What’s the latest on the coronavirus? The US market had a nice bounce yesterday, but that, it seems, was as much to do with investors being relieved that Joe Biden rather than Bernie Sanders will be going up against Donald Trump in November 2020.
As I keep saying, all politics is local and outsiders are not very good at grasping the nuances. So I won’t comment any further on US politics. (But it wouldn’t surprise me if everyone gets the collywobbles again next time Sanders sees a poll flip in his favour.)
Anyway – central banks are starting to join the party that the Federal Reserve kicked off. Canada cut interest rates yesterday too. But can they really do very much? And if not, who can?
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Central banks can’t do much with standard rate cuts alone
It’s clear that central bankers are now back in “cutting” mode. Interest rates aren’t going higher any time soon. The European Central Bank is expected to cut soon. So is the Bank of England (maybe around the time of next week’s budget).
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Investors have grown used to instinctively buying when central banks step in. It’s the “central bank put” – the idea that they act like a giant insurance policy, keeping markets from falling too fast or far.
The problem is, rates are now so low in most countries that simply cutting rates can’t deliver much traction, certainly not to the “real” economy. The US is best placed, because mortgage rates there still have room to fall. And even in the UK, it’d be quite possible for mortgages to get a bit cheaper – at that scale, every little helps.
But beyond that, making borrowing cheaper is not going to inspire companies to get out there and invest in the face of a massive demand shock, particularly when they haven’t exactly been itching to do so in any case. (Oh and it also doesn’t help with one of the central political problems of our era – unaffordable house prices. It’ll probably just exacerbate that problem.)
So if companies aren’t going to invest and consumers aren’t likely to go on a mad spending spree, what happens then? Well, that’s where governments come in (accompanied by “experimental” monetary policy).
Why big spending wasn’t seen as an option post-2008
After the financial crisis, we had lots of debates and arguments about whether or not it made sense for governments to embark on pseudo-Keynesian spending sprees. I can tell you that I was not in favour of it, but I wasn’t in favour of much that was done at that point, including quantitative easing (QE), bailing out the banks and all the rest of it.
The point is, back then, whatever the rights and wrongs of the case, the political consensus was that we’d had a private debt crisis that was in serious danger of morphing into a public debt crisis (because countries had put their balance sheets on the line to bail out their banking sectors). As a result, it was very risky for governments to stand up and say: “Oh we’re going to spend a load of money on digging a big pit and then filling it back in again.”
And we’ll never know the counterfactual. Having had a decade of ever-growing debt and higher-than-usual annual deficits, about which the bond market apparently cares not a jot, it’s easy to argue that deficits don’t matter. In the wake of 2008 and at a time when several eurozone countries genuinely were at risk of defaulting, it didn’t seem as obvious.
Today, it’s different, precisely because of the past decade. We’ve seen that it apparently doesn’t matter how much money a central bank prints. We’ve seen that it doesn’t matter what the central bank buys. (I mean, how much of the Japanese stockmarket is now owned by the Bank of Japan? I lose track.) We’ve seen that inflation is apparently as dead as a doornail.
So who cares? Fiscal prudence is for wimps. That’s shaped our politics too. Donald Trump and Boris Johnson have a lot less in common than Johnson’s detractors like to pretend. But one thing is certainly true – they are both in favour of spending money and making grand gestures and not worrying at all about debt levels.
The politics have changed – expect fireworks
So what can you expect? I think the Budget is one to watch out for this year. I was already expecting a “feel good” Budget and now that we’ve got coronavirus to contend with too, there really has to be something to cheer in there, or it’s all going to be a bit of a damp squib.
Chris Giles in the FT reports that Andrew Bailey, the incoming boss of the Bank of England, told politicians yesterday that it is very likely that the central bank will need to “provide some supply chain financing” to help out small and medium-sized businesses that are hit in the short term by the coronavirus outbreak.
He also said, interestingly, on the topic of central bank independence: “we must act in a co-ordinated manner [with the government] and can’t let our independence get in the way of that.”
I’ve always viewed independence as a somewhat pointless fig leaf but that’s the first time I’ve seen it brushed aside (so to speak) quite so openly. QE for the people? It’s not here yet, but it
