Tags: money | Fed | rates | Japan

Monetary History Doesn't Repeat Itself But It Does Rhyme

Monetary History Doesn't Repeat Itself But It Does Rhyme


Wednesday, 31 August 2016 11:30 AM Current | Bio | Archive

Boston Federal Reserve President Eric Rosengren just said it has been appropriate to be patient about normalizing interest rates, given that growth “has continued to underwhelm.” But the Fed’s mandated goals, stable prices and maximum sustainable employment are likely to be achieved relatively soon, and “keeping interest rates low for a long time is not without risks.”

Today we’ll also get Minneapolis Fed President Neel Kashkari who will speak about the role and structure of the Fed, which could be of interest in the context of the independence of the Fed.

We should not forget that the decline in inflation rates in developed economies in the last 30 years to manageable levels owes much to the move of making central banks independent.

To undermine the independence of central banks at a time when extreme central bank policy is in operation would be unwise, to put it mildly.

History has learned us what happened in the 11th century in the Chinese Kingdom of Sichuan when in 1024, under the Song dynasty the state took over the production of paper money, but gave little thought at backing the currency issue, which caused soaring inflation in the 12th century.

Yes, as Mark Twain said: “History doesn't repeat itself, but it does rhyme.”

Elsewhere in the Euro area we got the August flash consumer price inflation number that remained stable at 0.2 percent year-on-year (y/y) and which means too low for the ECB.

This comes in the wake of an also somewhat weaker than expected German CPI number that came in at 0.0 percent on a monthly basis. The German CPI print was lower because of lingering oil effects, which is something that is unlikely to last that much longer. Other countries may not have the same energy price effects as Germany. Local factors can play just as much a role in driving energy as international factors at a consumer price level.

Besides that, we got also the Euro area seasonable-adjusted unemployment rate for July that at 10.1 percent remained unchanged from June.

By way of comparison, the unemployment rate for the U.S. in July stood at 4.9 percent.

Youth unemployment in the Euro remains far too high with Greece coming in at 50.3 percent, Spain at 43.9 percent and Italy at 39.2 percent.

Investors could do well keeping their attention on the youth unemployment situation in Spain and Italy because as long these numbers stay around their actual high levels we can’t speak of a durable recovery in these 2 very important economies and the Euro area remains vulnerable to any negative shock.

In the UK, Prime Minister Mrs. May’s cabinet gathers today at her country residence to decide how to exit the EU as she wants to have some details to take with her to the G20 summit on the 4th and 5th of September in China, which is in fact nothing more than a taxpayer financed mini-break.

By the way, the G20 has never made any meaningful decision at one of its summits and it seems unlikely that it’s about to start now, especially on a topic as detailed as the UK’s exit from the EU.

Nevertheless, the decision to move ahead with the details may lay to rest the speculation that the EU will not in fact apply for article 50.

That said, the British consumer seems to be offering resistance with an improvement from the post-referendum flump in consumer confidence as the GFK survey increased by five points this month to -7, which remains weak but is performing better than last month.

Of course, the economic effects of the UK exit from the EU are likely to be felt through lower trend growth, more than through immediate effects, and things like labor market performance are only likely to show consequences later this year.

Finally, Bank of Japan (BoJ) board member Yukitoshi Funo said (regarding the idea that the BoJ could buy foreign bonds): “In theory, such an idea may be conceivable. But currency intervention falls under the jurisdiction of the Finance Ministry. It’s possible for the BoJ to decide on buying foreign bonds at its policy meetings. But its current mandate isn’t created in a way that allows it to guide policy to affect exchange rates.”

We’ll see if that will remain so as Japan’s currency remains too high, which doesn't allow a much needed boost to the economy as was demonstrated today by the industrial production numbers that for July remained unchanged month-on-month compared to a Reuters consensus forecast of a 0.8 percent increase and a 2.3 percent rise in June. Industrial production declined 0.5 percent y/y.

A stronger dollar could help Japan a lot, but all will depend on when the Fed will start raising rates.

Investors should not overlook the fact that when a stronger dollar would be welcomed by Japan, the same attitude shouldn’t be expected from the overall equity and commodity markets.

Etienne "Hans" Parisis is a bank economist who has advised global billionaires and governments on the financial markets and international investments. To read more of his articles, GO HERE NOW.



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Boston Federal Reserve President Eric Rosengren just said it has been appropriate to be patient about normalizing interest rates, given that growth "has continued to underwhelm." But the Fed's mandated goals, stable prices and maximum sustainable employment are likely to be...
money, Fed, rates, Japan
Wednesday, 31 August 2016 11:30 AM
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