In a “Trading Floor” interview, Saxo Bank CIO and chief economist Steen
Jakobsen, discusses the role of central banks in the global economy with Saxo
Bank’s Michael McKenna.
“Central banks can do nothing,” says Jakobsen.
He calls the current central bank low to negative interest rate policies
the “New Nothingness”.
What follows is a guest post interview, courtesy of Steen Jakobsen,
Michael McKenna, and the Saxo Bank “Trading Floor”.
Original Link : Central Banks Can Do Nothing
In guest post format, I have no block quotes or indents. I offer my
comments at the end.
Central Banks Can Do Nothing by Steen Jakobsen
- 2016 has seen a popular reaction against zero-bound
policies
- Political elites are struggling to preserve an
unfruitful status quo
- ‘The world has become elitist in every way’: Jakobsen
- Political middle has become crowded, stagnant; new
spectrum of ideas needed
- Investment in education and research needed; zero rates
are a dead end
- Saxo chief economist remains ‘very positive’ overall
In April 2015, Saxo Bank chief economist Steen Jakobsen said that zero
rates, zero growth, zero productivity, and zero reforms have left a great many countries adrift in a “new
nothingness”.
The products of this nothingness, said Jakobsen, include apathy,
stagnation and “an economic outlook based more in peoples’ heads than in
reality”. On the cultural level, he continued, the widespread lack of
dynamism and new ideas has empowered a political class that is “mainly
interested in maintaining the status quo”, even as that status quo provides
sharply diminishing returns.
US GDP growth, for instance, is hugging the zero line:
Source: Federal Reserve Economic Data
A little more than one year on and we remain, in terms of economics and
monetary policy at least, profoundly entranced by this combination of
zero-bound policies and continual “emergency measures”.
Culturally and politically, however, the past 12 months have demonstrated
time and time again that nature abhors a vacuum.
In Europe, for instance, we have the spectacle of the European Union’s
second-largest economy voting on whether it wants to leave the union next
month. In the United States, the candidacies of Democratic senator Bernie Sanders and Republican
front-runner Donald Trump have benefited enormously from widespread
frustration with the current consensus, particularly in the realm of trade
where both candidates – one hard left, one populist right – point to a
declining US manufacturing sector and a recovery bereft of “breadwinner” jobs as signs that the
country has been led astray.
The list doesn’t end there. From the European migrant crisis to the rise
of far-right political parties such as Germany’s Alternative für Deutschland
and France’s Front National; from the the apparent stalling of the Federal
Reserve’s policy normalisation plans to the European Central Bank’s continued
adventures in quasi-permanent stimulus, the past 12 months have demonstrated
that “nothingness” breeds restlessness.
This restlessness, as we have seen, will find release on the cultural
level despite the hesitancy of central bank policy mandarins and political
elites.
With this in mind, we sat down with Jakobsen to discuss the new
nothingness, the even newer reactions to such, and his outlook for the global
economy
TradingFloor.com: The “new nothingness” thesis was based
on zero rates, zero growth, zero reforms. But you hinted that all of this
nothingness has spilled over into culture and politics as well… do these
macro facts hinder peoples’ imagination, or their ability to deal with the
problem?
Steen Jakobsen: Yes, I think so. This year, we see a
growing gap between the central banks’ narrative – which is that you have a
trickle-down impact from lower rates – and [the situation on the ground].
People understand that zero interest rates are a reflection of zero
growth, zero inflation, zero hope for changes, and zero reforms.
In my opinion as an economist and a market observer, people are smarter
than central banks. And because they are smarter, they can live with policy
mistakes for a while because the narrative is very strong and because people
like (European Central Bank head Mario) Draghi and (Federal Reserve chief
Janet) Yellen have these platforms from which they not only talk but
occasionally shout, and they are deemed to be “credible”, scare quotes mine…
We see [this gap] in the Brexit debate as well, where the elite and the
academics talk down to the average voter. By doing that, of course,
they alienate the voters from their representatives.
Counterpoint?: “Too many politicians are listening to their [voters]”
says European Commission president Jean-Claude Juncker.
That’s what we see globally, that’s why Brazil is going to change
presidents, why Ireland could not get its government re-elected with 6%
growth. It’s not about the top line, but about the average person seeing that
we need real, fundamental change.
TF: Earlier this year, you said that the social contract – the agreement between rulers and the
ruled – is broken. It made me think of this year’s Davos meeting, which showed a leadership
class terrified of slowing jobs growth and enamoured with the idea that
population movements might be used to address this. Given the current
unpopularity of globalisation and its effects, would you say that there are
some things it is impossible for 21st century leaders and the led to agree
upon? Is a social contract impossible?
SJ: No, it could be re-established, but it needs to be
established on terra firma. Right now, we have a panacea in the form of low
rates and the idea that things will somehow improve in six months. This has
led to buyback programmes, a lack of motivation [and all the rest].
We as a society have to recognise that productivity comes from raising the
average education level. People forget that all the revolutionary trends, the
changes we’ve seen in history, have come from basic research. I don’t mean
research driven by profit, but by an individual’s particular interest in one
very minute area of a specific topic. This is what creates new inventions.
The second thing we often forget is that the military has been behind a
lot of the industrial revolution. Mobile telephony, for example, had nothing
to do with private citizens or companies – instead, it had a lot to do with
the US military.
The key thing here is that we need to be more productive. If everyone has
a job, there is no need to renegotiate the social contract.
The world has become elitist in every way. Before, you could start a
company and build a small franchise; now, you have to be global, you have to
have a billion users (if you’re an IT company), and [the pursuit of this]
does not necessarily provide the best technologies, but only the biggest
ones, the ones backed by [the firms with] the deepest pockets and largest web
of connections.
We need to democratise the ability to be educated because we don’t know
what’s going to work and not going to work. What we do know is that the
social contract needs to come from better education levels.
There exist a huge number of studies that show a correlation – in
mathematical terms, an R squared value – of 80% between the average education
of a country or company and the productivity of same.
Source: Federal Reserve Economic Data
TF: Last week, you
retweeted an article claiming that $127 billion in labour and services
could be replaced by drones. Is automation, and the consequent lack of
working-class jobs, partly responsible for “the new nothingness”?
SJ: Like everything else, there is an equilibrium between
supply and demand at work here. On the supply side, we must consider that, in
Western Europe at least, the amount of people needing jobs will be smaller in
10 or 20 years […] we need automation to pay for the lack of people in the
workforce.
This is probably the first period in the evolution of technology where
tech is deducting rather than adding jobs. But I think it ultimately will add
jobs again, because productivity will pick up
The demographic component here is that we will have less supply in labour
markets in the future, so we need a more efficient way of doing things, a
cheaper way.
That’s the good news. The bad news is that the next decade will be very,
very challenging, and you haven’t even spoken about immigration and refugees
– [this phenomenon] is adding to the labour market’s net supply while the net
demand from employers is very low because of indirect taxes, regulations and
the like.
So again, we need to go back and address what is feasible, or possible. I
very rarely agree with the International Monetary Fund, for example, but if
Germany can borrow at negative interest rates and invest in infrastructure,
why wouldn’t they do it?
Infrastructure is and always will be productive; productivity improvements
don’t happen because of silly shenanigans concerning politics…
There are a lot of things that can be done in the short term, but
underneath all of this is a long-term view that you need to make people
smarter. If they’re smarter, they’ll be more productive, more self-reliant,
they’ll have better lives.
Yes, the political system is doing us a disservice, but we as individuals
have also become extremely lazy and we are not intellectually challenged.
TF: You mentioned supply and demand and demographic
changes. Before German chancellor Angela Merkel launched the refugee
programme that has seen over a million people arrive in Germany, there were
several reports from EU banks and think tanks calling for an injection of new
working-aged people into Europe. Why were they calling for that if growth and
the jobs market are stuck at zero?
SJ: Again there are two sides. Looking at the
Organisation for Economic Co-operation and Development’s report on
immigration and migration, for example, it shows that in the history of
European immigration, 75% of all immigrants have been put into some kind of
work and become productive taxpayers within one year of their arrival.
A refugee family arrives in Greece: Despite concerns about jobs and
culture, Europe has historically had a great deal of success economically
integrating newcomers. Photo: iStock
If you can retain that 75% inclusion rate, immigration will provide a huge
boost in terms of injecting workers into a faltering demographic context.
These are young, aggressive, multicultural people who are going to add colour
and flavour to a continent that has been too homogenous for too long.
TF: But isn’t this very difference what is currently
unpopular, what is fueling the rise of right-wing nationalism and other such
movements?
SJ: People are always afraid of change. We are programmed
to want today to be very much like yesterday. We don’t have high aspirations.
On the other hand, people thrive when they are challenged. While the
political narrative on refugees might follow the script you just laid out,
for an economist like me it’s very clear: immigration is positive.
Of course, you can get too much of a good thing in too short of a time. If
we knew now that the maximum amount [of incoming migrants] would be, for
argument’s sake, 3 million over the next 10 years, then Europe could easily
adapt and put these people to work.
The problem is that we currently have an infinite number and it is seen as
an issue in the political spectrum – it’s not an economic issue.
There is nothing empirically that says refugees are a negative. It can
challenge the social fabric, it can challenge the political spectrum, but to
me that’s a good thing – we need openness.
Are there problems with this? Yes, but there are also problems with being
a startup, or with riding your bike for the first time. I don’t think there
is anything in life that doesn’t come with some pain. I think you need to
play through the pain to become better.
TF: We mentioned the expansion of the political spectrum,
how we’re seeing more interest in the far left, but I think notably we’re
seeing more interest in the far-right with FN, with AfD and with Donald Trump
in the US. Now, a huge amount of his support comes from the perception that
globalisation – NAFTA, the TPP, Chinese manufacturing – has harmed US
workers, and his solution is protectionism. What would a world in which the
US enacted protectionist policies look like?
SJ: The irony is that we already have protectionism.
Trade volume and trade value has been collapsing for the past 24 months. If
you look at the trade talks that happen under the umbrella of the World Trade
Organization, they have achieved absolutely nothing since China’s inclusion.
“Bad deals!” Photo: iStock
There are also signs, practically and economically, that you can have too
much of a good thing in terms of the division of labour. You can actually
come to a point where you end up with an endless deficit in one country and
an endless surplus in another if the deficit country does not have the
ability to respond to the deficit, whether through a weaker currency or by
being more productive.
The US is the prime example of this phenomenon which is why Trump is
having so much of a tailwind.
The US has basically been living off of cheaper imports for a very long
time. There is a lot of pain in the US, but for the middle class the pain has
been cushioned by the fact that Chinese imports, Vietnamese shoes and the
like are just so much cheaper.
Trump is having a good time right now, but it is not because he is right
about protectionism versus free trade. It’s because we are at the end of the
cycle where the US benefitted massively from lower import prices on consumer
goods, which make up 70% of US consumption.
If, like Trump wants, an iPhone were to be produced in the US, it would
cost $2,000 or more. This is why Trump is wrong – if that were the case, we
wouldn’t see the sales that we do, we wouldn’t see the share price that we
do.
TF: Wouldn’t his argument, or the protectionist one, be
that real wages are stagnant, and if working class or manufacturing jobs had
remained in the US, then people might not be so dependent on low prices?
SJ: That’s a circular argument. The fact is that the US
doesn’t have a competitive productive base anymore. In some industries they
do, like in cars, but to a large extent the car industry is subsidised.
It’s not that the US worker can’t do the work, he’s just massively more
expensive. The price difference between producing Nike shoes in the US versus
Vietnam is, in my best estimation, one to 10 if not one to 20.
The amount of US workers at or below the minimum wage is decreasing:
Source: Federal Reserve Economic Data
If you want to pay $500 for trainers, you can have the Trump version. The
reality, as with so many things in life, lies between Trump and
globalisation.
Let’s look at a Danish example: I never understood, for example, why
[pharmaceuticals giant] Novo Nordisk don’t use some of the money they put
into funds and trusts and [architecture] for basic research, for something –
like penicillin, for example – that might do some good in the world.
Of course, they don’t do it because there’s no profit in, but [they are
overlooking the fact that] something could come out of that research,
something that would give them a new product…
Everyone in the world is just looking out for number one. We’ve lost the
coherent belief that underlies the social contract.
Historically speaking, the most successful examples of social contract
formation occurred under benign kings, under regimes that tolerated a
sophisticated bureaucratic class and a robust opposition.
You have the [Russian president Vladimir] Putins and [Turkish president
Recep Tayyip] Erdogans and these people who can execute power… they destroy
society. You need both sides, and that’s why I talk about the far left and
the far right creating a new spectrum a new middle ground.
The problem now is that the middle has effectively disappeared. Everyone
wants to be in the middle, and the result is that there are no new ideas.
The media are always considering demand independent of supply and vice
versa – nobody is covering the balance.
TF: Finally, you have said that continual emergency
measures are unhealthy, and that’s very much where we are with central banks
– negative rates, zero rates. But following the one US rate hike that
happened, we saw a huge retreat from the US normalisation narrative.
If continual emergency measures are unhealthy, but the world’s arguably
strongest economy has stalled on the road to normalisation, what can central
bankers do?
SJ: They can do nothing. They should do nothing. They
should go away.
If you look at monetary history prior to the formation of the Bank of
England – the world’s first central bank – you will find that economic cycles
were more stable then. Since the founding of the BoE and the Fed 102 years
ago, we’ve seen an increased amount of business cycle up and downs.
The Old Lady of Volatility Street? Photo: iStock
The problem is that the fractional monetary system is based on access to
credit, and the only institutions that create credit in this system are the
banks.
Central banks keep these institutions alive with one hand, but choke them
with the other. [The result, as we see this year] is that they are
underperforming relative to the broader indices, so their ability to go to
the marketplace and get more money is diluted.
We have a very vicious negative cycle that is initiated by the central
banks. They’re not exclusively guilty, of course, and central bankers would
rebut this argument with one saying that monetary policy cannot work on its
own, you also need fiscal stimulus… but that’s all nonsense.
The way societies survive is by creating frameworks in which people can be
productive. This is based, again, on basic research, which is in turn based
on general education levels.
Let me end this little talk by saying that I am very positive. I think
[the reaction to the new nothingness] is the best news that has happened in
the last 10 years, because now people are starting to ask about the social
contract.
We are now questioning the central banks’ model.
I could be wrong with all my criticism, but I am not wrong in saying that
if you give people incentives and if you educate people, you become more
productive.
If I’m running a football team, I don’t try and improve my players’
performance by feeding them pizza every day, but this is what the central
banks are doing. They’re feeding us burgers and pizza when we need food –
training programmes, education, intellectual stimulation.
The “Janet and Mario diet” is known to cause bloating, fatigue, and a loss
of motivation. Photo: iStock
That is unarguably the way to go. And it’s beautiful, it means our kids
can be better-educated, can have more access to information, and hopefully
down the line we see better practices in terms of politicians laying out both
the supply and demand cases.
That, of course, is a big reach in any political sphere, but the ones who
will survive will be the honest ones and the ones who take both sides into
account before proceeding in a rational and disciplined manner.
Michael McKenna is an editor at TradingFloor.com; Steen Jakobsen
is Saxo Bank’s chief economist.
End Gust Post – Mish Comments
There is very little above I disagree with. Like Steen I believe
technology creates jobs over the long haul, even if it is not doing so right
now as part of a “creative destruction” process.
However, those displaced now feel like the “social contract is broken”, a
topic we have discussed before.
This explains the rise of Donald Trump in the US, Marine Le Pen’ National
Front party in France, Beppi Grillo’s Five Star Movement in Italy, and the
rise of Pablo Iglesias’ Podemos (We Can) party in Spain.
Refugee Crisis
My main disagreement with the article deals with the European refugee
crisis. While I do agree that a smaller more controlled number of refugees
could be handled, I debate how positive that might be.
Steen notes “that in the history of European immigration, 75% of all
immigrants have been put into some kind of work and become productive
taxpayers within one year of their arrival.”
That may be history, but it does not reflect today’s reality. Today, many
come simply for economic handouts.
In Germany, virtually none of the refugees speak German. Reports suggest
most speak no German after five years. Few have skills when they arrive. Some
tiny percentage are terrorists.
On average, the refugees are a huge monetary drain and an even bigger
social drain. Perhaps a decade or two from now this will change, but few will
wait that long. Meanwhile the rise of the protectionists is relentless.
Tariffs Not the Answer
Donald Trump is flat out wrong on tariffs being the answer. The US has
benefited from global trade more than any other nation on earth.
The problem is inflation, not wages.
Placing the Blame
Central banks are the blame for this mess. Their inflationary policies
have fueled the wealth inequalities that the central banks and socialists
rail against.
Misguided inflationist policies explain the “broken social contract”, the
shrinking middle class, rising wealth inequality, and even the rise of Donald
Trump and Bernie Sanders.
Rising productivity is a good thing. It’s a result of innovation and it
improves standards of living.
I have discusses these ideas many times before. Here are a few related
posts:
Bernanke, Yellen, Larry Summers, and most of mainstream media has everyone
convinced that lack of inflation is a problem.
The inflationists insist prices must go up, whereas technology and free
trade suggest prices should fall.
Middle Class Shrinks – Blame Central Banks
Central banks are the key reason the middle class is shrinking: See Middle Class Shrinks in 203 of 229 Metropolitan Areas.
@Steen_Jakobsen
Quote of the Day from Jakobsen: "People are smarter than Central Banks.
The banks should do nothing. They should go away"
— Mike Shedlock (@MishGEA) May 18, 2016
Mike “Mish” Shedlock
