Christine Lagarde had a word last week for Graeme Wheeler’s rate cut this coming Thursday. Or, rather, she had a word for big guys but the little guys can listen too.
Lagarde heads the International Monetary Fund (IMF). Some want her as the next United Nations Secretary-General. She told a meeting over the weekend of central bankers of the G20 big economies (Australia is a hanger-on) that they should hold off raising interest rates.
The IMF sees global GDP growth faltering. The oil price plunge has not delivered the stimulant the IMF expected. So “monetary policy must stay accommodative”, Lagarde said.
“Accommodative” means official interest rates at or just above zero, plus in some places “quantitative easing”, central-bank-speak for printing money.
Lagarde said the European Central Bank should step up its money-printing and Japan’s should stand ready to restart. The United States Federal Reserve Board (the Fed) is to decide on September 17 whether to start raising its official rate.
The Fed seemed all set to do that until China’s stockmarket plunged and set off wild speculation that China’s economy is off the boil. Its manufacturing contracted in August.
Add to that the slowdown in the other “emerging economies”, including big ones like Brazil. A fair amount of the money big-rich-country central banks printed went there in search of above-zero yields and that tide has reversed.
Wealthy Chinese have also been looking for safe places to park money. Houses and other property in the likes of United States, Canada, Australia and here are a target.
That doesn’t help Wheeler. His official cash rate is not zero but it is low by historical standards and has pulled down market rates, making investment in houses more attractive.
Also inflation is low, as is GDP growth. In such circumstances orthodox central bank rules say he has to keep cutting.
But, as Lagarde noted, the exceptional “accommodation” has not driven up G20 or rich-country GDP growth. We are now seven years on from the start of the GFC which was the initial reason for the ultra-low official rates and quantitative easing.
Will yet more of the same perk up the global economy?
Dominic Rossi, global chief investment officer for Fidelity Worldwide Investment, wrote last week in the Financial Times of an “ice age of low nominal growth and interest rates” which looks “more permanent than ever” and added: “Negative real interest rates on bank deposits cannot be the road to prosperity.”
Funds managers are not long-term seers so Rossi’s “ice age” is over the top. But clearly low interest rates and printing money have not yielded the orthodox uplift.
As Rossi wrote, that requires innovation. But not all innovation has the same impact on GDP growth. Some economists have argued for a decade or so that much modern innovation seems less geared to higher material welfare (the GDP focus) and more geared to other aspects of wellbeing such as entertainment.
So maybe Lagarde is pushing on a piece of string. Maybe Wheeler is, too. (That is quite apart from his calling 2% inflation “price stability” when commonsense says, as do some economists, that stability is 0%.)
Maybe the real point is that global GDP growth was artificially high through the 1990s and first half of the 2000s — driven up by loose money plus China’s initial industrialisation. Maybe the true potential growth rate now is lower than the orthodoxy says.
If so, more loose money won’t fix it. It will pump up bubbles and distribute shockwaves.
Griffith University’s Rungroj Yongrit drew a parallel last week in The Conversation between Keynesian “fiscal accommodation of the wage-price (inflationary) spirals of the 1960s-70s and the monetary accommodation of the asset-price bubbles of the 2000s-10s”.
Fiscal accommodation compounded the 1960s-70s problem. Is monetary accommodation compounding the 2000s-10s problem?
In 2009 China’s technocrats scoffed at western orthodoxy. But they are in knots as they wrestle with a complex of social, political, bureaucratic, economic and environmental conundrums. They have to talk down GDP growth rate expectations towards the 5% some were forecasting for later this decade when I was in Beijing 18 months back.
The Confucian Communist party has a way to go yet to prove there is a revolutionary Chinese way and that way might get very bumpy. No wonder rich Chinese want a nice house here.
The global turmoil leaves Wheeler — and Bill English and John Key and thousands of dairy farmers (now also facing an El Nino drought) — bouncing like pingpong balls on this ocean of counter-currents. Households will join the bouncing next year.
Is this surprising? Look across at the big story of the past week — actually of the past three years at least. The torrential refugee floods at last breached the stopbanks of Key’s unfeeling complacency.
We are in a disordered world. The economy is just one part of that disorder. Lagarde’s desperate lecture to central bankers said it all.