August 06, 2016
Sir, you write “there are a few welcome signs that fiscal rather than monetary policy may finally be taking some of the strain of stimulating a sluggish global economy” and, again, that “With bond yields apparently grinding ever lower in advanced economies, the cost of a debt-financed expansion continues to fall.” "A quiet shift in focus for economic policymakers", August 6.
And one gets the impression you believe monetary and fiscal policies are independent, and live separates lives. That’s really not so, they are much married even if they don’t live at the same address.
They were very much married back in 1988 when regulators (central banks) with Basel I assigned the sovereign a risk weight of 0% while giving us We-The-People one of 100%.
In November 2004, in a letter published by the FT I wrote: “Our bank supervisors in Basel [central banks] are unwittingly controlling the capital flows in the world. How many Basel propositions it will take before they start realizing the damage they are doing by favoring so much bank lending to the public sector [sovereigns]?”
And here follows a brief storyline I recently gave you in another of the letters you feel to have the right to ignore, only because they verse repeatedly on the same theme.
Government issues bonds, the public buys these, and central banks, wanting the economy to grow, then buy these from the public by means of QEs
Then the public does not know what to do with that purchasing power given to them by the central banks and, wanting to play it “safe”, looks to buy government bonds, and so the interest rates on public debts goes further down.
And so then you and many others recommend to take advantage of these low borrowing rates, in order for governments to invest in infrastructure. And if government follows their advice, it will issue more bonds, and the public will buy these.
But since the economic punch from infrastructure investments vanishes quite fast if there are no one willing to use and pay the right price for it, the central banks will then (cheered on by FT) launch new rounds of QEs, and buy more government bonds from the public… and on and on it goes… until!
Sir, at what point do negative rates become absolutely incompatible with a 0% risk weight of sovereign debt? How much capital will banks then need to hold against government bonds? How do we get off this not at all merry merry-go-round?
And to top it up, meanwhile, SMEs or entrepreneurs, those who could perhaps best help to get the real economy going, if these want the opportunity to a bank credit, banks are told that “since these clients are risky you need to hold more capital against their borrowings”. And so banks do not lend these clients the money, or, in order to compensate for the higher equity requirements, charge them much higher interest rates, making thereby the “risky” riskier.
How the hell did we land in this hole? I know!
PS. With respect to their future pensions, are central bankers and regulators isolated from their decisions? Should they be?