This reference is to Janet Yellen’s testimony in her Senate confirmation hearing as the chairman-to-be cited the benefits of the Fed’s policy of über low rates for the average household. While many Senators challenged the negative effects of the Fed’s policy for savers–financial repression in the words of Carmen Reinhart–Yellen noted that people were not just savers but also consumers. Thus, Fed policy may harm the return on savings, but households may receive the benefit of lower home and auto loans and the Fed’s QE policy may have had the ripple effects of getting their college graduate a job. So financial repression was a very difficult outcome to measure against the broad economic outcomes.
Well, Ms. Yellen, the same will also hold for the Federal Court that ruled Detroit’s bankruptcy is allowed to continue, which may enable a significant hit to the public sector pensions. However, pension restructurings are a form of financial repression that will have positive “ripple effects” for many participants in the Detroit economy and maybe even Illinois. Financial repression can come clothed in various forms and the restructuring of public liabilities may be an outcome that salvage states and cities for the greater good. Political payoffs resulting in State Constitutional protections do not hold sway over Federal bankruptcy law. Now, about those ripple effects.
***The Reserve Bank of Australia held its official interest rate steady at 2.5%, which was widely expected. The RBA is allowing its previous cuts to work before embarking on any further action. Again, the RBA cited the high value of the Aussie dollar as a concern but is reticent to cut rates to further weaken the currency, which is presently 12% lower on the year. Also, the Aussie dollar is making multi-year lows against its neighbor, the New Zealand kiwi, so there is no need to fear a competitive disadvantage. In a world of falling commodity prices, the biggest concern is the weakness of the Brazilian real, but with the Brazilian Central Bank raising the interest rate to 10 percent, the Aussies can be cautious as to how much lower the REAL will drop.
Tomorrow morning the Bank of Canada will announce its rate intentions and consensus is for no change from the present 1% level and a dovish outlook on the world economy. The LOONIE is down 7 percent on the year, which will allow the BOC to keep rates steady for there are no concerns about the Loonie being overvalued.
***For the YIELD CURVE MAVENS: The RBA has cut interest rates by 50 basis points. During the period of rate cuts, the 10-year Aussie note has moved about 100 basis points. If you had been buying the long-end of the curve in response to the rate cuts you would be a loser as the yield curve has steepened in response to the rate cuts. Again, it is difficult to time the outcome but it shows how you can be right on interest moves but where you are positioned on the curve will depend on profit or loss. Interest rates are dependent on much more than tapering and rate cuts, which is why yield curves are so significant in measuring the psychology of investors. Central banks can control the short-end but the long end of the curve is much more market influenced.