Later today, we get to see how badly Mark Carney thinks we need a weak pound. How much “stimulus” will he do? We’ll find out soon enough.
But already, wider markets are looking beyond bog-standard zero-interest rate policies and plain old vanilla quantitative easing.
Printing money to buy bonds is old hat.
It’s time to get really radical…
The Bank of Japan gets ready for next-level monetary policy
Global markets have rather shrugged off fears about Brexit in the last week or so. It’s partly because the Conservative Party has managed to get its act together surprisingly quickly, removing many sources of uncertainty.
But it’s also because of something that happened in Japan earlier this week. Firstly, Japanese prime minister Shinzo Abe just won something of a landslide in Japan’s upper house election. His Liberal Democratic Party now has a solid mandate to keep going with “Abenomics” – his plan to revive Japan’s economy through money printing and economic reform.
Secondly, who was one of the first people that both Abe and Bank of Japan boss Haruhiko Kuroda met with following this historic victory? Why it was former Federal Reserve boss Ben Bernanke. Bernanke is best-known as “helicopter Ben” – the man who suggested in the early 2000s that Japan could beat deflation easily by printing money to hand out directly to the people in some way.
The immediate conclusion of markets is that Japan is about to take this to the next level. The Bank of Japan meets at the end of this month. Abe could announce a big economic push at the same time as the Bank prints a load more money.
In essence, we’d have the Bank directly funding government efforts to boost the economy – “helicopter money”. As Bloomberg puts it, it’s “the equivalent of turning the central bank into a giant ATM to underwrite aggressive fiscal measures”.
There has been a rash of rumour and counter-rumour out of the Japanese government following the meeting. Earlier this week, one of Abe’s economic advisors suggested that he should use helicopter money. Then his chief cabinet secretary denied it was true – although he then added that the government “is planning to introduce a comprehensive and bold economic stimulus”.
So whatever you want to call it, it sounds like something big is planned. And following the negative interest rate debacle earlier this year – which sent the yen roaring in precisely the opposite direction to where Abe wanted it to go – the Bank of Japan knows that it has to deliver with the next big plan.
In short, markets are waking up to the fact that central banks aren’t out of ammo at all. They were just deciding how best to deploy the helicopter gunships.
Fetch the keys to der Hubschrauber
But the point is, it’s not just Japan. Russell Napier, one of MoneyWeek’s favourite analysts, just put out a very thought-provoking note, which ended up on the ZeroHedge blog the other day.
Napier thinks that Europe is at a turning point too. Given the state of the European banks and their post-Brexit share price collapse, “even politicians now realise that the ECB acting alone cannot stabilise the European economy”. And if the EU wants to survive, it has to find a way to bail out the banks and break out of recession.
That boils down to one basic choice. Either Germany gives the European Central Bank the go-ahead to “conduct outright monetary financing of all its constituent governments”. Or Germany decides that it simply won’t hand over the keys to “der Hubschrauber”, and the EU project gradually disintegrates.
There’s no guarantee that Germany will choose the first option. Germany obviously has an awful lot of historical baggage attached to the idea of money printing.
Then again, German chancellor Angela Merkel has been upbeat about prospects for a resolution of the problems around the Italian banking sector this week, fuelling hopes that Italy and the EU can come to some sort of arrangement that doesn’t involve politically toxic “bail-ins” for Italy’s banks (they’re politically toxic in this case because they would mean many small savers directly losing their money).
Hence the optimism creeping back into markets. And, incidentally, this is also why Germany can now borrow for ten years at a negative interest rate. If money printing fails, markets reason, then deflation will take hold, so negative rates won’t look too bad. If money printing takes off, then inflation might result in the long run – but in the short run it means massive demand for bonds.
Hmm. No wonder bonds are in bubble territory. It seems you just can’t lose. Until, of course, the psychology flips – and from there the only way is down.
Would helicopter money work? Napier’s take is that yes, “this form of reflation will likely work and in due course work too much”.
That’s why I’d stick with gold. If markets get back to “risk-on” mode then they probably won’t be so worried about holding the yellow metal – so don’t be surprised to see a correction – but in the longer run, gold will do well amid the monetary madness.