Monthly Archives: August 2015

The Sweet, Sickly Stench of Success

Corbyn & Trump

Six years ago, hardly anybody outside financial circles had any idea what Quantitative Easing was - hell, many within financial circles had no idea what QE entailed.

The Fed, and the BoE did the heavy lifting in explaining it to Western audiences (Japan had been doing it so long that its citizens were bored of it and paid little attention when iterations 16, 17 and 18 were rolled out in recent years) with then-Chairman of the Federal Reserve, Ben Bernanke, leading the way as only he could:

(Jackson Hole Speech, 2010): The channels through which the Fed’s purchases affect longer-term interest rates and financial conditions more generally have been subject to debate. I see the evidence as most favorable to the view that such purchases work primarily through the so-called portfolio balance channel, which holds that once short- term interest rates have reached zero, the Federal Reserve’s purchases of longer-term securities affect financial conditions by changing the quantity and mix of financial assets held by the public.

Specifically, the Fed’s strategy relies on the presumption that different financial as-sets are not perfect substitutes in investors’ portfolios, so that changes in the net supply of an asset available to investors affect its yield and those of broadly similar assets. Thus, our purchases of Treasury, agency debt, and agency MBS likely both reduced the yields on those securities and also pushed investors into holding other assets with similar characteristics, such as credit risk and duration. For example, some investors who sold MBS to the Fed may have replaced them in their portfolios with longer-term, high-quality corporate bonds, depressing the yields on those assets as well.

Yeah, I know.

Others took a swing at explaining QE in terms more accessible to the layman (and woman):

(The Economist): To carry out QE central banks create money by buying securities, such as government bonds, from banks, with electronic cash that did not exist before. The new money swells the size of bank reserves in the economy by the quantity of assets purchased—hence "quantitative" easing. Like lowering interest rates, QE is supposed to stimulate the economy by encouraging banks to make more loans. The idea is that banks take the new money and buy assets to replace the ones they have sold to the central bank. That raises stock prices and lowers interest rates, which in turn boosts investment.

But the general narrative that the general public was beaten over the head with by central bankers and politicians was, essentially this:

We are going to pull a few levers and create money which is going to solve all the problems we face. Don't worry, there will be no negative effects as a result of this policy. We will be able to maintain full control of everything and, when the time comes, we will gracefully exit the program and go back to the way things used to be just as soon as everything is fixed. In the meantime, carry on with your lives, go out, spend money, borrow more and leave the worrying to us.

The campaign to take a complicated concept and dumb it down sufficiently for a public that really didn't want to have to do the mental gymnastics required to understand its implications had one significant tailwind - complicity on the part of the public. They wanted to be told it was all going to be OK and they were positively inclined towards the idea of 'free' money being printed which would, in turn, lessen their own chances of being directly impacted by the economic downturn which had come so perilously close in 2008.

Those in charge of designing and implementing QE programs knew that it was all too hard for the public to understand and they played that knowledge brilliantly.

Unfortunately for them, they were wildly successful.

The public neither knows nor cares what QE actually is. All they know is that, optically at least, it has worked because a) they are being told it has and b) the stock market is going up.

That's essentially been the extent of the burden of proof.

 

They don't understand this:

BOE Balance Sheet copy

Or this:

But here's where the success in creating the narrative that free money does no harm and has no unintended consequences turns into a potential disaster.

In the UK, left-winger Jeremy Corbyn was a last-minute addition to the leadership ballot for the Labour Party (US readers can think in terms of the Democratic Party nomination) - thrown into the mix to supposedly 'broaden the debate'.

Well he's broadened it alright:

(UK Daily Telegraph): the joke has backfired. Mr Corbyn is now the clear front-runner, and on Thursday the bookies installed him as the favourite.

Oops!

Corbyn's own understanding of economics is on par with that of the average British citizen - which is perfectly fine - however, it's what he's doing with that knowledge that makes him far more dangerous.

Ladies and gentlemen, I give you; People's QE:

(UK Independent): Jeremy Corbyn said that future rounds of the monetary stimulus should be redirected from the financial sector to brick-and-mortar projects.

“I am calling for a people's quantitative easing - and asking my fellow candidates to join me in that call,” he wrote in an article for Huffington Post UK.

“The Bank of England must be given a new mandate to upgrade our economy to invest in new large scale housing, energy, transport and digital projects.

Jeremy Corbyn, MP for Islington North“This would give our economy a huge boost: upgrading our outdated infrastructure and creating over a million skilled jobs and genuine apprenticeships.”

Corbyn has been convinced that QE is a free ride, just like the majority of the electorate and so, of course, he will promise them more of what he knows appeals to them.

And, if they get the chance, they will vote for him. Of course.

(Jeremy Warner): ...It sounds a bit like The X Factor – perhaps we could get Simon Cowell to chair the MPC live on TV and we could all text in to say how much cash we want the Bank of England to print this month. It turns out, however, that the idea is for the Bank to “be given a new mandate to upgrade our economy to invest in new large-scale housing, energy, transport and digital projects”. 

Mark Carney might well feel he has enough to do already, what with controlling interest rates, inflation and regulating the City. But, heck, in a few spare hours on a Friday afternoon, he could just print a couple of hundred extra billion, and use the money to start building publicly-owned housing estates. Yet a few hundred years of history suggest that central banks financing governments directly creates inflation, and another few hundred suggest that state-owned companies don’t usually work well.

Jeremy Warner's warning was stark - its implications terrifying:

(Jeremy Warner): Everything about “Corbyn-omics” is delusional. Unfortunately, that does not mean it does not have an audience. By September, Mr Corbyn might well be leading the Opposition – or at least be shadow chancellor under Mr Burnham.

The success of the narrative created around QE; that it is the mythical 'free lunch' that we all intuitively know can't exist but secretly hope does, has played perfectly to the public and now, having endured for two electoral cycles, the next wave of politicians also believe it will have no consequences and are actually using it when planning the message they feel will endear them to the electorate.

What plays better than free money?

The same phenomenon will be front and center again tonight when the first GOP debate takes place with billionaire reality TV star, Donald Trump front and centre.

Nobody is better equipped to pander to a public who desire impressive promises of handouts which bear little or no scrutiny, as this remarkable excerpt from The Guardian demonstrates:

(UK Guardian): "Asked recently what he would replace Obama’s signature healthcare law with, [Trump] replied: “Something terrific.”

Who wouldn't vote for something terrific?