At the end of the sketch, Marx gets a chance to win a “beautiful lounge suite”. He admits to being nervous given that he rather wants to win the suite. He fails when unable to name the winner of the 1949 FA Cup. All a grand satire on the tendency of revolutionaries to be seduced by the material world.
When I was young I used to think that the way to make the world better was to encourage that idealistic goal of ‘equality’. When I got older, I felt that individual freedom, and free markets, was a more likely route to improving the world.
Those two views may lie at opposite ends of the political spectrum, but they both arose from a healthy cynicism about the efficacy and motives of governments and the policymakers who exercise the power of the state.
Today there seem to be lots of reasons to continue being sceptical about the efficacy of government and policymakers. The list of concerns is easy to recite. There was a lack of awareness of the fragility of the financial system in 2007 and 2008, followed by a sluggishness to find an effective response to the collapse of that system and the ensuing deepest recession for over 70 years.
Serious stimulus
The chosen response has been a massive attempt of assorted forms of stimulus resulting in the lowest short-term interest rates ever, including persistent negative interest rates in Germany, Switzerland and Denmark. According to research firm ISI, there have been 245 monetary and fiscal easing measures announced globally in the last year.
Leading the charge have been the central banks of the US and UK, which increasingly seem to have an ally at the European Central Bank (ECB). The Federal Reserve is currently doing Operation Twist, the purchase of longer-duration bonds and the sale of shorter-duration ones and just last week Chairman Ben Bernanke announced another round of quantitative easing (QE) too.
The Bank of England’s QE measures amounts to £375 billion of gilts bought by the end of the current round, and one fully expects more will be done after that. Finally, ECB President Mario Draghi has announced a plan for unlimited government debt purchases in the eurozone, his response to the need to stabilise interest rates in the periphery of Europe.
The Fed and the Bank of England have been at great pains to point out that their policies have proved beneficial. The Bank of England, according to some calculations by Jefferies Fixed Income, can argue that the combination of slashing the bank rate to 0.5% and QE will have boosted GDP by as much as 5%. Bernanke argued at Jackson Hole at the end of August that QE1 and QE2 may have increased US GDP by around 3%.
Market loyalty
It is certainly the case that monetary easing has boosted financial asset prices. The doubling of the US stock market and the compression of yields on corporate bonds has resulted in strong returns for investors willing to take risk since early 2009. And that risk is still being rewarded. Over 2012 to the end of August, the US equity market has returned 12%, US high yield bonds 11%, high grade bonds 8% and 10-year Treasuries 5%, as measured in US dollars.
Not surprisingly, financial market practitioners are keen on more QE and very excited about the ECB doing some version of it. But even if we allow the reasonable assumption that without QE things would have been even worse, the recovery since the Great Recession has been mediocre at best and virtually non-existent in some cases. Which is why new governments have been elected, or appointed, across much of the developed world and the incumbent US President is facing a tight race to win re-election.
Indeed, UK GDP has recovered more slowly from the Great Recession than it did from the Great Depression. The pre-Great Depression peak was in the first quarter of 1930. GDP rose above that previous peak in the first quarter of 1934. Today, UK GDP is still 4.3% below its pre-Great Recession peak in the first quarter of 2008.
In the US, the economy has grown at an average of 2.2% since the recovery began in 2009. That recovery rate is lower than the Fed’s estimate for the trend growth rate for the economy (2.3-2.5%). The economy should grow more rapidly at the beginning of a cycle than the end, so getting to that trend growth rate may prove difficult. Consequently, unemployment rates remain high on both sides of the Atlantic.
More to come
So, we will see additions to these stimulus measures.
I believe we will get more from the US and UK. And Europe will join in. Mario Draghi, Ben Bernanke and Mervyn King have a shared history of time spent together at the Massachusetts Institute of Technology in Boston in the late 1970s and early 1980s. Indeed, Bernanke and King had offices next door to one another. All three were taught at MIT by Stanley Fischer, now the Governor of the Central Bank of Israel, who cut rates from 5.5% in 2006 to 0.5% in early 2009 (although he subsequently raised them as high as 3.25%; they are now 2.25%). Perhaps we have candidates for a new version of the four horsemen of the apocalypse.
If you had told the young version of me that the solution to the great capitalist crisis of 2008-09 was in the hands of three blokes who have known one another for 30 years, and who had a shared educational past, I would have felt nothing but justification for a cynical view of government and policymakers. Yet here we are.
Governments may be able to finance borrowing at record low levels but the transmission mechanism between those official rates and the rates actually available to the private sector is impeded by both cautious lending practices by banks and by cautious management at non-financial corporates. Hence corporate cash levels are at record highs by some measures, and dividends are growing more rapidly than earnings as payout ratios increase. Companies are borrowing money in credit markets to finance share buybacks, not to fund the expansion of their businesses.
What about growth?
We need a catalyst to translate the stimulus into accelerating economic activity. We suggested last month that we may as well get even more state intervention and have the UK government sell more gilts and use the proceeds to buy UK corporate equities. Maybe that is a step too far, although it doesn’t seem that difficult to imagine given everything we have witnessed in the last few years. But just doing more QE or buying some Spanish debt would not seem to me to be sufficient to catalyse an increase from the very low levels of activity we are currently seeing.
There is certainly a lot of work to be done before our “four horsemen” can be as self congratulatory as they are in danger of being seen, if the Jackson Hole speech is anything to go by. But don’t expect any of the following to agree. Charlie Bean (Deputy Governor of the BoE); Olivier Blanchard (chief economist at the IMF); Larry Summers and Christina Romer, each of whom has been head of Obama’s Council of Economic Advisors; Paul Krugman, Nobel prize winner and New York Times columnist; plus the heads of the central banks of Cyprus and India. They all went to MIT.
