Europe’s lowest government bond yields since the Napoleonic Wars are signaling investors want more action from Mario Draghi.
Instead of a vote of confidence, the most pronounced rally in 200 years suggests the European Central Bank president needs to stave off the risks of stagnation and deflation. Austria, Belgium, France (GFRN10) and Germany can borrow at lower rates (GDBR10) than the U.S. as inflation less than half the ECB’s target stokes concern the euro zone will take many years to recover from its longest-ever recession.
More Easy Money Won’t Fix Global Deflation, Will Worsen Inequality:
Bond yields are – once again — plunging worldwide.
The reason for this revived buying among fixed-income investors is that central banks are – once again – signaling their intent to ease monetary conditions in yet another bid to kick-start sluggish economies and forestall a downward spiral in prices, or deflation.
But it’s not clear that everyone else in the global economy should share bondholders’ enthusiasm. We’re painfully aware that central banks have tried this tactic, in overwhelming, bazooka-like style, and failed. In fact, there’s every reason to believe the flood of cheap money since the 2008 crisis has not only failed to quell deflationary pressures but has actually worsened the other scourge of our age: income inequality.
Right now, the focus is on the European Central Bank, which finally has the green light from the Deutsche Bundesbank to employ aggressive new measures such as negative interest rates to spur credit, weaken the euro and revive inflation. This might be a watershed moment for the famously hawkish German central bank, but it’s not like the ECB has been tightfisted these past six years. Over that time, it has driven its benchmark rate to a record low near zero, it has provided almost one trillion euros ($1.37 trillion) in long-term liquidity support for banks, and it has pledged to backstop euro-zone governments’ bonds.
Meantime, the Federal Reserve has kept rates near zero for five-and-a-half years and has bought almost $4 trillion in Treasury bonds and mortgage-backed securities. The Bank of Japan has locked its base rate near zero for 18 years and is now buying 7 trillion yen ($71 billion) in government bonds every month. The Bank of England’s benchmark rate has been at 0.5% since the crisis and it keeps buying assets. And the Swiss National Bank has put a hard cap on the Swiss franc and is toying with negative rates.
The goal of all this was to revive economic growth, boost employment, restore business’s pricing power and give wage-earners more bargaining clout. How’s it working out? Not too well, according to the latest raft of economic data.
The euro-zone economy grew a meager 0.2% in the first quarter and posted an annual inflation rate of just 0.7% for April. At the country level, Germany’s consumer price index fell 0.2% last month, France’s was unchanged, and while Spain’s was up 0.3% on the month, it was still down 0.1% on-year.
In the U.S. the April producer price index unexpectedly rose 0.6% from March, but when stripped of volatile food and energy prices the core PPI was up just 0.3%. What’s more, this modest “pipeline inflation” was nowhere to be seen in the core consumer price index, released Thursday, or, more importantly, in wages.
Now compare this consumer-price stagnation with asset price trends, whose relentless gains are a direct result of easy-money policies, and you begin to see how the policy framework has contributed to the most extreme gaps in wealth and income since the 1920s. The Dow Jones Industrial Average is up 150% from 2009; the Nikkei 225 is up 69% from October 2012, even after a sharp correction this year; and Germany’s Dax index is up 77% from September 2011. Meanwhile, housing prices have soared in globally interconnected cities such as New York, London and Hong Kong.
In other words, anyone with financial assets or expensive real estate has gained, while those whose wellbeing depends on wages have gone nowhere. This is more than a moral concern, it’s an economic problem: we’re holding back those whose demand is needed to buy everything from U.S. cars to French wine to Chinese toys.
To be sure, these phenomena mostly stem from the big-picture structural factors behind what former Treasury Secretary Larry Summers calls our “secular stagnation” more than they reflect recent policy mistakes. Their root causes could lie in what Northwestern University economist Robert Gordon describes as a problem of stalled innovation or they could come from the opposite: that rapid innovation is displacing jobs. Many attribute inequality and economic stagnation to demographic shifts and societal aging, others to the glut of savings and goods produced by China’s entry into the global economy. More recently, French economist Thomas Piketty has inspired a new generation of leftists by arguing that capitalism itself is to blame for privileging capital over labor.
But whether we think one or a mix of these factors is to blame, surely we can all agree that pumping ever more money into the global economy will at best do nothing to fix our economic malaise and at worst exacerbate it.
The fact is we face a global challenge that requires political action. Fiscal policies, taxation reform, trade and financial liberalization should be all part of the tool kit, and all of it coordinated at the international level.
It’s time for central banks to step aside. It’s time for political leadership.
– Follow Michael J. Casey on Twitter: @mikejcasey.