As I have referenced in the past, what’s needed today is not an endless circuit of vapid speeches and tortured transcripts from central bankers posing as magicians, what’s needed is policy leaders with the courage to bring banking rates back up to rational levels so that savings can once more earn a reasonable yield, and self-destructive consumption and speculation on credit are reined in once more. Yes, this is likely to accelerate an economic slow down and bear market in over-valued asset markets but as Paul Volcker realized in 1981, that’s part of the purging process required, and those things are coming naturally, in any event. After 9 years of reflating through reckless debt at every level, we have earned the mean reversion cleanse coming.
Ironically, in the early 1980’s higher rates were needed to break the cycle of runaway consumption and inflation. Today, higher rates are needed to help break the cycle of runaway speculation and economic stagnation. Two ends of the spectrum, higher rates needed for both. Treatments can be painful, even as they’re necessary. So far, the leaders at the largest central banks of the world, are showing cowardice and capture not leadership and independence. No courage in sight yet.
Good piece on this from Stephen Roach this week, see The Courage to Normalize Monetary Policy:
In the current period, the Fed has outlined a strategy that does not achieve balance-sheet normalization until 2022-2023 at the earliest – 2.5-3 times as long as the ill-designed campaign of the mid-2000s. In today’s frothy markets, that’s asking for trouble. In the interest of financial stability, there is a compelling argument for much speedier normalization – completing the task in as little as half the time the Fed is currently suggesting.
Independent central banks were not designed to win popularity contests. Paul Volcker knew that when he led the charge against raging inflation in the early 1980s. But the approach taken by his successors, Alan Greenspan and Ben Bernanke, was very different – allowing financial markets and an increasingly asset-dependent economy to take charge of the Fed. For Janet Yellen – or her successor – it will take courage to forge a different path. With more than $6 trillion of excess liquidity still sloshing around in global financial markets, that courage cannot be found soon enough.