The central banks' reindeer moment

The central banks can no more use quantitative easing to raise prices than Domino's can use reindeers to deliver pizzas, says Merryn Somerset Webb.

Bad news for Domino's Pizza in Japan. The firm decided to celebrate Christmas in Hokkaido where very heavy snow is forecast this year by having its pizzas delivered by reindeer. It hasn't quite worked out as planned. The animals keep wandering off the roads into fields (they prefer to walk on grass and snow) and, according to the Japan Times, they simply cannot be trained to "stop in front of a customer's house". What seemed like a good idea (use an animal that is supposed to be good in snow to deliver in snowy times) just isn't working out quite as planned: Domino's is replacing the real reindeer with "reindeer-themed scooters."

The world's central bankers will sympathise: they too have had a problem (no inflation). They too have found a tool that looks like the perfect solution (super-loose monetary policy). And finally they too have found that it just doesn't work as they thought it would: the world hasn't seen much real deflation since 2008 but endless rounds of QE haven't given us much in the way of growth or inflation either.

So much so that this week the Japanese government have effectively admitted failure in their attempts to create inflation: from 2021, state pension payments will fall if wages and prices fall (rather than just rise if they rise). At the same time central banks everywhere (and in the US and the UK in particular) have started to agitate for fiscal authorities to take over the reflation effort.

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This will be one of the themes of 2017: fiscal policy becoming the reindeer-themed scooter of global economic management and the return of inflation that could bring. Will it work? Investors seem to think so (markets have soared since Trump was elected). In the US at least they might be right.

Trump is planning to aggressively cut taxes; to push through new state spending, particularly in infrastructure; and to deregulate various industries. We will probably never know if it will add up to his promised $1trn or not (there'll be overlap and much of it will unmeasurable). But coming into an economy already operating near capacity in terms of employment at least, it will certainly make a difference.

Does that mean you should buy US stocks? Before you do, it is worth remembering two things. First the US market is already expensive, and second corporate profits tend to go down as wages and interest rates go up (both things that will happen if Trump's fiscal stimulus works).

Instead, if you are thinking about where to put money next year, you might look to China (see Rupert Foster's take on this in our cover story), Japan which the rest of the investing world is now joining us in loving (the Topix benchmark is up by 20% since its mid-year low), or, a little down the size scale, some of the UK's more interesting venture capital trusts.

Merryn Somerset Webb

Merryn Somerset Webb started her career in Tokyo at public broadcaster NHK before becoming a Japanese equity broker at what was then Warburgs. She went on to work at SBC and UBS without moving from her desk in Kamiyacho (it was the age of mergers).

After five years in Japan she returned to work in the UK at Paribas. This soon became BNP Paribas. Again, no desk move was required. On leaving the City, Merryn helped The Week magazine with its City pages before becoming the launch editor of MoneyWeek in 2000 and taking on columns first in the Sunday Times and then in 2009 in the Financial Times

Twenty years on, MoneyWeek is the best-selling financial magazine in the UK. Merryn was its Editor in Chief until 2022. She is now a senior columnist at Bloomberg and host of the Merryn Talks Money podcast -  but still writes for Moneyweek monthly. 

Merryn is also is a non executive director of two investment trusts – BlackRock Throgmorton, and the Murray Income Investment Trust.