From Adam Carr of ICAP, the Australian brokerage, some views on where monetary policy is going:
“The Bank of International Settlements always seems to know what’s what. While the G20 meeting may have yielded a flimsy ‘do as you wish’, there was no confusion from the BIS. The Bank is worried about a new crisis developing, but the rhetoric is far from what we’ve become used to. In contrast, the BIS are more worried about heading to the exit too late, which as regular readers know, is my concern also.
“The BIS acknowledged the difficulty policy makers had, especially as the banking system was fragile in some cases. ‘But the longer that policy rates in the major advanced economies remain low, the larger will be the distortions they create, both domestically and internationally.’ The BIS argued that extremely low real rates altered investment decisions, postponed the recognition of losses, increased risk-taking in the search for yield and encouraged high levels of borrowing. There was also the problem that central bankers would underestimate inflation risks given the crisis may have lowered potential growth rates.
“The UK illustrates this view perfectly. Rates are historically low, the economy is recovering, the land registry is reporting house price growth of 8.2%y/y to May (consistent with other house price measures) and inflation is well above target. All the while the governor of the Bank of England insists there is no problem.”
The US is not in the same situation on inflation and house prices. Challenged by a reader on what I would want to see from the Obama Administration now I made a little list, which he called “Porkulus Spending”. TM thinsk any measures would increase the size and reach of governmetn and add new bureaucrats and new regulations which would hamper future economic growth.
This is a challenge, But the US is not in the same boat over inflation and housing prices as Britain. Challenged by a reader to tell what I want the Obama Administration to do, I created a list, which TM thinks is nothing but “porkulus spending. Any measures he fears will add to the size and reach of governments and add new bureaucracy and regulations that hamper future economic growth prospects. But I do not agree.
I think our country is in a crisis because of a lack of liquidity and a lack of what Lord Keynes called “animal spirits” leading to extremely risk-averse investment in no-yielt Treasury bills and keeping corporate cash undewr the mattress rather than investing it. Because there is no way for the consumer to take up the cudgels and invest in this climate, because of American household’s probems with underwater housing mortgages and unemployment, I want the government to act, preferably in ways that stimulate employment, and require the private sector to join in.
The cheap funds are there. I did not create the lack of animal spirits in the bond market or the unwillingness of corporate America to spend the money it has rather than hiding it under a mattress. household oversaving is the likeliest to stop when my proposals are in place but they will also encourage capex by gun-shy corporate America.
Just for the heck of it, here is my list which I think will put people to work and pay them.
We can borrow to invest in the future of America. for my 5 grandkids without burdening them with debt. Here’s how:
We extend unemployment insurance payouts so people can continue to eat while they look for work.We get businesses to come on board with training programs and internships or apprenticeships.
We figure out a way to refinance home loans. I am far too stupid to know how but I do not like families living on the street.
We improve education by cutting down the vacations and extending the school day. Teachers then can continue to get the high pay they collect regardless and produce something in return.
We don’t stop healthcare reform with the first incomplete round and try to avoid taxing elderly Medicare folks at the highest incremental tax rate in the USA.
We invest the borrowed money to replace bridges which are falling down and build toll roads. These will pay for themselves with tolls but meanwhile will put unemployed Las Vegas condo construction workers to work building them. WPA for today.
We beam everyone up to the internet. We reopen closed libraries and offer web access and e-books..I hear America learning.
We build a high-speed railway running from LA to San Francisco (and maybe further north to TM’s area). Another line down the Florida coast to Key West. Maybe even one from NYC to Boston or Washington DC or both. Again we charge fares to repay. And meanwhile people get jobs doing useful things for th country.
We restore breakfasts in school for hungry children so they can learn without their grumbling stomachs getting all their attention. Corporate America can help.
We resume bus service to take people from poor neighborhoods to their jobs, get kids to school without mama-chauffeurs, and get old codgers out of the house. The auto industry can build the buses.
We build nuclear power plants and wind and solar plants. Maybe even hydroelectric dams.
We finish the job in Afghanistan.
We finance the SEC and the new bank lending overseers properly.
We start out by doing a real investigation of the Flash Crash to figure out what happened, what the role of arbitrageurs and electronic was. (That’s the one for us.)
The government is no bigger today than under Ronald Reagan as a part of GNP. US debt is falling without any need for rigorous cutbacks in spending.
The goal is not to grow the government or its reach. the goal is to gorw the economy. Rright now relying on private spending is not working. the cost of borrowing money for even sound and stable companies is way too high. firms which have cash are not spending it out of funk and fear. We have to let the government act as the counter-cyclical force because there ain’t no other. It would be better if there was capex and a functioning bond market. There isn’t one. so I am crying uncle (or Uncle Sam) .
The cheap funds are there. I did not create the lack of animal spirits in the bond market or the unwillingness of corporate America to spend the money it has rather than hiding it under a mattress. household oversaving is the likeliest to stop when my proposals are in place but they will also encourage capex by gun-shy corporate America.
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