Category Archives: International Monetary Fund (IMF)

Biting the Hand that Fed Us

Mr. Kevin Warsh, a former member of the Federal Reserve board, now a distinguished visiting fellow in economics at Stanford University’s Hoover Institution, pens a damning Commentary of the Federal Reserve in today’s US print edition of the Wall Street Journal.   

In “The Federal Reserve Needs New Thinking“, he slams the Fed for “….[T]he economics guild push[ing] ill-considered dogmas into the mainstream of monetary policy. The Fed’s mantra of data-dependence causes erratic policy lurches in response to noisy data. It’s medium term policy objectives are at odds with its compulsion to keep asset prices elevated. It’s inflation objectives are are far more precise than the residual measurement error. It’s output-gap economic models are troublingly unreliable.”

If that were not enough he adds: “And it expresses grave concern about income inequality while refusing to acknowledge that its policies unfairly increased asset inequality.”

Wow- this is a damning perspective from a ex-member of the Fed. I have to say that I tend to agree with his perspective. However the Comment falls short of the title: there is little new policy offering or suggestion to warrant any ‘new thinking.’ The challenge is to query what could or should the Fed and other central banks do differently.
One odd idea I toyed with a few months ago (see The ghost of Keynes haunts our global leaders and economic conditions today) is to globally reset interest rates as if a new normal had been established. What I mean to say is that central banks around the world should all raise their interest rates at the same time by an agreed amount in order to:

  • Preserve current interest rate differential between central bank authorities
  • Establish a more natural rate in order to reestablish normal market and investment operations

If we had nearer-normal interest rates the following would happen:

  • Private capital investment decisions might once again take on a normal demand curve and pattern, thus contributing and steering toward increased productivity
  • The cost of money will rise and so private firms will stop issuing bonds or taking out cheap loans only to increase share buy-backs, thus decreasing the inequality in invest class assets
  • M&A levels would fall to more normal competitive levels
  • Consumers will start to save again
  • Pension funds will have their unfunded portion of their liability reduced

All in all that would be a good day at the office. But it only works if the Fed and central banks in UK, Canada, Europe, Japan, and China agree and collaborate closely.  Additionally the IMF probably needs to leed this effort.

The other problem is the large overhang of debt that central banks now have on their balance sheets. These acquisitions represent government (and some private) debt. These enlarged balance sheets also distort the market. The problem is that central banks have no idea how to jettison these debts without completely upsetting the market again.  

So I guess the only option might be to collaborate with other central banks and agree some kind of normalized write-off. If all central banks agreed to write-off 75% of the government debt they hold, it would free up government spending (since they can start up again, hopefully on the right things this time like education and infrastructure) and the market prices will be balanced. This is of course a silly idea. But how else can we make progress with this challenge?

Yes, new thinking is needed. And a lot more collaboration. The solution will not be found in one central bank. We are too connected. We need a new Bretton Woods 2.0 agreement.

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The Relentless Rise of the Dollar and Fall of the Yuan

With sentiment at the Fed shifting toward a rate rise in June, and news today in the Wall Street Journal (see China loses resolve to revamp Yuan) that China is again worried about the pressure on the Yuan, we can all predict what is about to happen. 

The low interest rate the Fed promotes has been described as a response by the Fed to the lack of active policy by the US government to drive economic growth. The market distortion as a result of the low interest rate are frightening. There was a piece, albeit an opinion, in yesterday’s Financial Tines that explained the impact on savings (negative), retirement planning (disastrous), and debt (growing toward all time highs again).   But we will not change the government’s actions overnight, not until November that is, and even that is not guaranteed. So we are stuck between a rock and a hard place. The Fed wants to raise rates but has to avoid chocking off the meager growth that is limping along.

China has its own economic challenges. As it wrestles with the gradual transition from a manufacturing based economy to a consumer and services based economy, it is using the exchange rate to control its export competitiveness. Note that in recent times, in studying the UK’s transition between late 1950’s to the 1990’s, this effort won’t be easy or quick. But China is trying to move quickly, perhaps too quickly.  And despite the IMF signaling it’s faith that China was going to let the market drive the Yuan’s exchange rate, the People’s Bank of China (PBOC) continues to take action to stabilize its currency. 

Assuming the Fed increase interest rates in June, we will all hear that big sucking sound again as capital flies from emerging markets including China back to American shores and the powering dollar. This will trigger a fall in the Yuan and the PBOC will again start to leverage its foreign exchange reserve to stem the losses. That reserve has fallen from an estimated $4th to about $3.2tn in the last year or so. The question is, how far can that reserve go in defending the Yuan?

Sterling was ‘broken’ in the 1970’s and the U.K. Government had to go to the IMF for a loan – check out “Decline to Fall: The Making of British Macro-Economic Policy and the 1976 IMF Crisis, Douglas Wass, 2008”.  That was a low point for the UK. The pound was again ‘broken’, perhaps more famously, by George Soros during ‘black Friday’ when the UK was forced to leave the Exchange Rate Mechanism (ERM), a pegged exchange-rate system that preceded the single currency, the euro. 

Clearly the PBOC won’t use up all its reserves. So the question becomes: what is the level at which the market expects massive red flags? Perhaps a leading indicator to watch are the monthly reported FX outflows from the PBOC. As that ramps up, the red flags will start to fly. And they won’t be the party flags of choice- they will be the economic panic flags that none of us want to see.

The Peculiar Thing about Currencies and Bonds

As every day passes by our central banks and currency czars head further and further into uncharted territory. What is going on now could not have been predicted, and the resulting behavior cannot be anticipated. Worse, there are no lights at the end of the tunnel, just ever growing darkness.
This weekends newspaper headlines highlight the nightmarish situation:

Japan’s nightmare roots are well known, starting with record breaking public sector debt, which continues defy logic but has yet to become an active challenge. This makes Japan different to other sovereign states but the other roots are common across other nations as follows.

The Bank of Japan (BoJ), like many other central banks, has a never-seen-before burgeoning balance sheet as a result of Quantitative Easing (QE), a process whereby central banks purchase debt and therefore drop billions of dollars (or local currency) from the sky. This policy helps lower interest rates and thus, so the theory goes, encourages private sector investment and so economic growth (e.g. GDP). This has not happened. The ghoulish result is that:

  • Firms did not increase capital spending 
  • But instead took out low cost bonds to fund massive and ongoing share buy-backs and unproductive or natural-cycle meters and acquisitions.

The result is that the investor class has gotten richer and inequality has gotten worse. As the data published by central statistical agencies around the world report the depressing news, corrosion in trust by the public in the political system increase now to the point where national elections are being fought more on distrust with government than with positive policy comparison.

QE encourages the exchange markets to disinvest in the local currency, thus lowering the exchange rate. This should then, so the theory goes, encourage exports. However this has not happened either. The monstrous condition now is that other large, mature, trading nations are in the same boat and all are engaged in the same QE effort. So all markets are flooded with cash, and the trillions of dollars that slosh around in the currency exchange have no clear direction where to call home. In fact, as one nation lowers its rates, in the hope encouraging some increased exports, other nations have reacted with additional QE this neutralizing any advantage sought. The result is a rush-to-the-bottom where we continuously lower rates without any resulting benefits. And bottom we are approaching with zero, even negative rates. At some point banks will have to pas such rates onto households.

As the article about Japan reports, the BoJ must be considering new action at some point, but political considerations will likely figure strongly due to the pending US election. More crucially when everyone is in the same sinking boat, one would think that coordination, nay, collaboration might be the order of the day. And when I mean collaboration, I am thinking along the lines of Bretton Woods or Plaza Accord. We cannot get out of these woods, or prevent the boat from taking on more water, with the current beggar-thy-neighbor approach. 

The other side of this nightmare is just as confounding.  

German yields, the return for holding a bond of government debt over a long period of time, is approaching zero. It could well go negative very soon. Japanese yields went negative earlier this year and US yields are very close to zero too. If you take into account (meager) inflation, real US yields are already negative.

Note that the Federal Reserve holds about 20% of outstanding government bonds (i.e. debt); the Bank of England holds about 26% of the U.K. Government gilts (i.e. debt); and the Bank of Japan holds about 30% of their government debt, as of March. The ECB holds about 10% of outstanding German government debt. So the market is hugely distorted, and private buyers are crowded out. 

But the complication does not stop there. In the interests of QE, the ECB is now expanding beyond government debt into corporate bonds, which crowds out even more the private sector. This changes the dynamics for how forms seek long term capital investment. Investors (see WSJ ECB’s Debt Purchases Cause Concern) are now worried that should private bind holders sell any amount of debt, the price will swing violently due to the loss of liquidity as a result from central banks owning large swathes of the market and not being active in it.

The perverse logic of negative rates means that there is no incentive for investing in the debt. More staggeringly we are slowly learning that we can only just guarantee the return of the capital ‘stored’ in those bonds. And the assumption is that the cash when returned the will be worth less than it is now. But as demand increases for this unproductive asset we have to assume that this is the best of a bad bunch of investment options. What does that say about our confidence in waking up and getting out of this situation?

But do our economic and financial leaders work together to find a global solution? No they do not. They seem happy to assume our problems are not at a global level but can be handled one decision, one policy, one central bank at a time. They have signally failed to solve this problem alone and in tandem. They need to work in parallel and that requires real collaboration, the kind not seen since Bretton Woods and the Plaza Accord.  I have been talking about this need for global collaboration for some time – see my last missive, Preserving our Future Wealth for Future Generations, and my earliest from 2015 Open Letter to Christine Laguarde, head of IMF.

This is an inside down financial world and there are literally no signs of getting out of it. The one hope, the one glimmer of an way out, is if inflation does take root. That once enemy incarnate is now needed to save our economy before our leaders ruin it. They show now signs of taking a global leadership role. So we pin our hopes on inflation. And by the way, if inflation ever did take hold, that won’t be pretty either. Remember the central bank’s balance sheet and amount of QE ‘out there’ in the market? That would have to be sucked out pronto and yields would alike immediately and rates would raise dramatically. We are set for a nightmare that will just go on, and go on.

The Ghost of Keynes Haunts Our Global Leaders and Economic Conditions Today

I would like to ask you an honest question – but the title of this blog will have given you the answer already.  Who do you think the author of the following text is?

We have reached the conclusion that there is no means of raising world prices except by an increase of loan-expenditure throughout the world.  There are, I think, three, and only three, possible lines along which we can lend assistance.

  1. The first, and perhaps the most obvious, means is that of direct foreign loans, in the style to which we have been accustomed in the past, from the strong financial countries, which have a favorable foreign balance or excessive reserves of gold, to the weaker, debtor countries.
  2. The second, and more promising, means is for the stronger financial countries to increase loan-expenditure at home.
  3. Yet, once again, it seems obvious that we are discussing, so far, remedies of which the quantitative effect is hopelessly disproportionate to the problem of raising world prices. I see no reliable prospect of a sufficient rise in world prices within a reasonable time, except as the result of substantial, and more or less simultaneous, relief of taxation and increase of loan-expenditure in many different countries. We should address great important to the simultaneity of the movement towards increased expenditure. For the pressure on its foreign balance, which each country fears as the result of increasing its own load-expenditure, will cancel out if other countries are pursuing the same policy at the same time. Isolated action may be imprudent.  

You are correct to conclude that this is none other than John Maynard Keynes.  And to be honest, I have to admit that I have not changed any text whatsoever but I did remove a few extra words and/or lines that provided additional context but do not detract from the base message.  So now the second question – when was this written?  Many of you will know that Keyenes died a young man – he left us only just a short while after the adoption of the Bretton Woods Agreement (1944).  The passage above refers to “gold” too – which is a bit of a give-away, surely.  To help you gauge from when this narrative was plucked, here is another related comment from the same paper:

We all agree that the settlement of war debts and of reparations are, first of all, indispensable. For these are of primary importance in creating fear of acute tension in the foreign exchanges.

Here the reference is to war debts.  That is a give-away, right?  This refers to, of course, the war debts and reparations owed between the Allied and Central powers at the conclusion of the Great War.  I will put you out of your misery – the text above is taken from The Means to Prosperity, published March 1933, as four articles in The Times.  

What I find most fascinating about this passage is the fact that, baring the reference to gold, this problem, and the solution, are very similar to what we face today.  The passage above, when read completely, refers to advice Keynes is giving regarding pending World Economic Conference due to take place later in 1933.  And what is most interesting item about this is that in the run up to this famous conference, the major economic powers of the world – including the US – were in agreement about the need for stable exchange rates over stable prices.  What made this conference famous was not the agreement, but that newly elected President Roosevelt famously “torpedoed” the conference before it concluded by announcing, unexpectedly that the US was leaving the fixedly exchange model and going to devalue the dollar, to initiate the New Deal.  

What is hard to get one’s head around is this: The US effectively told the world to ‘go away’ and survive on your own.  But in so doing, the very size, homogenous nature, and unique balance of domestic demand versus global trade, resulted in the US, some years later, helping the world as a whole.  The one, minor downside to all of this was that as the US walked away from global leader and economic monitor, the decision left Europe off the hook and any reigns that might have slowed the rise of economic Germany and its new deal were dashed.   

Moving beyond the politically incorrect conclusions this might bring, let’s look at what Keyne was saying in 1933.  His comments are no less true then as they are now:

  • We have a beggar-thy-neighbor policy by each nation in terms of currency exchange and domestic interest rates
  • We have each central bank suggesting that others need to do more for each other, as they each do more for their own economy
  • We have no global agreement or coordinated effort

We need a new World Economuc Conference.  Perhaps it should take place in New York, or perhaps Bejing.  We need to align interest rate raises together, at the same time.  We need to coordinate infrastructure investment; we need to coordinate tax reduction and regulatory simplification to help spur new business growth.  We have to do this altogether.  As it stands today, we have no hope, and Bob Hope, and he left the building.

And if you think Keynes is too outdated?  Check out one of his last comments in the third article: “Thus what is to the advantage of each of us regarded as a solitary individual is to the disadvantage of each of us regarded as members of a community.”  He was righ then – he is right now.

Preserving Our Future Wealth: Road Map to Recovery

Looking forward from here is a frightening thought. Central banks are stumbling along, inching forward or back, one decision at a time and often less in concert and more at variance with each other. In effect we have 5 sparing players against each other in a wrestling tournament, when we actually need a 5-man wrestling team.
Our politicians are not much better. Policy after policy, lobby group after lobby group, and the #RomeWillFall syndrome is now fully set in. Our society has created enough wealth, enough leisure time, that we can now spend our entire working and non working lives regulating and arguing over ever aspect of freedom, non freedom, pseudo freedom and everyone else’s view of freedom. We even have time to play with our own social structure. Such indulgences created the environment for human selfishness to thrive and presto, our financial crisis was born. Poor people who should not have gotten loans they could not afford did. In the maddening rush of the mortgage boom we got too clever for ourselves with understanding debt and risk. It was selfishness all round but it was political policy that put it all in train.

As Walter Pidgeon (Morbius) says in the 1950s ‘Forbidden Planet’, my favorite classic sci-fi movie, “My poor Krell. After a millions years of shining sanity, they could hardly have understood what power was destroying them.”

There are forces that we have unleashed on our global economy that are nearly out of our control.  As a result our goals for the future and our ability to get there are being severely curtailed. The path we are on is creating a vortex that is becoming self-fulfilling and hard to escape. If we do not change direction soon, we won’t be able to, until and after a very dark and painful period.

  • Inequality, the source of extreme political turbulence, is at an all time high and shows no sign of decreasing. In fact political, fiscal, and social policy as well as independent monetary policy, is reinforcing the pattern put in place, not reducing it. QE has actually accentuated the ability for the rich to become even richer, while the middle class treads water. As the income gap widens more policy is called forthe in the name of redistribution of the contracting pie that is the private sector. 
  • Virtual stagflation is upon us. Each policy taken, it matters not in which region of the world, pushes prices of commodities that drive the start of global supply chains, further and further down. However, price increases that are observed in the service industries are not being controlled, let alone monitored by, our political leaders. And other prices, such as equities, are out of control.  
  • Productivity and growth. Political policy, already tied up in knots, is not helping. The wrong policies are deployed. We make it harder for small companies to start-up. We make it harder for start-ups to grow and compete. We fiddle with related polices related to eduction since centralized government knows best. The problem is accentuated. The left is in ascendency due to the inequality issues, and they get to hold capital investment and new start-up policy hostage as they fiddle with the trappings of office as the barbarians approach.
  • Signals. Governments and monetary policy agencies use signals to set policy. But the signals are confusing. The very way in which we measure inflation is wrong. We need to track services and important consumer goods, the infamous basket of goods, separately. The oil bonanza is supposed to have created more consumer demand in the US. Did you increase your spending? I did not. Salaries are pretty much flat and other products, non-important and services especially, have risen. Sometimes by as much as 10%. Where does this show up in the Fed dashboard?  
  • Low interest rates have led to unpredictable behavior of private sector treasuries to take out loans to buy shares, and fund M&A, and not increase capital investment. The M&A has created a double whammy: as interest rates increase debt servicing levels increase, just at the time that profits fall. And the M&A embarked on (record levels) is not the kind of M&A that is productive. It is M&A funded on the predatory behavior encouraged with cheap money, not competitive performance. Thus the benefits of the M&A are not going to be as long running or sustaining as they should be.  

Thus the stage is set for a weakening economy to become a disaster that will take years to recover from. Here are some ideas to be considers as means to shock the system back to life.

Coordinated, global-wide and simultaneous large interest rate hike.  

Negative interest rates are distorting many aspects of our global economy. Firms are taking cheap loans out simply to support M&A and share buy-backs. These are not contributing to growth at all. Capital investment that would contribute to growth remains muted. If all regions increased their interest rates simultaneously by, say, 5 percentage points, rational and predictable behavior might be pushed back into the debt markets and private treasure offices around the globe. We may need 7%. Some regions already have higher rates but if those regions with low rates raise theirs by the same ratio, the differential should be maintained.

Global exchange rate alignment.

A Bretton 2.0 agreement is needed to hold currency exchange at a stable rate. Volatility is at extreme levels and much of this is not rational but more knee jerk reaction to small data points. Central banks and currency blocks (US dollar, yuan, euro, yen, sterling, and rupee as the anchors) need to publish agreed currency bands outside of which will attract agreed market operations or controlled and public realignment, should long term trends require it. This will go someway to reduce volatility.

Immediate moratorium on QE 

We have to eliminate the central bank’s from the market. We have to cease QE. More than just ceasing more QE we need to reduce the easing that remains in the market. We need an explicit goal to sell off assets acquired by central banks within the next 3 years. With more natural interest rates and much less volatility in the currency markets, there will be much less need to print money that continues to drive prices down and inequality up. We need to publish the plan to sell the assets on the central bank balance sheets. This will depress the stock market. This is desirous. The super rich need to get a little less rich. The markets will quickly look for normal drivers of growth, such as profitable companies, the old fashioned way. And this all leads us to the most difficult of steps.

Something Rotten in the State of Central Banking

The real ‘fix’ is to take the responsibility of fiscal and other debt creating polices out from under the political arm and move it under the central bank’s responsibility. This is not going to happen since it denudes the politicians of their chance to do things. Though that is a good idea, they won’t vote for their own castration. It would also put a heavy burden on the central banks, who will quickly become more politicized than they are.

Since this won’t happen, the fall back position will also not be popular but is required: political overall and realignment: 

  1. We have to have a liberal workforce that is responsive to wage changes. Since wages rarely go down, we need to increase the gap between wages for work and subsidies. We have to curtail subsidies. This “nation of takers” has to become a nation of workers.
  2. We need to relax regulations that have grown out of all proportion to the unmeasurable good they claim to fulfill. This includes a moratorium on the efforts to put the climate firsts. If we don’t get out this economic hole, the climate will be the last of our worries.
  3. We need to accept that university is not for everyone, though everyone should have the same opportunity to get there. We should defund student loans and move that to the private sector; and only offer public funds that those that cannot afford it.
  4. We need a fairer and simpler tax code. We need to eliminate all focus of dual and double taxation. We need in the US a globally competitive personal and corporate tax code. 

The long, unfinished shopping list is the hardest step, but the most likely to create a sustained period of renewed growth that we need before demographics swallow up any chance of recovery. If we only execute the other items, and not this shopping list, we will only temporarily put off financial ruin.

The Three Key Leading Indicators that will Signal Global Economic Recovery

This week the mandarins and thought leaders of our leading economies and policy wonks are meeting in Davos.  They do this every year at the World Economic Forum.  In anticipation of this the IMF publishes before hand an update to its World Economic Outlook, and the Wall Street Journal publishes it’s, “Outlook” piece.  The IMF came out yesterday and reported more trouble ahead, worsening conditions, and slight reduction in global growth.  The Wall Street Journal piece is very good too – and is well worth reading.  It highlights several challenges we face.  However, it also exposes in my mind what ought to be thought of as leading indicators that tell us our global economy might be turning a corner.  Even if these analytics turn positive, there is ample room for our politicians, bent by political dogma, to make the wrong fiscal and regulatory decisions.  At this time in our economic history, we need to expunge socialist, modernist, post-capitalistic ideas about furthering social policy and equality through re-distribution.  Any and all such attempts, for the next two years, will actually make things worse for the poor and middle-class since such policy energy will detract from the energy needed to grow the same pie that such wonks need to share.  

So what are the three main metrics that express why we are in the mess we are?

 – Chinese debt

– Business Investment

 – New Business Start-ups

Martin Wolf’s Comment in today’s US print edition of the Financial Times (see China’s great economic shift needs to begin) explored China’s debt challenges.  Andrew Browne, of the Wall Street Journal, did the same in his article (see China’s Debt Binge Isn’t Over Yet, and That’s the Problem) in its Outlook 2016, did the same.  First is the scale of the problem. Mr. Wolf reports that China’s debt to GDP was 157% at the end of 2007, 250% at the end of 2013, and 29% at the end of the second quarter in 2015. Mr Browne calls out that it was due to the launch of China’s debt binge in 2008 and 2009 that helped the global economy stave off depression, after the collapse of Lehman Brothers. The problem is that this debt mountain has been the main driver of growth in China, and China has become the second largest economy in the world and, with anemic growth in the US, the biggest single driver of global growth.  Now that debt-driven demand cannot be maintained for ever and with no natural consumer demand to replace it, over capacity is driving down commodity prices around the globe.  This continues to weaken growth further, and contributes to deflation.  So the cycle is complete and we need to break it.  We need to watch Chinese debt and debt to GDP and look for a change in behavior.

In Greg Ip’s piece in Outlook 2016 (see Dear Business Leaders: Invest in Optimism, Not Buybacks), the challenge related to the lack of business investment in productivity improving efforts are exposed.  He reports that since 2009, US businesses has boosted capital investment by 43%, dividends by 67%, and stock Buybacks by 194%.  Record levels of Mergers and Acquisitions are being made year over year.  Record levels of debt are being taken out to fund these acquisitions, and Buybacks.  And the phenomena is global, according to Mr. Ip.  The press (as reported by Mr. Ip) tells us that increased government regulation and persisting trauma from the financial crisis are behind this behavior.  The Fed has used this lack of investment and spending as reason to justify its entire QE program (the world over, too) and the unprecedented expansion of the Fed’s balance sheet.  But if you ask business treasury leaders, you get a very different perspective.  Business do not, on the whole, change investment strategies based on interest rates.  They base their main investment strategies based on business goals, opportunities and strategies.  It seems the M&A spurt is about the only aspect of this that has reacted to policy changes, specifically interest rates at historic low levels.  The challenge remains – irrespective of the trauma, regulation, or indifference to interest rates, firms are not investing for productivity growth.  Until they do, we cannot magic such growth out of the air and we cannot mandate such growth through political edict.

In the same article by Grep Ip there is a related data point: “Since 2009, annual new businesses started have run 18% below the prior eight years, while business closures haven’t changed, according to the US Census data”.  Mr. Ip has been talking of this issue for some time.  I blogged on an article from him on the same topic in July 2015.  More telling is this quote from today’s article:  “For all the hoopla surrounding social media and smart phones, US business investment in high-technology equipment remains well below its pre-recession level as a share of gross domestic product.  BUsiness and individuals are taking longer to replace their computers and smart phones, since each upgrade adds fewer compelling features then the last.”  R&D is this not paying off as it used too and so money is finding new ways to generate a return, and that does not include productivity-inducing IT.  I have blogged on this issue too.

So I think these would be useful leading indicators.  Alone, neither will lead to growth but combined, they could signal a change in our furtunes.  If we could just get the politicians out of the way, we could take rational, economic decisions to help improve our chances.  As it stands, this is not going to happen so economic malaise is assured.  In fact it will get worse, before it gets better.  Since our leaders cannot bring themselves to agree global collaboration and alignment of goals and policy, the market may force their hand.  Ray Dallio, founder of Bridgwater Associates, agrees with my thoughts of the other day.  Today, on CNBC, while on site at Davos, he said that the Fed’s next move would be toward quantitative easing, not towards (quantitative) tightening.  This suggests that US interest rates may fall again.  So even as the US determines it is strong enough to ignore the world, it will be brought back to earth with a bang.

Christine Lagarde, IMF head, calls for Upgrade to Policy – falls short of what is really needed

If you read between the lines of today’s speech from Christine Lagarde, IMF head, you can get both a good sense of the size of challenge we face but also a sneak peak into the panic perhaps hiding in between her words.  The problems our global economy faces are global – complex – and never before assembled.  No one country has the answers and no one country with its attendant policy changes can solve the global economic challenges we face.  

The speech is excellent as it touches on and highlights all the major challenges we face.  This includes the Chinese economic slow down, slow growth in US and Europe, debt, productivity, bubbles, inflation (or lack thereof) and commodity prices, and more.  This is a great snap-shot of the problems we face.  Where her advice falls down is in the action department.  She talks a good talk about policy changes to increase demand, and of course supply side policies to free up the labor market.  There is even a call to develop and align fiscal policy globally.  This is a new thread but one that has little chance of being progressed – central banks have no control over fiscal policy and politicians will not give this up any time soon.  It’s a pipe dream even though it’s a great idea and one that needs serious consideration.

But there is no actual demand from Ms Lagarde for global monetary policy collaboration.  This is the line that Ms Lagarde is not able, or willing, to cross.  Why?  Does she not perceive the need?  Does she think that the Fed, operating at its own rate, will magically align with the Chinese PBOC?  And what about Japan, ECB and the U.K.?  I feel bad since my suggestion for a Bretton Woods 2.0 seems so obvious yet I hear virtually nothing about it in the press or from the lips of the IMF.  I even thought to write to Christine Lagarde with this open letter.  I will try to get Ms Lagarde attention.  Without global policy coordination there is little chance we can solve our global problems.