Apoplectic Ambrose Evans-Pritchard Sings from IMF Hymn Sheet
AEP, who thinks central banks should print us all to Nirvana lest the dreaded deflationary depression sinks our ship, is lately firmly in the grip of tapering paranoia (this is not a recognized clinical condition yet; give it time). First he feared publicly for emerging markets, several of which are on the cusp of balance of payments crises. Let's see: when the Fed's printing seemed to feed imbalances there, a consensus emerged that this was one of the negative effects these countries could do without. They themselves kept saying so, but their tune has of course changed in the meantime (even former vocal 'QE' critic China now 'warns' the Fed not to release the print button too soon).
Now AEP reports on the latest IMF report on the euro area, which kind of blames US 'QE' tapering in advance for the next round of expected problems there. If the IMF says so, it must be true, right?
“The report warned that the onset of a new tightening cycle in the UShad already led to major spill-over effects in the eurozone, pushing up bond yields across the board.
Early tapering by the Fed "could lead to additional, and unhelpful, pro-cyclical increases in borrowing costs within the euro area. This could further complicate the conduct of monetary policy and potentially damage area-wide demand and growth. Financial market stresses could also quickly reignite," it said.
The Fund said the European Central Bank must take countervailing action to prevent "a vicious circle setting in," ideally by cutting interests, introducing a negative deposit rate, and purchasing a targeted range of private assets.
It should launch "credit-easing" policies to alleviate the deepening lending crunch in Spain, Italy, and Portugal, where borrowing costs for firms are 200 to 300 basis points higher than in Germany, with small businesses struggling to raise any money at all. The IMF said the more the Fed tightens in the US, the more the European authorities need to offset this with other forms of stimulus.”
Since AEP is wedded to Anglo-Saxon central banking socialism, he presumably approves of this sort of advice. He expresses worries about the growth rate of euro area M3, but the true money supply in the euro area has recently grown by 8% year-on-year, so money has been created at quite a fast clip over the past year.
Anyway, we tend to think that ignoring the economic analysis and advice issuing from the IMF is almost a duty. AEP further on the IMF report:
“There is a high risk of stagnation, especially in the periphery. Such an outcome could push the periphery toward a debt-deflation spiral," it said.
The report said that it may take years to unwind the colossal credit boom of the early EMU years. "Historically, almost all of the run-up in household debt tends to be reversed. But in the euro area, the reduction in debt-to-GDP ratios has barely started, and the boom was more pronounced.”
Someone should tell these people that one cannot have it both ways. Either there is going to be 'debt deleveraging', or not. Their recommendations all aim at keeping the unsound credit created during the 'colossal credit boom' well supported into eternity.
Carmen Reinhart: Getting Back Into the Good Graces of Statists
Carmen Reinhart at Harvard (she used to be the IMF's chief economist once, and therefore possesses essential establishment credentials galore) recently had a very public spat with Paul Krugman over a paper she co-wrote with Kenneth Rogoff on sovereign debt and the ways in which it impedes economic growth once it grows too large. Since Mr. Krugman wants the government to increase its deficit spending almost regardless of how high this spending already is (unless the president is a Republican, in which case '), he relished the opportunity to lay into the paper and its authors following the discovery of a few spreadsheet errors.
The entire spat revolved around an utterly irrelevant question, since matters concerning economic theory cannot possibly be settled by invoking statistics. The proper question was always 'what does economic theory have to say on the topic', and not 'what do the statistics of economic history say'. That a number of world-famous and widely respected economists have skirted this essential aspect of the debate only confirms in what a cul-de-sac most of modern mainstream economics finds itself in.
Anyway, Mrs. Reinhart is sure to win over étatistes of all stripes with her latest admonishment to the Fed, which can be summarized as: keep printing!
“The Fed should continue with its current quantitative-easing program, given the prolonged US deleveraging cycle and downside risks to inflation and growth, warns Carmen Reinhart, economics professor at Harvard, as fears grow that the tapering of bond purchases, expected in September, will deepen the sell-off in emerging markets.
The Fed risks a substantial policy mistake if, as markets expect, it begins to taper its asset-purchase program in September, warns Carmen Reinhart – economics professor at Harvard and one of the world’s leading experts on debt cycles – citing the stubborn disrepair of US household and fiscal balance sheets, and headwinds to growth.
In an interview with Euromoney, Reinhart warns: “We still have a great degree of deleveraging to endure in the US, and the issues around the world, particularly in Europe, are far from resolved.” Asked about the relative emphasis of employment versus price stability in the Fed’s dual mandate, Reinhart says these objectives were “nowhere near conflict”. “At some point the Fed’s policy mandate will force it to consider a trade-off but I don’t see that yet,” she says. “Cyclically right now, where is the inflation?”
“Right now, a withdrawal of stimulus would be premature. Where you have weak inflation and poor unemployment, even though we have seen better economic news recently, you have a tepid recovery. “And in the area where the Fed has chosen to help, such as the housing, there has been a bit of a recovery but the Case-Shiller index [a benchmark gauge for US house prices] is still below its peak, so we are not there in terms of recovery.”
Asked whether the Fed should take into account the prospect of financial bubbles, triggered by its loose stance, in its policy calculations, Reinhart says there is no precedent of the US central bank conceiving of its mandate outside the objectives of employment and price stability. “Because of the recent crisis, people are understandably more bubble-conscious than before,” she says. “There is a consensus that the Fed should continue to focus on growth and employment as its target, and it does not have a history of pricking bubbles. I don’t see why this should be changed.”
The list of Fed 'policy mistakes' is longer than Methuselah's beard, that much is absolutely certain, but easing off the monetary gas pedal has never been one of them.
The inflation Mrs. Reinhart cannot see is right here:
We are of course aware that she is referring to the CPI, an indicator that purports to 'measure' one of the many effects of inflation, in this case on consumer goods prices in the aggregate. Apart from the impossibility of such a measurement, the biggest problem with this semantic confusion between inflation and its effects is that people keep talking about things that simply do not matter much in this context.
It cannot be said with any certainty how long it will take for CPI to show a concerning rise in prices. All one can be reasonably sure about in this respect is that considering the way in which it is calculated these days, the lag time is likely to be even longer than usual. However, it can be apodictically stated that monetary inflation has already influenced prices in the economy and in the process distorted relative prices. That is actually the crux of the problem.
So housing prices are still below their bubble peak and that is a problem? They are definitely well out of the reach of most first time buyers even so, as nearly every real estate expert will readily confirm. Why should the peak prices of an unsustainable bubble be the standard by which Mrs. Reinhart judges whether prices are at the 'right level'? We will only be 'there in terms of recovery' when the most extreme bubble prices for residential real estate in US history are reached once again? This is a truly bizarre thing to say.
Yes, it is true: the Fed has no history of pricking bubbles, except by mistake. It does however have a history of blowing them. That is not part of its mandate either, and yet it is doing it incessantly since it has been founded. Ultimately the idea that a handful of central planners should decide what the proper interest rate and proper height of the money supply for the economy should be is utterly preposterous.
In fact, it is just as preposterous as Mrs. Reinhart's contention that she knows the 'right price' for houses. The planners and their apologists may well believe that they know better than the markets, but this idea flies into the face of sound economics. The history of central banks specifically is a history of constant failure, at least from the point of view of the common man. The tiny group of special interests that actually profits from inflationary policy probably thinks otherwise, but no wider societal benefit can possibly accrue from it.
Carmen Reinhart shows us how high house prices need to be …
(Photo via Yale News)
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