, & whether they get them all or not, most underground Aquifers are interconnected.

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