G20 gathers for debate on debt, monetary stimulus

1 of 3. U.S. Federal Reserve Chairman Ben Bernanke takes his seat at the G20 finance ministers meeting during the Spring Meeting of the International Monetary Fund and World Bank in Washington, April 19, 2013.

Credit: Reuters/Yuri Gripas

By David Gaffen and Jan Strupczewski

Fri Apr 19, 2013 10:01am EDT

(Reuters) – Finance leaders of the G20 economies on Friday were set to debate specific targets for reining in debt levels and the potential dangers from the latest round of aggressive easing of monetary policy from the world’s biggest central banks.

They were also poised to demand swifter resolution to setting guidelines for financial benchmarks like the Libor interest rate in the wake of a global rate-rigging scandal.

But a rethinking of the austerity push among the world’s biggest economies loomed as the biggest talking point. Advanced economies, particularly in Europe, have undertaken sharp austerity drives in recent years to curb growing debt, but those efforts have at times damaged economies already suffering from capital flight and under-investment from the private sector.

EU Economic and Monetary Affairs Commissioner Olli Rehn told Reuters in an interview on Thursday that a period of reduced spending and borrowing was necessary to calm markets concerned about out-of-control debt levels, particularly in peripheral European countries. That time has passed, he said.

“Decisive action was taken. Now as we have restored the credibility in the short-term, that gives us the possibility of having a smoother path of fiscal adjustment in the medium-term,” he said.

The United States has opposed committing to any targeted level of public debt as a percentage of GDP, a common way to measure a nation’s debt burden.

“I think an issue that will come up … is the issue of hard targets, or not, for debt-to-GDP,” Canadian Finance Minister Jim Flaherty told reporters on Thursday.

In a 2010 study frequently cited by policymakers, Harvard professors Kenneth Rogoff and Carmen Reinhart found that on average, economies contract when the debt-to-GDP ratio surpasses 90 percent – a level G20 officials were set to debate.

However, the study’s results were disputed by researchers at the University of Massachusetts at Amherst, who said growth for countries with those ratios was actually 2.2 percent.

Weakness in economies that undertook the most severe measures to cut deficits undercut the austerity argument. The United Kingdom, in particular, is suffering its third recession in the last five years.

Still, Flaherty urged the G20 to set hard targets on debt and deficit, though he added that troubled economies should move more slowly towards balanced budgets than others.

“It’s important for confidence by investors, which leads to more investment, economic growth and jobs,” Flaherty said.

SPILLOVER CONCERNS

The unprecedented level of monetary stimulus designed to reinvigorate struggling large economies, including the United States, the euro zone and Japan, has raised concerns about excessive capital flight to developing nations.

In a communique on Thursday, the Group of 24 developing nations, whose ranks include Brazil, India, South Africa and Mexico, called on the advanced economies to “take into account the negative spillover effects … of prolonged unconventional monetary policies including on inflation and the volatility of capital flows and commodity prices.”

The Bank of Japan is attempting to end decades of stagnation by pumping $ 1.4 trillion into its economy, some of which is expected to find its way into emerging markets. Local currency funds have pulled in $ 16.7 billion in the first quarter of 2013 worldwide, the most in more than two years, according to Lipper, a unit of Thomson Reuters.

“There is a call from the G24 members to have clear coordination and better communication between advanced economies and emerging markets … towards using coordination as a way to mitigate these potential asset appreciation bubbles. The consensus is that this is something that has to be closely monitored,” said Mexican Finance Minister Luis Videgaray.

Videgaray has cause for concern.

In the days following the Bank of Japan’s announcement, for example, the Mexican peso jumped 2.5 percent against the dollar to its strongest in 20 months. Against the yen, the peso surged over 9 percent.

Bank of Japan Governor Haruhiko Kuroda, in response to questioning about the country’s aggressive efforts, said he didn’t see signs of asset price bubbles “brewing in emerging nations” as a result of monetary stimulus.

“It’s true that the massive monetary stimulus of advanced economies may affect emerging economies including through capital inflows,” he said. “Such spill-over effects had been discussed even before the G20 meeting, and will likely be on the agenda at (this week’s) meeting too.”

The G20 finance ministers are due to release their formal communique around midday on Friday. They plan to task the Financial Stability Board, a coordinating body of global financial regulators, with overseeing the reform of financial benchmarks such as Libor, two sources familiar with the situation told Reuters on Thursday.

An early draft of a communique G20 financial officials will be debating asks the FSB to take on the role after a global interest rate-rigging scandal that involved some of the world’s largest banks.

The International Organization of Securities Commissions came out with a report this week saying that financial benchmarks should be based on actual transactions rather than estimates, such as is the case with Libor.

(Additional reporting by Louise Egan, Krista Hughes and Douwe Midema; Editing by Dan Burns and Tim Ahmann)

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Reuters: Business News

G20 gathers for debate on debt, monetary stimulus

Gold And 5 Years Of Global Central Bank "Temporary And Emergency" Monetary Policy Actions

When all this began, we were reassured that extraordinary balance sheet expansion and the ZIRP environment were merely temporary and only to get us through the short-term emergency. The following chart and table covering the monetary-policy-on-steroids of the Fed, ECB, BoE, and BoJ suggests this is a long-emergency indeed… and the current disconnect between the ‘planned’ expansion of central bank balance sheets and gold suggests that Cyprus’ central bank head may just replace UK’s Gordon Brown as the worst market-timer ever.

 

Five years of temporary, emergency-only actions by the world’s central banks… (click for large more legible version)

 

As all of these actions took place and the balance sheets of the world’s central banks exploded – and each time, Gold has front-run that move…

 

This time it appears (once again) gold was right (in its guess to April 2013) and unless all the central bankers in the world are about to be forced to stop the seemingly unstoppable plans they have (black arrow indicates Fed and BoJ expectations alone), then Gold (just as in late 2012) is set to recover significantly.

 

Charts: IMF and Bloomberg

Zero Hedge

Gold And 5 Years Of Global Central Bank "Temporary And Emergency" Monetary Policy Actions

"Livid" Chinese Top Economists Call BOJ Decision "Monetary Blackmail", Demand "Currency War" Retaliation

The Chinese Central Bank has so far stoically endured the monthly injection of $ 85 billion in boiling hot money for the past seven months, lovingly delivered by the inhabitants of the Marriner Eccles building, even if it meant a proportionate hawkish response which has pushed the Shanghai Composite red for the year, and having to deal with a property market that is on the verge of another inflationary blow off top. But while the PBOC will grudgingly take this kind of monetary abuse from Bernanke, now that it has to deal with another de novo created $ 70+ billion in monthly central bank liquidity (poetically called Carry-O-QE by Deutsche’s Jim Reid), this time coming from that loathed neighbor and one time invader across the East China Sea, China won’t take it any more. As the SCMP reports, “Many of China’s top economists are livid at what they view as an effective currency devaluation by Japan and are calling on the People’s Bank of China to retaliate by weakening the yuan to defend itself in what they see as a new currency war.” 

Of course, calling on the PBOC to “do something about it” is one thing, and certainly China whose GDP is still extremely reliant on net exports for economic growth would like nothing more than to crush the CNY, boost its exports and hurt Japan in the process. However, if it does that, it will merely accelerate already rampant home price inflation, which in the aftermath of the recent chicken culling birdflu outbreak and what is already a scracity of pork meat after last year’s corn drought, will then spread to food prices and lead to mass social instability (something Japan, and its docile, irradiated population apparently has little to worry about).

More from South China Morning Post:

These economists, including Tsinghua University professor Li Daokui and ANZ Bank’s Liu Ligang, see Japan’s plan to double its monetary base within two years as “blackmail” and have criticised the Japanese central bank’s decision to open the liquidity floodgates to bump up the economy.

Liu said Japan’s unprecedented easing programme, aimed at ending more than two decades of deflation, was “a monetary blackmail” targeted at other export-driven Asian countries such as China and that the central bank should sell more yuan and buy the US dollar to push down the yuan.

He also called on authorities to guard against a fresh wave of hot money into China’s fragile financial markets, warning that Japan’s move would reignite the so-called carry trade, under which investors borrow in low-interest yen and invest in high- interest markets.

“The massive monetary stimulus by the Japanese central bank could spell doom for other nations in the region,” said Tsinghua’s Li, a former adviser to the People’s Bank of China.

All spot on, and all well-known in advance, but apparently all the brilliant minds in the world forget that trade is a zero-sum game, and that Japan’s current account and trade surplus gain (if any, recall both hit record lows recently) facilitated by a plunging yen, will come at the expense of other very angry exporting nations. This also ignores what happens to Japanese import energy and food prices, already exploding as has been documented here previously. The BOJ’s hope: companies will promptly hike wages to make up for rising staples costs. We hope the central banker often confused with a Yankees pitcher does not hold his breath.

As for countries hating Japan’s guts right now, China may have to wait in line: if there is one country that has to be truly livid at Japan it is South Korea, whose net exports account for nearly 60% of its GDP. So yes: the next currency war salve will come most likely not from China, which is already caught between a rock and a hard place, but from Seoul, where the perfect storm of a totally nutjob neighbor to the north has emerged just in time to crush its economy.

In conclusion, if there is one thing Japan has done, is to make sure all the overnight angst so carefully focused on Europe in 2011 and 2012 (and where it is pretty much game over now following news that “success-story” Portugal will pay public workers in bonds not in cash, all it takes is someone to put down the time of death) shift forward, with the attention now focused not on the 3 am European open, but on what promises to be a daily 8 pm Eastern JGB volatity explosion each and every day.

Zero Hedge

"Livid" Chinese Top Economists Call BOJ Decision "Monetary Blackmail", Demand "Currency War" Retaliation

Guest Post: More Monetary Quackery

Submitted by Pater Tenebrarum of Acting Man blog,

Central Banks Urged to Drop their ‘Fear of Inflation’

An example for the relentless pro central planning and pro inflation propaganda we are regularly confronted with nowadays is a recent editorial at Bloomberg, entitled “Central Banks Must Master Their Fear of Inflation”.  Here is an excerpt from this pro-inflation screed:

“The details get complicated, but the basic reasoning is straightforward. Although nominal interest rates can’t fall to less than nothing, real (inflation-adjusted) interest rates can. To push real short-term interest rates as low as it deems necessary, a central bank merely has to achieve a sufficiently high rate of inflation. (A nominal interest rate of 3 percent is a real rate of 3 percent if prices are expected to be stable, but a real rate of only 1 percent if inflation is expected to be 2 percent.)

 

In fact, the central bank only has to promise to raise inflation and be believed — that’s enough to change real rates. This is a promise a central bank, and only a central bank, is in a position to make.

 

Could it therefore make sense for the Federal Reserve to promise, say, three years of 4 percent inflation as a way to drive real short-term interest rates lower? Theoretically, it turns out, the answer is yes. Yet the idea fills most central bankers, raised on the consensus forged in the 1980s, with dread.

 

The dread is understandable. If higher inflation becomes entrenched, bringing it down again may require a policy-induced recession. Any central banker will tell you that anchoring inflation expectations is vital for economic stability. Few want to be suspected of even considering a controlled dose of higher inflation — in fact many would say there is no such thing.

 

This thinking is counterproductive. Modern central banks pay lip service to the idea of transparency and insist they want their actions to be better understood. When it comes to discussing the trade-off between inflation and a more rapid recovery, they prefer to look away.

 

Lately, however, this reluctance has collided with the inescapable reality that, with all the advanced economies growing so slowly, maintaining or increasing monetary stimulus through QE is necessary. At the same time, central banks know that doing QE while promising to keep inflation very low is partly self-defeating.

 

Which brings us to the important question: As part of a new monetary-policy framework, can central banks openly aim for a therapeutic spell of higher-than-target inflation while containing the danger that the treatment would go too far?

 

The answer’s unclear, and the central banks’ unwillingness to confront the issue squarely isn’t helping the discussion. Our view is that a new target, tied to nominal incomes or to the level of future prices rather than the rate of inflation, could serve this purpose. (For a more thorough examination of this idea, see this accompanying essay.) There are good reasons to fear inflation. But no one should be so afraid that the subject can’t even be discussed.”

(emphasis added)

The fact that such arguments are forwarded in editorials and by many modern-day economists is simply stunning. Even if one knew absolutely nothing about economic theory and were instead only aware of economic history, one should recoil from such ideas. The very same argument – namely that there is a ‘trade-off between growth and inflation’, read: inflation can somehow ‘create growth’ – has for instance been made the members of France’s revolutionary assembly in 1789. And for a while it seemed that they were right. These men were not stupid; they thought: ‘all we will do is give the economy a brief shot in the arm, until it is revived again, then we will stop’. But then it turned out that they simply could not stop.

They then proceeded to deliver a historical achievement of some distinction: they completely destroyed two currencies in a row, back-to-back (the ‘assignat’ and the ‘mandat’). For a detailed account of that experiment, see “Fiat Money Inflation in France” (pdf) by Andrew Dickson White. This is a text everyone should read – it stands as a monument for the folly of continually trying to ‘stimulate’ the economy by means of inflation. It also shows how well educated men can, in spite of actually knowing better, easily fall for committing this abject error.

As Ambrose Evans-Pritchard recently remarked quite correctly, the very same fate awaits the Fed and BoE’s ‘QE’ operations. They will never be ‘reversed’. In fact, prominent academic economists are making precisely this argument, namely that ‘QE’ should just be continued forever!

“Columbia Professor Michael Woodford, the world’s most closely followed monetary theorist, says it is time to come clean and state openly that bond purchases are forever, and the sooner people understand this the better.

 

“All this talk of exit strategies is deeply negative,” he told a London Business School seminar on the merits of Helicopter money, or “overt monetary financing”.

 

He said the Bank of Japan made the mistake of reversing all its money creation from 2001 to 2006 once it thought the economy was safely out of the woods. But Japan crashed back into deeper deflation as soon the Lehman crisis hit.

 

“If we are going to scare the horses, let’s scare them properly. Let’s go further and eliminate government debt on the bloated balance sheet of central banks,” he said. This could done with a flick of the fingers. The debt would vanish.

 

Lord Turner, head of the now defunct Financial Services Authority, made the point more delicately. “We must tell people that if necessary, QE will turn out to be permanent.”

(emphasis added)

That the dangerous quack quoted above is regarded as the “world’s most closely followed monetary theorist” is shocking, though perhaps not surprising. We have previously discussed the question of central banks canceling the government debt they hold and what to expect from such a move. It doesn’t need to be repeated, except to say that it would compound the foolishness of the current path of policy.

One really wonders why people have lately sold gold. It seems to make little sense in light of the widespread mainstream views on what the ‘correct’ monetary policy should consist of. Monetary cranks abound wherever one looks. The ultimate outcome of all this inflationary experimentation is preordained, so people have every reason to be very concerned about preserving the value their assets. Of course we are well aware that markets can often behave in an irrational manner for extended time periods. In fact, this is what allows astute speculators and investors to make profitable trades, as there are frequently opportunities created by the markets getting it wrong. In this particular case it is still astonishing, considering how blindingly obvious it is in which direction things are currently moving. Mr. Woodford wants to ‘scare the horses’. We are wondering why they are not scared yet – but we suspect they will be soon enough.

 

Michael Dean Woodford, a proponent of ‘QE forever’ who even wants central banks to cancel the government debt they hold, thus enshrining the inflation of recent years irrevocably.

(Photo via The Washington Post)

Zero Hedge

Guest Post: More Monetary Quackery

Competitive Easing Madness; Japan to Double Monetary Base; Draghi Signals More Easing; Yen Plunges

Escape Velocity

Central bankers have gone totally mad. The stunning news of toady is a new pledge by Japan to double its monetary base in two years as the Bank of Japan Unveils Aggressive Easing.

The Bank of Japan will aim to double the monetary base over two years through the aggressive purchase of long-term bonds, in a dramatic shift aimed at ridding Japan of the deflation that has dogged the country for almost two decades.

Haruhiko Kuroda on Thursday announced his arrival as central bank governor with a “new phase of monetary easing”, a move that comes after Prime Minister Shinzo Abe told the bank to target a 2 per cent rate of inflation.

“We can’t escape deflation with the incremental approach that’s been taken until now,” Mr Kuroda said after the announcement. “We need to use every means available.”

“I am confident that all the policies we need to achieve 2 per cent inflation in around two years are now in place,” he said.

Yen Plunges

As one might expect on such a surprise announcement, the Yen had a spectacular plunge.

Draghi Signals More Easing

Bloomberg reports German Yields Fall to 8-Month Low as Draghi Signals More Easing

German government bonds rose, pushing 10-year yields to the lowest since August, after European Central Bank President Mario Draghi signaled further stimulus is possible should economic conditions deteriorate.

French and Austrian 10-year yields fell to records as Draghi said monetary policy will “remain accommodative for as long as needed” to boost growth. Spanish and Italian bonds pared gains as the ECB president said the central bank won’t immediately implement measures to ease funding strains for smaller companies.

Fed Uncertainty Principle

This is all in accordance with the Fed Uncertainty Principle corollary three.

Corollary Number Three:

Don’t expect the Fed [central banks in general] to learn from past mistakes. Instead, expect the Fed to repeat them with bigger and bigger doses of exactly what created the initial problem.

Japan is eventually going to achieve “escape velocity” on deflation, and I assure you Japanese citizens will not like the results when it happens.

When the Japanese bond market finally reacts to this inane policy, there is going to be a global currency crisis.

Mike “Mish” Shedlock
http://globaleconomicanalysis.blogspot.com

Mike “Mish” Shedlock is a registered investment advisor representative for SitkaPacific Capital Management. Sitka Pacific is an asset management firm whose goal is strong performance and low volatility, regardless of market direction. Visit http://www.sitkapacific.com/account_management.html to learn more about wealth management and capital preservation strategies of Sitka Pacific.

Mish’s Global Economic Trend Analysis

Competitive Easing Madness; Japan to Double Monetary Base; Draghi Signals More Easing; Yen Plunges