Archive for the ‘Federal Reserve’ Category

Central Bankers’ Bankrupt Monetary Policy.

9 February 2016
Bank of Japan’s Governor Haruhiko Kuroda finally bit the bullet of -Ve Interest Rates on 29 January to reflate the Assets, for example, the Nikkei, by driving down Yen. The Depreciation of Yen was to export Deflation and import somehow the long eluding Inflation. A strategy, incidentally, most major world economies are bidding for aggressively. Negative interest rates are like a fee or tax that the Central Banker would charge for holding the money commercial banks keep in their accounts with it. European Central Bank [Euro], Swiss National bank [Swiss Frank], Danish National Bank [Danish Kroner] and Swedish National Bank [Swedish Kroner] have already travelled some distance on that path. In turn, the commercial banks in these countries pass on the -Ve interest rate effect to their major clients to make it unattractive to hold those currencies as an asset class. Who would want a negative return on their assets? Simple Logic!! Isn’t it?
But it has backfired rather badly on Kuroda and he is staring at a double whammy as of now.
The Yen in fact has appreciated after initially responding positively to the move by Kuroda and has steadily moved up [I couldn’t invert the scale as raw data was not available]; and as of today, 9 February, has reached 114 to a US$. What has Nikkei done? It has moved exactly in the opposite direction to lose almost 10% in value by first rising to 17,700 on 29 January and then steadily falling to 16027 today as of 10:30 IST. 
What does it indicate? The Monetary Policy has turned into an Impotent and Ineffectual tool to which neither currency nor stocks or for that matter, any other markets, respond as they were expected to normally. Obviously these are not Normal Times.
Japan has been experimenting with low, low interest rates or Cheap Money since the 1990s when it hit road block of stagnating economy. US federal reserve has more or less followed the same path  for almost that long since the times of once ‘infallible’ Allen Greenspan and has kept blowing bubbles every 7 years or so [Dotcom in 2000, 2007/8 Housing] on the way; and still persisted with more of the same Stupid policy [in fact, worse, by adding Quantitative Easing to already near Zero Interest rate policy] until world reached the cusp of another bubble in 2015/16 that is now waiting to burst. ECB joined the ‘Party’ two years ago and now China would be soon forced on the same path, or is already there somewhat. Unlike in 2009, there is no China to rescue the world economy from recession. The writing is on the wall. Yet nobody seems to care. Just the Opposite.
Jeffries Chief Market Strategist David Zervos has this to say about ‘the Central Banker’s Wonderland’ []:
For the BoJ and ECB to achieve their objectives, they’ll need to push down much harder on the financial accelerator,… I now believe both the Europeans and the Japanese have massively miscalibrated both the size of QE purchases and the target level of short-term interest rates,” “In their current form, monetary policy in both regions will NOT generate a reflationary outcome.”“.
He argues that the transmission channels of ECB and BOJ are neither that wide nor that deep like that of Federal Reserve [US Dollar continues till now to be the the effective world reserve currency], and therefore ECB and BOJ would have to drive Interest rates still lower into Negative territory and step up their asset purchase programs higher to have a ‘visible’ effect on “Reflating Assets” and weakening their currencies [Reflating instead of Inflating is an euphemistic use that self-servingly suggests that Assets classes like stocks are currently unnecessarily deflated, when they are actually by all indicators already on steroids].
This Dangerous Prescription Zervos hands out despite making an uncanny observation in his report, which should warn to the contrary: ““We took a perfectly healthy Chinese economy in 2009 and shot it full of steroids, thereby creating what will no doubt go down in history as one of the largest monetary policy induced bubbles [read Reflation] in history,”“.  Who does he suggest should be shot with steroids this time around? 
What does this show? Clearly, Experts, Investors, Most Economists, Hedge Funds, Banks, are all shit scared of the oncoming storm that they sense, but have no clue where it is going to hit first and what to do about it.
They all seem to have a simple Mantra. When Clueless, Just Persist with More of the Same [Even when all the available evidence suggests that it did not work, is not working, and is not going to work].
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