A Benjamin Cole post
And so the Bank of Japan becomes the latest monetary policy-making body to introduce negative interest rates, in what has been a years-long yet curiously feeble battle by global central bankers to avoid sluggish growth, recession and deflation.
“The Bank of Japan adopted negative interest rates for the first time at the end of its two-day policy review on Friday, buckling under pressure to ease concerns about the health of the world’s third-largest economy.
[T]he BOJ said it will apply a rate of negative 0.1% to excess reserves that financial institutional place at the bank and introduce a three-tier system on rates.
The news saw the benchmark Nikkei shoot up 3 percent, the yen slide 2 percent against the greenback and U.S. stock futures rally 1%.”
The Inflation Bogeyman
So, we see negative interest rates in parts of Europe and in Japan, and the People’s Bank of China is employing stimulus of lower rates and possibly quantitative easing. The Reserve Bank of India has been cutting rates and conducting periodic “liquidity injections.”
Weak global aggregate demand has left worldwide manufacturing with superfluous capacity, commodities markets flooded, while the ongoing pervasive capital glut shrinks investor returns. Major economies are in deflation, or exhibiting microscopic and sinking inflation, as measured.
Yet to read literature from the U.S. Federal Reserve or the Bank of International Settlements is like entering an alternative universe in which there are only three topics: inflation, inflation past, and inflation future.
On Jan. 27 the Fed issued its 520-word FOMC policy statement, with the word “inflation” in it 11 times, and “prices” five times. That’s actually less monomaniacal than usual; last August at the annual Kansas City Fed inflation-fest in Jackson Hole, Fed Vice Chair Stanley Fisher used the word “inflation” 75 times, and the word “price(s)” 31 times in a speech of barely 2,000 words. The word “growth” appeared three times, and “unemployment” eight times.
Inexplicably, the Fed is promising a tighter monetary policy.
The BIS issued a study in June of last year entitled, Another Year of Monetary Policy Accommodation, with this sentence “extraordinary degree of monetary accommodation in the major advanced economies.”
This is an anorexic saying, “I have been eating to an extraordinary degree, and I have lost only two pounds in the last year.”
The world’s major central banks need to meet quickly, summit-style, and in unison agree to promote national and global nominal GDP growth going forward for five years, whether by interest-rate cuts, quantitative easing or any means necessary. I would suggest national targets of 7% NGDP growth, possibly higher in India and China.
For the next five years, the primary goal of global monetary policy should be economic expansion, while “fighting inflation” is put on the back burner. Frankly, with so much global excess capacity and competition, I doubt inflation will amount to much anyway.
Yes, there are structural impediments galore in the global and national economies. There always will be, that is the nature of government and man.
But for independent central bankers to put a monetary noose on the global economy and then to issue sanctimonious sermonettes about inflation and better government is intolerable, especially in light of polemical political movements in most of the developed world. Central banks cannot suffocate the world into political stability and free markets.
Print more money, and a lot of it.
PS I hope the Western experiment with the “independent central banker” is coming to a close. I want to vote for better monetary policy—is that not the nature of democracy?