By Christian Takushi MA UZH, 11 June 2015, Switzerland.
I believe that the former chief of the German Bundesbank (BuBa or German Central Bank) has put forward probably the best analysis any global leader has yet delivered on the “Global Crisis of Central Bank Policy” we currently face.
Mr Axel Weber, who reportedly quit his job out of protest against the huge bond-buying plans by the ECB, is back to the monetary policy debate. With a world facing a growing convergence of manifold challenges, Mr. Weber’s view is well received among independent economists and comes at a time the IMF has started a public debate on FED policies. Just within one week we have seen Mrs. Christine Lagarde (IMF) and Mr. Axel Weber (UBS) making public remarks critical of central bank policies.
Although I have to admit that my support for Mr. Weber’s analysis is somehow predicated by my own Classical Monetarist training, my overall support for his analysis goes beyond the “Monetarism vs Keynesianism” school-of-thought discussion. There is a sound balance of monetary theory and openness to new realities in Mr. Weber’s analysis. Which is refreshing. At this juncture all economists should be open to criticism, new perspectives and more holistic approaches. If we stick to consensus, we will fail to add value to society.
I just wrote a comment last Saturday supporting Mrs Christine Lagarde for opening a public discussion on the FED’s interest rate normalization. But this analysis of Mr. Weber is among the best I have seen in “monetary-policy terms” since the year 2008. He wisely avoids saying exactly what we should do, but he does give a clear direction that is sensible and that takes into account the dramatic failure of current monetary policy and the huge systemic and ethical risks it has introduced.
Historical background to why Mr. Weber’s analysis should be heeded
Those acquainted with my theoretical position on post-modern monetary policy know I developed it from going through the tough experiences of the Japanese crises from 1989 to 2003 and the Japanese Liquidity Trap. First as economist, then as a fund manager. From meeting leading economists, officials, corporate executives, workers and engineers over all those years I realized the treatment could not succeed, because the diagnosis was wrong. Although Japan’s labor force was in straight decline since 1998, the shrinking of the economy was attributed squarely at policy failure to print excessive money. Why would a mature economy like Japan (median age 46) try to grow as a younger economy like the USA (median age 36)? When asked why Japan’s policy makers were so incapable, I answered it is a mix of policy errors and unavoidable demographic realities, but mainly a failure to adapt monetary policy to the realities of an old and shrinking population. Furthermore I warned Japan’s lost decade is a good example of what lies before Europe. You can imagine how other economists and investors reacted to my remarks during the late 1990’s and early 2000’s, Europe was booming and they thought I was too cautious.
Old people can live happily in a shrinking economy, but if policy makers set unrealistic targets of 2-3% growth, a whole nation can be in collective depression and that in itself keep the economy in a negative spiral, forcing policy makers to introduce ever more unorthodox measures. Europe in 2015: Instead of adjusting policies to our new realities and shrinking labor forces, our policy makers are desperately trying to import more foreigners and depreciating the EURO to export more. We should export more if we have new technologies that meet peoples’ needs, not because we can sell more at the expense of somebody else – thanks to currency “dumping”. Both strategies are not just short-sighted and unsustainable, they have long term political, geopolitical and economic costs & implications that policy makers seem blinded to. It is feeding national fervor and even nationalism, the very thing that could destroy Brussel’s dream of a Federal European Union.
Making your currency cheaper might be a short term boost to this year’s GDP, shareholders and corporate bosses’ pay, but they are like a curse for your economy long term. A weaker currency removes a powerful driver of competitiveness and improvement. A strong currency is painful but a macroeconomic blessing, because it drives innovation and technological improvement. Only outright war can top that. Look at Singapore or Switzerland – their currencies have been strengthening for decades, making the surviving industries stronger and flexible. The short-sighted policies we see in the G7 and OECD realms are not just a zero-sum game, they are worse than that. Because of the gigantic side-effects.
For 2 decades policy makers do the same – ever more aggressively, but expecting different results
After all the view attributed to Mr. Bernanke “I got Japan figured out, trust the FED” propagated an almost condescending attitude of superiority in the USA and Europe over Japan and rising Emerging Economies. Japan’s Crisis and stagnation was simply a policy error – they weren’t aggressive enough”. Nothing we should be worried about.
Japan doesn’t bode well for Europe: During 15 years I urged Japanese economists to re-think their policies, aim at Nominal GDP per capita and avoid trying to engineer artificial inflation. They said, “Mr. Takushi, you’ve got a point, but this is the global consensus among the most famous economists and leaders”. I ask, how well has this consensus served Japan or Europe? And why are they still doing it with ever more aggressive tools? A leading U.S. bible teacher, Mr. Andrew Wommack, has said that “a definition of insanity is to keep doing the same again and again and yet expect different results”. It may sound funny, but it kind of hits the nail on the head. I think FED, ECB and BOJ policy makers are leaning on well-elaborated theories, but they need to realize that a growing number of independent economists, business leaders and citizens are seeing their unyielding closed-ranks behavior with concern and would appreciate a broader discussion on current monetary policy. Policy makers’ behavior is eroding trust in the Central Bank System. That is highly dangerous, because our paper money has no gold-backing since 1974 and is now also debased, thus its value hinges merely on a tenuous “trust”.
A decade later the US and Europe are in a Liquidity Trap of their own. Somehow even worse than Japan, because Japan never artificially supported asset prices to boost consumption and engineer a recovery. Western policy makers continue to overlook – in the case of Japan then, and Europe today – the powerful factor of demographics (the combination of a shrinking labor force with an aging population), the serious de-linking of the banking industry from the real economy and the Balance Sheet Recession. The latter well exposed by a leading economist, Mr. Richard Koo. A Balance Sheet Recession is a serious phenomenon: as individual companies react too late and simultaneously do the right thing by cutting excess debt, they bring distress and deflation to the broader economy. That herd-behavior is acutely widespread today: the smart move at the corporate level brings distress to the overall economy, reinforces deflation and deepens the Liquidity Trap. And of course this shock at the macro level will come back upon all individual firms, prompting them to do more cost cutting. Such a type of recession shows the big difference between business administration or business economics on the one hand and macro economics on the other hand. We need both for a balanced policy assessment.
Could FED, ECB and BOJ targets be out of date and misleading?
Mr. Weber rightly points at the risks of getting misleading signals by an obsession with CPI inflation by policy makers and investors. This chart shows policy makers thought they could print money recklessly as long as CPI prices would not rise. Actually they may only jump once the crisis has begun to unfold, as happened in 2007-2008.
As I wrote last June 2nd and June 9th: Policy Makers are aiming at out-dated targets: maximizing real GDP and aiming at 2% CPI inflation. These targets are rather optimal for younger economies with dynamic and growing labor forces – their bank balance sheets are growing organically at healthy rates in line with GDP. Western economies, especially Japan & Europe (but also China, South Korea, Thailand, Taiwan etc) are mature, somewhat saturated & fast aging demographies with shrinking labor forces.
As someone asked recently, how many more cell phones and gadgets can a saturated Japanese own? Such mature economies should aim at a broader set of targets. Beginning with Nominal GDP per capita, a broad set of inflation indices and qualitative targets. If there are 10% less people, shouldn’t GDP shrink somehow too? It is vital to stop throwing all our resources at unattainable and dangerous Inflation targets, totally obsessed with a CPI inflation of 2%, although inflation in other areas of the economy is rising beyond 3% p.a. According to politicians and central bankers for years now there is no inflation, rather deflation. Thus the cost of living should be falling or basically unchanged. Ask any housewife in the UK if the overall cost of living has remained practically the same or stable over the past ten years as official CPI statistics kind of suggest. Not at all; essential cost items doubled in the last decade. The fact is CPI baskets are helpful but highly political constructions. CPI is too narrow a target, just as Mr. Weber has rightly stated.
In a desperate effort to achieve an illusory 2% inflation despite natural (demographics), internal (new technologies etc) and external forces (Asian economies exporting deflation to us), central banks are printing gigantic sums of paper money, not only failing to achieve sustainable growth and inflation but ..
– keeping governments from really having to address big structural issues: the excessive liquidity pushes up financial assets which in turn support consumption (GDP) via a wealth-effect. We have thus still a government-sanctioned excess consumption.
– debasing our Paper Currencies beyond remedy, thus rendering the inherent value of the money in our wallets close to zero and our Global Monetary System highly vulnerable to any shocks. Making a Global Currency Reform a necessity soon or later.
– Incentivizing firms to borrow money to speculate and buy back their shares in order to prop up the value of their shares (and corporate executives’ bonuses), with the result that few firms have any incentive to really invest and hire people, they are busy with financial engineering and profit enhancements. Central banks once incentivized banks to behave like that, now they incentivize all types of firms to play with money to create nominal wealth for so-called shareholders. Because of that, shareholder value is no longer a respected term, but a by-word for government-sanctioned enrichment at the expense of other stake holders. And those with access to newly printed High-Powered Money have almost printed money at no risk (FED-aided) since 2009. Policy makers are the biggest source of moral hazards in the global economy.
– Finally, zero interest rates send a very dangerous signal to all agents in an economy: a sign of maximum distress and emergency level. Why should consumers and producers really spend and invest as long as central banks tell them the whole system is at maximum risk? It only opens the door to people wondering why our governments would like to keep our economies in a constant state of crisis. It has indeed opened the door to unhealthy conspiracy theories.
It is thus for macroeconomic, political and ethical reasons that the extreme “zero rate” policy of the FED has to come to an end. We need to begin normalizing rates before the current business cycle enters into its down-leg or a recession. To enter a recession without being able to cut interest rates is like landing on a beach head without any ammunition.
I will be monitoring this very closely, checking with our panel of independent researchers/specialists/thought leaders and updating you.
Christian Takushi MA UZH, Macro Economist, Thursday 11 June 2015, Switzerland.
Bloomberg’s article on Mr. Weber’s paper:
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