Q.: Why has: "The definition of insanity is doing the same thing over and over again, but expecting a different result" become the market's favourite quote? A.: Because it's generally true… and because it's a bit of a worry if it's applicable to policy makers
ref: - "Revolutionary thinking is needed to fire up the global economy”, by Luigi Speranza of BNP Paribas, Markets Insight in the Financial Times
It's a line most often attributed to Albert Einstein although he himself suggested that it probably didn't originate from him. It doesn't really matter who said it (and many of the usual suspects are put forward as alternative sources, as is the early literature put out by anti-addiction groups), it would surely not be a good thing if you could use it to describe the actions of those in charge of the world's economic wellbeing.
Investors may have been doing very nicely with their bond portfolios, and with the recent return to form of equity prices, but to a large extent those moves are a function of expectations of easing monetary policy… and of course that reflects pessimism over the economic future. Perhaps of even more concern is pessimism over whether central banks still have the power to do anything about it.
If you were only to look at market prices, you'd have to assume the world was already in the midst of a pretty deep recession: $16trn global bonds with negative yields, flat and partially inverted yield curves etc. Actually, we're not there yet. The US economy may be slowing but growth is still respectable. A rate cut of at least 25bp by the Federal Reserve tomorrow has been all but guaranteed in recent weeks and months, but this week the probability of such a move has fallen from well over 90% to below 70%. That's a reflection of the perception that there at least a few members of the Fed Open Market Committee who are arguing against the necessity of a rate cut. There were even dissenting voices at the European Central Bank's decision to ease last week, though that was less to do with differing interpretations of the state of the Eurozone economy than the natural aversion of the more "fiscally prudent" nations to ultra-low and negative rate policies.
Whilst central banks pursue that elusive goal of boosting inflation, easy policies are likely to remain in the ascendant. But there's more to the arguments of the dissenters than a contrasting view of economic strength or philosophical arguments over the sanity of a world where you now get paid to take out a mortgage on your house (in Denmark, anyway). Increasingly, there's concern about using up all central banks' monetary ammunition. When the next recession really does come -- and let's face it, historically-speaking it's well overdue -- what tools are policy makers going to have at their disposal to turn things around? Previous recessions in the US typically prompt an easing cycle of 5%, but with rates already low, ultra-low or negative such medicine is not an option.
Besides, how effective could more easing be? Despite the acknowledged unwelcome side-effects of asset bubbles and risk-taking (in search of yield), few would argue that Quantitative Easing didn't play an important role in pulling things back from the brink. But over a longer period, where are we now? Still trying and failing to spark some healthy inflationary pressure, with much of the ammunition spent. To go back to Einstein (or whoever it was), if it hasn't worked so far, why do they think it's going to work this time?
Signor Speranza believes that the time is ripe for some more radical thinking. The previous great recessions of the 1930s and 1970s engendered solutions borne out of new intellectual thought processes (Keynesian interventionism and Monetarisn respectively). Many are calling for monetary easing to be accompanied by bold fiscal measures (though not many in the key positions in the German government, obviously). We might end up with something "close to debt monetisation” -- governments issuing debt to finance spending projects, and central banks buying that debt on secondary markets, increasing the money supply.
There's no guarantee that such tactics would work either, but ironically enough the worst result would be TOO MUCH inflation… and recent experience reveals that we should be able to get that under control. As things stand at the moment, central bank balance sheets are set to expand further, but with very little optimism that the desired results will be achieved. Enormous political will AND time will be required to put any new approach in place that might ultimately lead to the normalisation of the interest rate environment. Patience, too… and in the near-term Sig Speranza sees downbeat forecasts, and continuing downward pressure on yields.
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