Don’t expect coordinated easing
James Saft is a Reuters columnist. The opinions expressed are his own.
HUNTSVILLE, Ala. – That much-anticipated global coordinated easing won’t be global, won’t be coordinated and won’t even be much of an easing.
In 2008 the world got global coordinated monetary easing, with contributions from central banks from Tokyo to Washington.
In 2009 virtually every member of the Group of 20 nations contributed to global coordinated fiscal easing, committing to a total of almost $700 billion in additional spending, or more than 1 percent of global GDP.
In 2011 we will get half measures, conflicting policy and self-preservation. This should be no surprise; not only has the crisis spread from being one about banks and houses to one about governments, it has also hardened the divisions between constituencies and interests.
Short of a not inconceivable breakup of the euro it’s hard to see this changing soon. The U.S. and Europe are riven by political and fundamental divisions, China is hardly poised to carry the water and the rest of the world is weak, small and looking to its own diverse interests. It is easier to see currency wars and protectionism rising than the linking of arms of 2008 and 2009.
The Federal Reserve on Wednesday said it would over the next year sell $400 billion of shorter term Treasuries already in its portfolio, using the proceeds to buy longer term Treasuries, a move intended to drive longer term interest rates lower.
This might buy the economy cheaper long-term interest rates of perhaps 20 basis points, but, considering that the Fed said there are now “significant downside risks to the economic outlook, including strains in global financial markets,” this is little more than a cold cup of coffee.
The Fed also threw in a splash of skim milk for that coffee, saying that it would now reinvest maturing mortgage securities it holds into new similar bonds.
Given that unemployment is 9.1 percent and the U.S. economy produced exactly no additional jobs in August, this hardly even qualifies as palliative care. That the Fed, which was split by a 7-3 vote on its decision, made the moves shortly after receiving a highly unusual letter from Congressional Republican leaders gives an indication of exactly how difficult its position has become.
House Speaker John Boehner, Senate Minority Leader Mitch McConnell, Senator John Kyl and Representative Eric Cantor asked Chairman Ben Bernanke to “resist further extraordinary intervention in the U.S. economy,” maintaining that it could worsen current problems or cause new ones.
President Obama’s $447 billion jobs plan will likely end up being less than half that size, if that, and could end up having far less impact on confidence and the economy than the discussions about cuts and the budget that will accompany it.
In the U.S., there is no consensus about what works and what should be done, only mutual cynicism about motives.
Expecting global coordination out of Europe seems a bit rich, given that it can barely coordinate policy internally. The parts of the euro zone that need stimulus most, Greece, Spain, Portugal, Ireland and Italy, are the ones the rest of the euro zone seem most bent on punishing with a self-defeating austerity.
After having led the European Central Bank into two disastrous rate hikes, Jean-Claude Trichet has toned down his rhetoric and the bank has cut its forecasts for growth and said the risks to inflation are now balanced, having previously been tilted higher. The ECB at least has room to cut, but continues to be deeply ambivalent about its real lever, its ability to buy up the bonds of countries like Spain and Italy.
While the Bank of Japan might be willing to add to a long-running program of buying assets, it is more likely to act to intervene to limit yen strength, effectively acting to send economic weakness back across the Pacific to the U.S.
Minutes from the Bank of England’s Monetary Policy Committee indicate that it may take another run at supporting demand through quantitative easing, a path stoutly advocated by member Adam Posen. Britain’s plans to cut its way to fiscal health are also under question, as weak growth caused it to record a modern all-time largest budget deficit in August. The IMF cut its forecast for British growth and said a policy reversal may be called for in the event of further weakness.
As for the Swiss, their signal contribution to coordinated policy has been to act unilaterally, pledging to cap the strength of the franc.
China’s economy will slow, but it remains constrained by inflation and high debt levels. To expect China to play along with a united U.S. and Europe is one thing, to expect it to lead and take extra risks onto itself is another.
While bond markets are preparing for disaster, the equity markets still appear to believe, at least a little, in the policy fairy. It may not take long to find out who is right.
At the time of publication James Saft did not own any direct investments in securities mentioned in this article. He may be an owner indirectly as an investor in a fund.