“The trend is still in principle a sell-off in markets, a sell-off in riskier assets on the expectations that the Fed might signal further readiness to maybe slow down the rate of purchases,” said Daiwa Securities economist Tobias Blattner.
“So all eyes are on the FOMC meeting next week. There is very little else that matters at the moment”
There is very little else that has mattered for the past 5 1/2 years.
Younger readers might wonder how many times the Fed can keep making the same mistake. Removing the punch bowl before the party even begins. Unfortunately, the evidence suggests that the answer is “quite a few.” In the 1966-81 period the Fed had 15 straight years of continually making the same mistake. Continually refusing to tighten money because the inflation bubble was “temporary,” and would soon pass. Respectable opinion said that those foolish monetarists who blamed it on printing too much money just didn’t understand that the real problem was a bad food harvest, or higher oil prices, or a union wage contract. And those problems were easing. And in any case, interest rates were high, so how could monetary policy be considered “expansionary.”
Let me guess, we just have a mild growth pause, but we’ll get that vigorous recovery in
2010, er 2011, make that 2012, 2013? I just picked up an issue of The Economist, and they assure us that although US growth this will will be only 2%, next year it will speed up to 2.8%. European growth in 2013 and 2014? You don’t want to know. Let’s just say that my rule of thumb that Europe’s about 75% as rich as America is going out the window. By 2015 it will be about 70% as rich. Soon we’ll need a new development category—upper middle income, mixing Greece and Portugal with Chile and Poland.
When you have central bank officials that see inflation everywhere, even as we experience the lowest core PCE inflation in history, then it’s pretty hard for them to change their ways. Eventually a younger generation of policymakers arrives. They’ve noticed that the old folks running the show were wrong, wrong, and wrong again. Inflation? What are those old farts talking about? A new regime takes over, and (after a relatively good period) a new set of mistakes start getting made.
Japan’s been making the same mistakes for 20 years, and the ECB is determined to follow in Japan’s footsteps.
This is what happens when a political system delegates power without responsibility. Central banks have the power to determine the path of NGDP, but don’t get blamed when the path disappoints. That’s a recipe for disaster.
Question: If German savers hate low interest rates, why do they insist on a monetary policy that will insure near-zero interest rates for the next 20 years? Wouldn’t faster NGDP growth lead to higher interest rates?
And here’s another question for you hawks at the ECB; did you see what 20 years of near-zero NGDP growth did to the Japanese public debt/GDP ratio?