Opinion

Anatole Kaletsky

Now may not be the time to buy bonds

Anatole Kaletsky
Jun 6, 2014 18:35 UTC

anatole -- top

Why are interest rates so low? And how long will they stay that way?

Now that the European Central Bank has passed another historic milestone by imposing negative interest rates on a major part of the world economy, there is one explanation of the unprecedented collapse of interest that everyone can agree on. Central banks can set money market interest rates as low or as high as they please just by giving commercial banks whatever amount of excess credit is needed to keep these rates at the chosen level.

Since early 2009, central bankers all over the world have decided, rightly or wrongly, that interest rates should be lower than ever before in history. Moreover, these policymakers made it clear that they will continue to squeeze interest rates down to near-zero, or even negative, levels until next year and perhaps beyond.

But this obvious answer to the interest rate conundrum only begs a more interesting question: What accounts for the rock-bottom levels not only of the overnight interest rates that central banks set directly, but also the long-term rates that depend on the willingness of pension funds, insurers and private investors to tie up their savings for 10 years or more in government bonds?

If investors were absolutely confident that short-term rates set by the central banks would remain near zero for many years ahead, then the seemingly paltry returns — varying from 2.6 percent down to 0.6 percent — on 10-year bonds issued by the U.S., European and Japanese governments would seem generous. Rational investors would be happy to lock up their money for a decade at these rates. But why are investors as confident about the persistence of near-zero interest rates as today’s low bond yields seem to imply?

anatole  -- ecb headThere are two possible answers, reflecting diametrically opposite economic views. The pessimistic view is that the world economy since the 2008 financial crisis has settled into a “new normal” of weak growth and negligible inflation or even falling prices. Whatever causes they attribute for this economic ice age — financial fragility, demographics, stagnating productivity or the unintended consequences of the post-2008 monetary experiments — proponents of the new normal agree that central banks will keep interest rates near zero for most of the next decade. So today’s historically low bond yields will offer investors much higher incomes than they will be able to secure in future years.

Yellen looks toward a Keynesian approach

Anatole Kaletsky
Feb 13, 2014 19:18 UTC

This has been a banner week for the world economy, inspired largely by events in the United States.

In Washington, the first congressional testimony from Janet Yellen in her position as new Federal Reserve Board chairwoman reassured and impressed two notoriously petulant audiences: Tea Party congressmen, who had assembled a posse of hostile witnesses to attack the Fed’s “easy money” policies; and panicky Wall Street investors, who had spent the previous month swooning on fears that monetary policies might not be easy enough.

The significance of Yellen’s testimony lay not in the fact that she was a bit more “dovish” than former Chairman Ben Bernanke, or seemed more committed to the new central bankers’ fad for “forward guidance,” as opposed to “quantitative easing.” More striking, if subtle, was the change in economic philosophy that Yellen represented.

If Europe wants Thatcherism, it must abandon austerity

Anatole Kaletsky
Apr 11, 2013 16:43 UTC

Among all the obituaries and encomiums about Margaret Thatcher, very few have drawn the lesson from her legacy that is most relevant for the world today. Lady Thatcher is remembered as the quintessential conviction politician. But judged by her actions rather than her rhetoric, she was actually much more compromising and pragmatic than the politicians who now dominate Europe. And it was Thatcher’s tactical flexibility, as much as her deep convictions, that accounted for her successes in the economic field.

Governments in Europe and Britain today are obsessed with hitting preordained and unconditional targets: Inflation must be kept below 2 percent; deficits must be reduced to 3 percent of gross domestic product; government debt must be set on a declining path; banks must be recapitalized to arbitrary ratios laid down by some committee in Basel. In sacrificing their citizens’ well-being and their own political careers to these numerical totems, modern leaders often claim inspiration from Thatcher. And when voters turn against them, Europe’s leaders keep repeating Thatcher’s most famous slogans, “There is no alternative” and “No U-turn”.  But are these the right lessons to draw from Thatcher’s political life? A closer look at her economic achievements suggests otherwise.

In the 20 years she spent in parliament before becoming prime minister, Thatcher first saw Harold Wilson’s Labour government wrecked by currency crises and trade union militancy; then Ted Heath ousted by a miners’ strike; and finally James Callaghan humiliated by the 1976 sterling crisis and driven out of office by the wave of public-sector strikes that came to be called the “winter of discontent.” After these searing experiences, her immediate priority on becoming prime minister was to turn British monetary management and labor relations upside down. Yet her actions were much more cautious and pragmatic than her rhetoric.

Is Japan set to lead after 20 years of torpor?

Anatole Kaletsky
Dec 19, 2012 16:56 UTC

As 2012 draws to a conclusion, it’s likely that the fiscal cliff will be averted, U.S. politics and monetary policy are irrevocably set, European politics are suspended until September’s German election and the Chinese leadership transition is over. In short, the political and monetary uncertainties that have obsessed financial markets and paralyzed business have all been dispelled. As a result, 2013 promises to be a year for businesses and investors to focus again on economic fundamentals and corporate performance instead of delaying decisions while they waited with bated breath for the next euro summit, or election, or meeting of the Federal Reserve and European Central Bank. In one part of the world, however, events are moving the other way.

In Japan, economic and business conditions remain as dull as ever, but politics and monetary policy are suddenly exciting. And while the world has largely lost interest in Japan, the gestalt shift  in the world’s third-largest economy could have big implications for global business and for the way voters think about governments and central banks.

Last weekend’s landslide election of Shinzo Abe, a potentially powerful prime minister, was largely a result of his promise of a revolution in monetary policy designed to jolt the Japanese economy out of its 20-year stupor. If Abe delivers on his election rhetoric – still a big “if”, especially in a country where power is wielded mainly by bureaucrats rather than elected politicians – the global impact could be huge.

  •