Central bankers to governments: it’s time to spend, spend, spend

Janet Yellen, boss of the US Federal Reserve, made her big speech at Jackson Hole on Friday.

Markets had been waiting all week. And, naturally, she didn't say much of any specific use. The US economy is looking pretty healthy, she said. But the Fed remains "data-dependent", and there's no obvious point at which rates will rise.

Pretty much as expected. Non-committal, with more than enough wiggle room to avoid any rate rises if she can possibly help it.

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But a much more important message for investors came through loud and clear from her fellow central bankers: "We can't keep doing this on our own"

The fine line between fiscal and monetary policy

Central banks are in charge of monetary policy. You can think of that as the "backdrop" to the economy. They tweak interest rates to make the economy go slower or faster (it doesn't really work like that at all, of course, because the economy isn't an engine but that's what the idea is).

Governments are in charge of fiscal policy. That's because fiscal policy is political. It's all about who gets what. It's about taking money from certain groups or priorities and funnelling it towards others: tax cuts, infrastructure spending, higher unemployment benefits whatever. Those choices are things we're broadly meant to agree on as a society, and that's why they're in the hands of our elected representatives.

Of course, these two things are not distinct. Monetary policy is distributional as well. If you cut interest rates, then people with mortgages benefit at the expense of those with savings. But it's not too controversial because we all know that's how it works.

Where it starts getting a lot trickier is when you get into the weeds of something like quantitative easing (QE). That's a more radical policy measure and it has more radical effects. No one entirely agrees on exactly what QE does, but it does seem to boost the price of assets.

The majority of assets are owned by those who are already wealthy. So you're giving money to the wealthy while pricing those assets out of the reach of those who aren't (check out the global housing market if you want to see a very clear example of this and the social consequences in action).

That's fiscal policy and a pretty regressive one by anyone's standards being enacted under the guise of monetary policy. To their credit (and I don't often say that about central bankers), central bankers are aware of this and they seem to be pretty squeamish about the idea of stretching their mandate much further.

And that's why, as Howard Schneider notes on Reuters, they're asking for help from "their colleagues in the rest of government".

Central bankers: "give us a hand here"

Bank of Japan boss Haruhiko Kuroda wants Japan to become more open to immigration. Yellen, notes Schneider, "devoted the final page of her keynote talk to a list of fiscal and structural policies she feels would help the economy".

Meanwhile, Princeton University economist Christopher Sims argued that if governments want to convince populations to spend, then they have to persuade them that inflation is set to take off.

That might require "a massive program, large enough even to shock taxpayers into a different, inflationary view of the future." Apparently "it requires deficits aimed at, and conditioned on, generating inflation. The deficits must be seen as financed by future inflation, not future taxes or spending cuts."

In other words, the government has to throw caution to the winds and spend, spend, spend.

Now, I don't know about you, but that doesn't sound like a difficult sales pitch to make. A bit like telling a small child that before they even think about tidying their room, it's absolutely critical for them to eat as much ice cream as they possibly can.

In short, it seems hard to imagine that governments won't take up this offer.

What does that mean? Well, it's all grist to the mill for the argument that inflation will end up taking off, one way or the other. It's also another reason to be concerned about the ultimate fate of the bond bubble.

If governments are going to abandon any pretence of austerity and issue more bonds with the specific aim of producing inflation the great bond killer to wipe out the value of that debt, then you have to wonder who would be mad enough to hold bonds.

I'm sure we'll find out soon enough. But it's certainly another argument to be keeping an eye on gold and gold miners. In this week's issue of MoneyWeek magazine, Dominic Frisby takes a look at how they've performed this year and ask what's next for the sector.

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