ECB: “the loneliness of the long distance runner”
While the ECB left its policy stance unchanged at its September 8 meeting, the time of assessment of monetary policies has come, in Europe, but also in Japan, the UK and even the US. And the question is whether the exceptional monetary policy measures put in place have generated more problems that they have solved any?
Looking at the trend in the interest rates, it is indeed a remarkable success: in the past three years, 10 year bond yields have fallen from 150 to more than 250 bp, pushing real interest rates down, and in some cases in negative territory. This is the key to reduce the debt burden, even in times of low inflation.
But do these results outweigh the potential collateral damages?
In Europe, those most in need of reducing the cost of their debt still endure positive real interest rates (Italy, Portugal, Greece) ;
Ever larger asset purchase programs induce market distortions and disturb valuations, at the risk of generating bubbles.
Flattening bond yield curves, negative short term rates tend to hamper bank lending and threaten insurance companies (13tn $ worth of bonds bear negative rates).
Yet many corporations continue to hoard cash. Lower interest rates are not enough to push massive investment.
Central banks will also have a hard time to reduce their balance sheets. Janet Yellen, Fed chair, explained how the Fed had to give up its initial strategy to reduce its balance sheet before raising its interest rates.
As a conclusion:
Remember Rheinhart & Rogoff’s analysis? Exiting a debt crisis takes a long time!
What would have happened if central bankers had not undertaken unconventional monetary policies when they did?
Yet using negative interest rates may bear more inconvenience than advantages.
The recent G20 meeting concluded that now is time to loosen fiscal policies and support large investment projects to boost global growth. Probably a good idea, but:
Who can really do it?
Will those heavily needed infrastructure investment be allocated wisely?
We are experiencing a vast technological transition, and entering this era with a heavy debt burden is not the best feature for sure. Sound asset allocation is key for risky investments, and the private sector is best positioned to achieve such programs. Public investments can probably support these trends, with longer term investment in education, and well targeted infrastructures – especially in emerging markets.