In the time of “secular stagnation,” the burden of economic policy has fallen on the world’s central bankers. Whatever the question of economic malaise the answer is to print money and stave off the fear of deflation. This is why Ben Bernanke was the captain of the ’37ers, the cadre of central bankers who learned that the mistakes made by the U.S. Secretary of Treasury and the Federal Reserve would not be repeated. As it goes, it is easier to stop inflation then it is to prevent the pains of a deflationary spiral. The central banks of all the developed world economies are in full stop deflation mode. Thus, when in doubt, PRINT.
In a November 20 Financial Times article by William White, the former BIS economic adviser wrote, “Japan’s Stimulus Plan Is Not Courageous But Foolhardy.” Mr. White wrote a splendid piece in 2006 predicting the coming credit crisis, thus his opinions carry far more weight than the talking heads that fill the airwaves on a daily basis. White argues that the BOJ stimulus is not needed for three reasons. First, slow growth is a result of demographic trends and not the result of deflationary trends. Secondly, the policy of weakening the yen is in contravention to what the Japanese economy needs, more consumer spending, but the weakened YEN is putting pressure on import prices which is forcing Japanese citizens to spend less because wages have failed to rise. And lastly, if price rises begin to increase risk premiums for yen-denominated assets, bond yields could rise putting much more pressure on the Japanese budget deficit.
The current Japanese fiscal deficit is 8 percent and if interest rates were to rise the cost of financing the deficit would rise putting more pressure on government finances. There is no time-table for the outcomes to any of these events but it does raise a modicum of doubt about current bank policy. The world’s equity markets are giddy over a world floating on a sea of central bank created liquidity. It is necessary for analysts with the stature of William White to raise concerns about global central bank policy:
“Higher central bank rates to support the yen would increase debt service, sending bond rates even higher. A failure to raise rates would result in the yen weakening further, exacerbating ‘currency war’ tensions. Sales of foreign exchange reserves to support the yen might be effective but could have serious effects on the markets for U.S. Treasuries and elsewhere. Confidence everywhere would be seriously affected should it become clear Japan’s authorities were losing control of events.”
The BOJ is not alone in promoting a “foolhardy” policy. THE SWISS NATIONAL BANK (SNB) has embarked on a three-year effort to contain the strength of the Swiss franc. Thomas Jordan, chairman of the SNB, delivered a speech on November 23 titled, “Sound Money: A Fundamental Pillar Of Our Society.” Jordan provided a historical summary of Swiss monetary policy but failed to convey why the present policy of protecting the EUR/CHF 1.20 level is representative of sound money. It seems that the SNB is preventing the overvaluation of the FRANC in an effort to placate Swiss exporters but the price is an exploding SNB balance sheet which risks future instability for domestic prices. In the SNB‘s determination to keep the SWISS FRANC at a steady level the Swiss are captive to the decisions of Mario Draghi and the ECB.
Mr. Jordan maintains that the Swiss have not surrendered control of its monetary policy but is in fact acting out its mandate. “The minimum exchange rate is therefore an expression of our national policy sovereignty and the SNB‘s lived independence, not a sign that we have given up our autonomy.” Sorry but having to quadruple the SNB balance sheet in an effort to placate the Swiss exporters is a sign of enslavement not an act of free will. The SWISS have tied themselves to the mast of the ECB and are reacting to the siren calls of Mario Draghi and his continued, “Whatever It Takes.” Printing money should be the last action for the SNB, which prides itself on stability.
The SNB should be placing negative interest rates on deposits, especially foreign money, and to prevent a housing bubble raising the equity levels on home loans to a very lofty percentage (macroprudential tools in the classic sense). In a speech last Thursday, SNB member Fritz Zurbruegg noted that the SNB “… is prepared to purchase foreign exchange in unlimited quantities and to take further measures immediately if required.” The Swiss have been consistent practitioners of sound money but recent SNB actions have raised doubts about its credibility. In Sunday’s referendum I would certainly vote in favor of Swiss GOLD purchases. Let’s see what the sense of the Swiss citizenry is as the establishment and the SNB are actively campaigning against the proposal. The question is whether to be crucified on a GOLD CROSS or the EUR/CHF cross … hmmmmmm.