HAS LARRY SUMMERS GONE INSANE?
2016-10-03 2pm EDT | #Larry Summers #Central Banks #monetary policy #fiscal policy #oil #economic growth
Last week the man who-most-wants Janet Yellen’s job stunned the investing community with a speech in Japan. According to Bloomberg:
Former U.S. Treasury Secretary Lawrence Summers floated the idea of continuous purchases of stocks as a potential ingredient in a recipe for the developed world to strengthen economies struggling with subdued growth and inflation.
Among the proposals that deserve “serious reflection” is the purchase of a “wider range of assets on a sustained and continuing basis,” Summers said in a lecture at a Bank of Japan conference in Tokyo Friday.
To the extent that low neutral rates are in part the consequence of investors preferring fixed-income assets and steering clear of riskier options, policy makers can combat that by buying risk assets, he said.
Japan has “engaged in that type of transaction to much greater extent than other countries,” Summers said, pointing out among its initiatives the BOJ’s purchases of exchange-traded funds. “It is something that economic logic suggests should be considered in other places where the zero lower bound is a potentially important monetary policy issue,” he said, referring to the perceived lower limit for benchmark rates set by central banks.
I am not sure where Summers learned his economic logic theory, but Central Banks monetizing their balance sheets through the purchase of equities is not just stupid, but bat shit crazy.
Not only does it create virtually no economic growth, but it exacerbates the growing inequality problem. In a world struggling with an ever increasing chasm between society’s wealthiest and poorest, a Central Bank pushing up the value of the assets held by the rich is the least needed policy prescription. Central Bank purchases of equities also introduces all sorts of problems with governments choosing the winners and losers within society. And even if you argue Central Banks can buy indexes, this also further distorts the large cap bias problem. Governments in any form should not be touching equities. I don’t even think they should buy corporate bonds, but I am a little old school.
Larry Summers’ Central Bank stock purchase idea is the same extreme monetary stimulus crap that got us in the current economic mess. But hey, what do you expect from a guy who appeared on the cover of TIME magazine with these two other “gurus”?
Could Summers really be this stupid? Does he really think Central Banks buying stocks is the answer?
Although I am open to the idea he very well might be this idiotic, I am wondering if Summers is pulling the ole’ “set the ask high, so the settle will appear reasonable” tactic. Here in Toronto we are experiencing a manic building boom. There are condos going up on every corner. Developers inevitability receive push back as previously untouched neighborhoods are suddenly cast in shadow from new buildings. Often the developers’ technique for dealing with this opposition is to ask for higher size tower than their real desire. So if they want to build a 30 story tower, they propose a 40 story. When everyone complains, they settle at 32 and seem like reasonable guys.
What if Summers is doing the same thing? What if Larry Summers does not want the Central Banks to buy stocks, yet is trying to force the governments to respond with a fiscal solution?
I believe a much better negotiating tactic would entail the Central Banks announcing they are indeed restrained by the zero bound, and that although they will leave rates at zero, any further stimulus will have to take the form of fiscal responses. In essence Central Banks declare they have done all they can do, and toss the ball back into the politicians court.
But what if Larry Summers’ negotiating technique is to threaten even more extreme monetary responses, like Central Banks buying equities, in the hopes they can settle with a much more reasonable fiscal solution? What if Larry believes the politicians are too inept to respond to my proposal, and that threatening to go nuclear with Central Bank equity purchases is the only way to get them to the table?
I am not sure what is going on through Larry’s mind. I sure hope he doesn’t believe Central Bank equity purchases are an actual solution to our problem. It’s time we stop thinking Central Banks can solve our problems with ever increasing dramatic monetary solutions. Central Banks have done enough. It’s time for governments to step up to the plate and loosen their purse strings. Is Larry a brilliant negotiator, or just insane? You decide…
In early January I wrote about the potential for an uptick in growth in the coming quarters. Most of my argument centered around this relationship between crude oil declines and future economic strength (chart is from January 2016):
Although many market pundits are currently quite bearish on global GDP growth, over the past month there appears to be a bottoming and a slight pickup in the PMI stats. Here is a great chart I lifted from @fwred:
Many of these economic bears are dismissing the uptick as noise. I will take the other side of that trade. I only wonder what took so long…
Thanks for reading,