The World's On Fire Because the Growth Never Was

The World's On Fire Because the Growth Never Was
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They didn’t do these things in those days. This was before the current age of transparency in central banking, back when Montagu Norman’s dictum was more widely regarded. Monetary policy didn’t need hype and hoopla, the central banker just made some money and sat back to watch its predictable magic.

In a way, that’s kind of what they hoped they’d be doing. On February 12, 1999, Masaru Hayami’s Bank of Japan released its historic press release; and only that release, no frills, no spectacle. The text didn’t even use the word “zero” anywhere in it. In fact, even though a world’s first, you were made to infer the main idea from the typically cryptic Japanese way of doing things.

Here's what it actually said:

“The Bank of Japan will provide more ample funds and encourage the uncollateralized overnight call rate to move as low as possible.”

Call money rates at the time were already close to zero anyway, so “low as possible” meant nothing else other than the zero lower bound (ZLB, or effective lower bound, ELB, as they have rebranded it recently). The zero interest rate policy, or ZIRP, had arrived.

So, in February 1999, mired in structural problems and turmoil, the Bank of Japan embarked upon an experiment with zero interest rates and the ZLB.

In December 2008, amidst structural difficulties and disorder, the US Federal Reserve under Ben Bernanke climbed aboard the same test of zero interest rates and the ZLB.

During July 2006, near seven and a half years after beginning ZIRP, the Bank of Japan began to raise its benchmark rates anticipating inflation, accelerating growth, and recovery.

During December 2015, almost exactly seven years after starting ZIRP, the Fed raised its “double floor” benchmarks while forecasting inflation, accelerating growth, and, most of all, recovery.

Two years after initially hiking, Japanese policymakers were starting back down toward zero again – where they remain to this day.

Three and a half years following their first hike, US policymakers began heading back down toward eventually zero again.

Federal Reserve officials now say they’ll leave the US mired in ZIRP for at least five more years. But we’re not Japan, right?

The zero lower bound is no mythical monster, an uncontrollable demon gobbling up and ravaging one economy after another with ruthless determination and application of unstoppably destructive financial force. That’s just how the current paradigm of central banking sees it.

An economy can easily escape zero; it is the central bankers who cannot.

Several weeks after sending Japan to its date with the ZLB, in March 1999 Governor Hayami spoke about it to an audience at Tokyo’s Research Institute. The economy had suffered harshly from the setbacks experienced after the Asian flu (basically, the regional dollar shortage of 1997-98) following nearly a decade of being unable to recover from the big crisis which began Japan’s futility in the nineties.

Even though things were looking up, said Hayami, monetary authorities simply could not let emerging risks derail what they believed would turn out to be recovery. The initial response to what many were calling a flood of monetary accommodation had been hugely positive, an encouraging first step back toward the light. Stocks soared, he wanted everyone to know.

“The yen has generally followed a downward trend. Stock prices, as measured by the Nikkei 225 Stock Average, have recovered to around 16,000 yen. We believe that, if these trends in the financial markets continue, they will influence the economy positively through an improvement in returns on investment, a further alleviation of the fund-raising conditions of financial institutions and firms, and a recovery in business and household confidence.”

Despite the glut of positive feelings from the sharp rebound in equities, not much else went right from there. Just over two years later, Japan’s central bankers would seek to surmount their ZLB problem by creating another world’s first (in modern times, anyway) with quantitative easing (QE).

If you can’t go below zero with nominal rates, and there’s lots of substantial reasons why you can’t, then you might be able to force real interest rates underneath the ZLB by first ZIRP and then “money printing”; not actual money printing, mind you, but getting people in the markets and economy to believe that’s what you are doing.

Once they think you are being reckless with the printing press, they’ll begin to act, right now, anticipating a breakout of inflation not far down the road. As Keynes called it, the pump would be primed, putting the economy on its way to good things whether it wanted to before or not. Negative real rates are how monetary officials describe that process.

Fairy tales, however, aren’t real stories; like modern money printing, it’s all made up. In April 2005, four years after QE, six years following ZIRP, the Bank of Japan published a working paper which concluded pretty much what everyone by then already knew.

“From this analysis, we tentatively conclude that the BOJ’s monetary policy since 1999 has functioned mainly through the zero interest rate commitment, which has led to declines in medium- to long-term interest rates. We also find some evidence that, up until the end of 2003, raising the reserve target may have been perceived as a signal indicating the BOJ’s accommodative policy stance although the size of the effect is not large. The portfolio rebalancing effect -- either by the BOJ’s supplying ample liquidity or by its purchases of long-term government bonds -- has not been found to be significant.”

In short, QE didn’t work – at all. The reserve target was the quantitative part of this presumed easing, but the effect was found to be “not large.” At most, what the public perceives of as money printing is nothing more than a signal – a visible sign that the central bank is doing something because its balance sheet is getting bigger due to a rise in the balance of (otherwise inert) reserves.

Other than the single act of signaling, it doesn’t appear as if those signals did much – or any – good since quite obviously neither the business sector nor the public reacted to them in the way policymakers had intended.

The other major theoretical channel for QE is called rebalancing, or portfolio effects. This is where because the central bank is buying government bonds as well as handing out what people say is free money, the banking system itself then uses all this free money to go out and buy risky securities or to engage in lending to replace lost income streams scarfed up under BoJ bond buying.

And in the paper the rebalancing effect “has not been found to be significant”, either. What Japanese banks did do is repurchase more of the same safe, highly liquid government bonds.

The only part these Japanese researchers could statistically identify as being of minimal help was through the “through the zero interest rate commitment,” meaning ZIRP. But the study never actually matches this with economic success, either, merely substituting the act of lower bond yields and assuming some positive results in the real economy.

But - and this is a gigantic but - bond yields especially out further away form the shortest money rates reflect real economy conditions rather than fake monetary inputs and signals - and you don’t have to go that far down the yield curve to begin easily observing such independence. Yields tumbled, and stayed low, as the Bank of Japan’s lack of success in the real economy grew unmistakable, creating robust demand for safe liquid instruments at any price.

The combination of QE and ZIRP hadn’t actually accomplished a single thing. That’s the trap at the ZLB; the monetary and banking system goes haywire, depresses the economy, dragging it down and keeping it down (by never letting it get too far up when it does go up, the next downturn always just around the corner), damage from which accumulates in the bond market as the desire to hold only the safest and most liquid instruments (suppressing longer run inflation and growth expectations).

Central bankers are not serious people; how can they be? In Japan, respected authors wrote this paper and the Bank itself published the thing fifteen years ago for everyone to see and read – and still they repeat the same program over and over and over again.

Worse, those mistakes have been copied and exported the world ‘round. After ridiculing and mocking the Bank of Japan’s QE and ZIRP combination as an obvious failure in June 2003, Federal Reserve officials five and a half years later were fully and completely implementing it. They still adhere.


The big story this week is the gross unrest in Wisconsin, the still-hot burning cinders of a substantial bit of Kenosha. A few states further west, over in Jackson Hole, the central bankers are gathered once again for their latest annual conclave whereby they console one another into believing, yes, by God, QE 25 and the nineteenth year of ZIRP will do the trick!

These are not serious people.  

As a consequence, Federal Reserve Chairman Jay Powell’s BIG IDEA for making a splash in Wyoming wasn’t a new asset class to buy up under the next QE, nor even some novel way of making bank reserves look more like money; look a little like money.  It was a word, a single word: symmetry.

He'll use every tool in the kit, Japan’s kit, to achieve it.

And he wants you to know, he demands that you know this incredible breakthrough came about because of so much hard work and tireless effort conducted over months of exhaustive research and thought on the part of an army of Fed officials, staffers, and outside academics who seriously care about you and your family.

It began in November 2018 with Powell’s announcement of this grand review. That was followed by fifteen (15!) Fed Listens events “to engage with employee groups and union members, small business owners, residents of low- and moderate-income communities, retirees, and others to hear a wide range of perspectives about how monetary policy decisions affect their communities.” They care, dammit!

That was followed in June 2019, right when rate hikes were “unexpectedly” becoming rate cuts, though that’s not mentioned, by a Conference (with a capital “C”) featuring a dizzying array of research papers from the most studious mainstream scholars, a line up of the most impressive speakers each displaying ever more impressive mainstream credentials.

And if those weren’t enough, the following month, July 2019, the FOMC arranged five (5!) individual working groups each consisting of teams of the brightest mainstream analytical staff toiling over reams of analytical data in order to supply the Committee with every bit of information humanly possible to reach so that when policymakers put together their new monetary policy framework based first upon Fed Listens and conference papers the finished product would be in the most unassailable (looking) fashion.

Chairman Powell yesterday finally revealed what that was: symmetry. Policymakers have concluded that while still targeting 2% inflation, after periods, especially prolonged periods, when the economy doesn’t measure up and cannot reach that target, the central bankers promise to let inflation go above it for as long as needed so that over time everything averages out to 2%.

In their view, this makes real rates right now even more negative.

Like you, I, too, heard the unmistakable choir of angels singing down from the Beauty of Heaven, the bright sunlight of knowledge and wisdom shining in from the unearthly thrones harking all the way back through history when humanity’s greatest minds had sat nobly upon them, all while this truly momentous word passed out of Chairman Powell’s enlightened mind and issued forth from his dexterous tongue past his lips, this most righteous and holy gift upon all of humankind.


Yeah, no. Sorry for the detour deep down into the irrationally absurd but it is absolutely demanded here given how hype and hoopla are now the centerpieces of monetary policy having long, long ago been substituted for anything like rational or technical proficiency.

As I’ve been writing for two years and nearly four months, symmetry (or average inflation) had already been introduced as a main character in the Federal Reserve’s puppet show all the way back in May 2018. The official statement which accompanied that particular meeting had back then declared:

“Inflation on a 12-month basis is expected to run near the Committee’s symmetric 2 percent objective over the medium term.” [emphasis added]

Within a month and a half, the eurodollar futures curve had inverted, and the FOMC’s commitment to letting inflation run hot so as to finally average out into perfect symmetry disappeared back into the realm of legend from which it came. The only change Jay Powell seems to be making from 2018 is that this inflation symmetry will also be a long run objective, too. Big whup.

In response to an economy in 2020 now facing even more massive deflationary forces, unprecedented deflationary destruction being carried out in the labor market (it’s near the end of August, initial jobless claims remain greater than a million), and the Fed responds with…something that barely two years ago had failed within months, weeks of its first appearance?

How utterly devoid of ideas must they be? Never mind solutions, how about just something actually creative within their own realm of entertainment and puppet show? Don’t answer; these are rhetorical questions already spoken for in the first two-thirds of this essay.

What Jay Powell wants you to believe, no, he absolutely needs you to believe is his promise to push inflation to rise up beyond, and stay up beyond, the same target, and do so by using basically the same tools which hadn't done the job for so long it had necessitated this grand “new” strategy in the first place. You can see what I mean; he is saying the way out of this disaster is by making you the same promise as before, but really, really meaning it this time.

They’ve spent the last eleven almost twelve years failing to hit their inflation target, so now they’re not only going to get inflation above the target they can’t hit, they’re also going to keep it there for enough time to average out the decade they’d already botched. And using the same tools, QE’s and ZIRP’s, to do it!

These are not serious people.

The zero lower bound is indeed a trap, but the trap isn’t what it’s portrayed to be. Instead it is this: once you get there you have to get rid of all of those who let it happen because they obviously had no idea why it had happened and, most importantly, these people will have no idea how to get out of it.

And while you may not think that has anything to do with what’s happening in Wisconsin right now, as well as around the country and the rest of the world, as I’ve been warning for years (too many) you can’t go this long without real economic growth (the inflation “puzzle” a symptom of this) and expect any other set of results.

Clueless central bankers, the ZLB trap they will never escape, and an increasingly hopeless, disturbed world putting the torch to itself because someone’s going to be made to answer for all of it. Will it be the right people with the right answers? Don’t ask Jay Powell, or all the others like him. He’s too busy showing you he has no idea. 

Jeffrey Snider is the Head of Global Research at Alhambra Partners. 

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