If after the great financial crisis of 2007-2009 the word “extraordinary” characterised monetary policy, the Covid-19 pandemic calls for a much stronger adjective: “unprecedented”.
As the world has never before been faced with an instance when virtually all economic activity stopped for a certain period of time, this is an appropriate word. However, in monetary policy really very little can be said to be truly “unprecedented”.
For example, take modern monetary theory (MMT) — a theory about how to have your (monetary) cake and eat it, which (simplistically) states that if a country can print its own currency, that country will never default on its debt because it can create as much currency as it wants to and use it to pay back the debt.
Major central banks, to a certain degree, have already begun versions of MMT.
The panic buying of essential items around the globe – from food to, fittingly, toilet paper – sparked by the spread of the COVID-19 coronavirus has been mirrored by panic selling in capital markets. It’s almost as if investors were taking cash out of stocks and bonds to buy whatever food, hand sanitiser and toilet paper they could get their hands on.
Pessimism in global financial markets has reached heights not seen since the dark days of the great financial crisis of 2007-2009, which this current crisis threatens to overtake in depth and significance. But, as news about rapid tests for COVID-19 and resilience to deal with the virus begin to multiply, could investors hope for a bottom in the capital markets’ selloff?
Central banks are again under the limelight. With Mark Carney’s departure as governor of the Bank of England next month, Boris Johnson could try to seize the opportunity to curtail the central bank’s independence.
This should not come as a surprise. Already, Johnson’s soulmate from across the ocean, Donald Trump, has been making noises about the Federal Reserve being too independent (or rather: insubordinate) for his liking.
So, if these two authoritarian populists go for central banks, what are their chances of bringing them under their rule?
It is becoming increasingly difficult for central banks to surprise the markets with good news. No matter how dovish they are, investors expect them to be even more dovish still. This financial repression has facilitated the rise of populist politicians, who threaten to bring the end of central banks’ independence.
When the bank of central banks warns about financial stability, you have to take notice — even if the warning comes in the Bank for International Settlements usually dry, academic style.
The BIS recently published a paper about the effect of prolonged interest rates on financial stability, and it makes worrying reading. (However, as most people are on holidays in August, unless they are reading it on the beach it will largely go unnoticed).
This past week, there has been a frenzy of selling of emerging markets assets. The outflows from both stocks and debt in emerging markets reached their highest level since December 2016.
This amounted to $3.7 billion withdrawn from emerging market equities and bonds, according to data analysed by Bank of America Merrill Lynch. These outflows have helped push our old friend, the Bull/Bear indicator developed by BofA Merrill Lynch, to 4.8 — its lowest level since January 2017.
The financial repression that central banks started after the global financial crisis of 2007-2009 does not seem to be close to an end. The central banks argue that inflation has not come back to their target of around 2%, but their definition of inflation is flawed.
Some people wonder why the Federal Reserve is in such a hurry to raise interest rates, pointing out that growth in the world’s first economy is hesitant at best. Inflation, of course, is an issue — even the stripped-down official version of inflation, “core” as they like to call it, is rising.