September must be Diversity Training Month at the world’s central banks because they seem to have taken the month off.
This month the ECB, the BoJ and the Fed all announced big splashy bond-buying programs.. The ECB announced “unlimited” Outright Monetary Transactions to buy the bonds of compliant governments. The BoJ announced a Y10 trillion increase in its JGB Asset Purchase Program. The Fed announced its open-ended QE3+, wherein it would buy mortgage and agency bonds until its full employment mandate was fulfilled.
These announcements, coming at the same time, pushed equity markets up around the world. Now the markets are falling back, and some pundits are already calling the exercises a failure. Let's look at the facts..
We start with the inscrutable Japanese. On the 19th the BoJ announced that it would add another Y10 trillion ($100B) to its existing Y70 ($700B) trillion APP. Two observations: (1) twenty years of BoJ failure have shown that incremental purchases accomplish nothing; and (2) the BoJ’s recent announcement is meaningless. It merely continues the bank’s existing QE program, which is tiny compared to other countries and which has--surprise!--not worked.
The BoJ currently shares the title for World’s Worst Central Bank with the Reserve Bank of Zimbabwe. Under the BoJ’s care, Japan has experienced over twenty years of negative nominal growth and an increase in government debt from 70% of GDP in 1992 to 220% today. What should have been paid for in rising nominal tax revenue over those years was instead purchased with IOUs. Frankly, it is now too late for Japan: the inflation that it will take to dissolve the debt mountain will bankrupt the banks many times over. The endgame will be either default or high inflation. Bottom line: No good news.
Next, let’s look at the hapless Europeans. Draghi made his big announcement on the 6th. Activity to date: nothing. Even though both Ireland and Portugal are fully qualified for the ECB’s bond buying program, they have yet to receive the slightest benefit. Perhaps OMT wasn’t meant for puny countries but rather as a firewall around Spain. At some point in the future, Spain may see fit to beg for help and become a beneficiary. But so far, the ECB hasn’t bought a single bond under OMT. And, although OMT is not a QE program (unfortunately), it is noteworthy that the ECB’s balance sheet is contracting. That makes sense, since higher unemployment will help to underpin price stability.
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Now for the Americans: more nothing. Instead of expanding its balance sheet as promised, the Fed’s balance sheet has actually shrunk since the big announcement. In its statement, the FOMC said that “The purchases of additional agency MBS will begin tomorrow (9/14), and are expected to total approximately $23 billion over the remainder of September.” Well, as of yesterday the Fed’s MBS is down by $9 billion, and September is now over. I don’t mean to be churlish, but is it really that difficult to print money and buy bonds?
So I have two points to make: (1) these banks should start putting their money where their mouth is and get on with it; and (2) in the case of QE3, don’t say that it isn’t working, because it hasn’t started yet. If Bernanke actually does what he said he’ll do, the stock market will take notice.
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September must be Diversity Training Month at the world’s central banks because they seem to have taken the month off.
This month the ECB, the BoJ and the Fed all announced big splashy bond-buying programs.. The ECB announced “unlimited” Outright Monetary Transactions to buy the bonds of compliant governments. The BoJ announced a Y10 trillion increase in its JGB Asset Purchase Program. The Fed announced its open-ended QE3+, wherein it would buy mortgage and agency bonds until its full employment mandate was fulfilled.
These announcements, coming at the same time, pushed equity markets up around the world. Now the markets are falling back, and some pundits are already calling the exercises a failure. Let's look at the facts..
We start with the inscrutable Japanese. On the 19th the BoJ announced that it would add another Y10 trillion ($100B) to its existing Y70 ($700B) trillion APP. Two observations: (1) twenty years of BoJ failure have shown that incremental purchases accomplish nothing; and (2) the BoJ’s recent announcement is meaningless. It merely continues the bank’s existing QE program, which is tiny compared to other countries and which has--surprise!--not worked.
The BoJ currently shares the title for World’s Worst Central Bank with the Reserve Bank of Zimbabwe. Under the BoJ’s care, Japan has experienced over twenty years of negative nominal growth and an increase in government debt from 70% of GDP in 1992 to 220% today. What should have been paid for in rising nominal tax revenue over those years was instead purchased with IOUs. Frankly, it is now too late for Japan: the inflation that it will take to dissolve the debt mountain will bankrupt the banks many times over. The endgame will be either default or high inflation. Bottom line: No good news.
Next, let’s look at the hapless Europeans. Draghi made his big announcement on the 6th. Activity to date: nothing. Even though both Ireland and Portugal are fully qualified for the ECB’s bond buying program, they have yet to receive the slightest benefit. Perhaps OMT wasn’t meant for puny countries but rather as a firewall around Spain. At some point in the future, Spain may see fit to beg for help and become a beneficiary. But so far, the ECB hasn’t bought a single bond under OMT. And, although OMT is not a QE program (unfortunately), it is noteworthy that the ECB’s balance sheet is contracting. That makes sense, since higher unemployment will help to underpin price stability.
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Access every new PS commentary, our entire On Point suite of subscriber-exclusive content – including Longer Reads, Insider Interviews, Big Picture/Big Question, and Say More – and the full PS archive.
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Now for the Americans: more nothing. Instead of expanding its balance sheet as promised, the Fed’s balance sheet has actually shrunk since the big announcement. In its statement, the FOMC said that “The purchases of additional agency MBS will begin tomorrow (9/14), and are expected to total approximately $23 billion over the remainder of September.” Well, as of yesterday the Fed’s MBS is down by $9 billion, and September is now over. I don’t mean to be churlish, but is it really that difficult to print money and buy bonds?
So I have two points to make: (1) these banks should start putting their money where their mouth is and get on with it; and (2) in the case of QE3, don’t say that it isn’t working, because it hasn’t started yet. If Bernanke actually does what he said he’ll do, the stock market will take notice.