EC Monetary Mountain Madness

“Practical men who believe themselves to be quite exempt from any intellectual influence, are usually the slaves of some defunct economist. Madmen in authority, who hear voices in the air, are distilling their frenzy from some academic scribbler of a few years back.” – John Maynard Keynes

Scientific research says that leaving your normal environment can stoke creativity. This is one reason organizations send managers and workers to off-site retreats and conferences. “Getting away from it all” seems to lubricate our brains.

You would think the effect might have been observable among the central bankers who attended the Federal Reserve’s recent Jackson Hole, Wyoming, retreat. Sadly, however, having reviewed the speeches and the interviews that came out of the gathering, I found few if any fresh ideas, or at least none that would truly be helpful. Even the calls for “reformed thinking” turned out to be just variations on the same old thinking. For instance, rather than targeting inflation at 2%, why can we not think about 4% inflation? Instead of worrying about GDP, couldn’t we worry about nominal GDP? As if such minor variations on old themes would make any real difference to employment or growth.

Indeed, what was revealed in the papers and discussions and then in the interviews that followed the conference alarmed me and in some cases truly outraged me to the point that I was spitting epithets. When the dust settled, I was left with a profound sense of sadness over our global economic leadership’s obvious lack of understanding of the real world.

Jackson Hole revealed things that did not make it into the reporting of the event by the mainstream media. Turns out, the academic and philosophical underpinnings were laid down there for a radical expansion of the Federal Reserve’s toolbox. I guess you could call that creative, but I wouldn’t call it helpful, because the unthinkable policy that I have been warning about since last May – yes, we’re talking negative rates – was not only discussed at Jackson Hole, it was discussed in a positive, even slavishly approving, manner. I am going to share with you my sense of what happened at Jackson Hole and what it really means. I trust that by the end of this letter you will better understand just how bankrupt – and disastrous – what passes for sound economic thinking among the world’s central bankers actually is.

Putting Investors Before Savers

It is hard to know where to start, so let us start with what was most outrageous, an interview that had me muttering multiple expletive deleteds.

Last week Tom Keene of Bloomberg Radio interviewed Fed Vice Chair Stanley Fischer. (Tom is one of my favorite media personalities, because he asks the best questions and helps you say what you really want to say. You have to be careful, though, because Tom will also give you enough rope to hang yourself. When you are sitting with Tom Keene, you need to bring your A game, which is why he’s so popular.) Dennis Gartman transcribed part of the Fischer interview in his Aug. 31 letter. Here it is, with some bold emphasis added.

MR. KEENE: What did you learn about negative rates in the crucible of the markets? What have you learned in the last number of months?

DR. FISCHER: Well, we’ve learned that the central banks which are implementing them – there were four or five of them – basically think they’re quite successful and are staying with their approach, possibly with the exception of Japan. They’re thinking it through, and they have said they’ll come back to try and make negative rates work better. So we’re in a world where they seem to work.I think one of the most interesting developments I’ve seen in theory is a paper that says, yes, they work up to a certain point and then they become counterproductive.

MR. KEENE: Precisely. Yes, that’s a critical point. I mean we have within the interviews of Bloomberg Surveillance that Francine Lacqua and I have had, Olivier Blanchard [former Bank of England Governor during the crisis and a friend] calls them an outright scam. Granted, he’s not a public official anymore, I understand that. There is a raging debate about the efficacy of negative interest rates for central banks, for governments, and again for banking itself. What about the efficacy of negative rates for savers and the people of these different nations?

DR. FISCHER: Well, clearly there are different responses to negative rates. If you’re a saver, they’re very difficult to deal with and to accept, although typically they go along with quite decent equity prices. But we consider all that, and we have to make trade-offs in economics all the time, and the idea is, the lower the interest rate the better it is for investors.

I have to say, reading that last part made my blood boil. For the vast majority of people with savings all over the world, zero or negative rates are not just “very difficult to deal with.” They are in many cases the difference between living with a modicum of dignity and living in abject poverty. Or, if you’re slightly better off, you may feel forced to take too much risk in your portfolio at the very time of your life when you should be taking few risks. But that’s okay with Dr. Fischer, because negative rates also bring “quite decent equity prices.”

Let’s read that sentence again: “… the idea is, the lower the interest rate the better it is for investors.” They are sacrificing mom-and-pop middle America, the hard workers who have played by the rules and retired and saved and now want to live out their lives enjoying their grand-kids and a little well-deserved relaxation, and they find they can’t do that because the Federal Reserve thinks that protecting Wall Street and wealthy investors and bankers is more important.

If you ask other Fed decision makers outright whether they support this remarkable view of Dr. Fischer’s, they would of course cough, mumble, and then launch into a jargon-laden digression, since Fischer’s little “trade-off” is so obviously politically incorrect. But the reality is that protecting investors at the expense of savers is precisely what Fed policy aims to do; and here Fischer, in an astonishing moment of candor, has come right out and admitted it. How in the name of all that is holy and just can you think that the public’s savings have to be sacrificed on the altar of equity prices?

I should point out that we’re not just talking about middle-class America, Europe, and Japan. The [multiple expletives deleted] central bankers are jackhammering to smithereens the very foundation of our retirement system. They are making it impossible for pension funds and insurance companies to meet their targets and to provide their services without massive contributions that will have to come from taxes and skyrocketing insurance rates that will have to be paid mostly by the middle class.

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Moon Kil Woong 11 months ago Contributor's comment

"Yes, the economy did recovery (slowly), but it did so in spite of the Fed, not because of anything the Fed did. Trillions in QE bond purchases served only to cap interest rates and drive up asset prices – mainly stocks and real estate." Correct. The low rates did other things sadly. They increased housing costs way over inflation. They discouraged capital investment by companies. They encouraged mass debt by companies that now can't invest because they have massive debt. They discouraged savers and capitalism by destroying the benefits of capital. And they are encouraging massive asset bubbles while destroying all the remedies to counter the inevitable downturn when it comes.

Gary Anderson 11 months ago Contributor's comment

You said this, John: "I have to say, reading that last part made my blood boil. For the vast majority of people with savings all over the world, zero or negative rates are not just “very difficult to deal with.” They are in many cases the difference between living with a modicum of dignity and living in abject poverty."

Thank you for saying it.

Israel is seeking to limit cash just like the USA. Stanley was there too, a dual citizen. Larry Summers and Stanley Fischer seek to limit cash because they see the inevitability of negative rates. How far they go with limiting cash and how far below they go below zero becomes the concern.