Central banks: When policy doesn’t work – HSBC

FXStreet (Delhi) – Steven Major, Global Head of Fixed Income Research at HSBC, suggests that a number of unconventional and conventional policies have been tried in recent years, all with the objective of boosting nominal GDP.

Key Quotes

“Quantitative easing, negative rates and fiscal policy have been put in place. Helicopter money is for now just a theoretical concept but it could be tested.

What happens when policies appear not to work? Between lurching from one type of policy to another or when absolutely everything appears to have been tried, perceptions of policy paralysis may set in. This may be a direct consequence of the lack of ability or willingness to try something new at a time when existing policies are not effective. Policymakers are seen as
impotent, either unable or unwilling to take the bold steps necessary.

In the Eurozone this might apply to the ECB if it reaches the outer limits of what is technically and legally feasible, whilst governments fail to forge ahead with the necessary integration and supply-side reform. It is already controversial that the ECB is expanding its balance sheet and paying a negative rate on deposits. We wonder how much further the ECB can go before exhaustion is followed by policy paralysis.

Faced with another downturn, just as the US presidential election approaches, it is hardly the right time for the US to unleash fiscal loosening, especially given the starting point for debt levels. And it is difficult to imagine the Fed starting QE4. The US could be much closer to the policy buffers than central bankers and politicians would care to admit.

China may have greater policy flexibility with regards to both conventional and unconventional measures but the concern for the developed world is what domestic Chinese reflation may mean for the rest of the world. The tendency has been for reflating regions to export their problems to others.

Japan has already benefitted from 50% depreciation in the yen from three years ago and with the BoJ balance sheet already close to 70% of GDP, recently opted not to expand stimulus. Fiscal policy loosening is not an option with the debt/GDP ratio at 230%, so if one country was close to making an iterative step towards helicopter money, this is surely it.”

Steven Major, Global Head of Fixed Income Research at HSBC, suggests that a number of unconventional and conventional policies have been tried in recent years, all with the objective of boosting nominal GDP.

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