We are increasingly convinced that monetary stimulus is verging on pointless in the West. There is no point in shovelling money at people who shouldn’t be borrowing, while scaring the living daylights out of everyone trying to produce a retirement income from their assets.
But it looks like it might also be totally pointless in China.
In my interview with Paul Hodges, he noted that “back in 2007, for example, every dollar of lending gave you about 83 cents of GDP growth. So, not great –you are destroying value. But, you know, you can probably live with it. By 2013, that dollar is only getting you 17 cents of GDP growth.” That’s pretty epic value destruction.
It is backed up by data from the Beige Book (see my last post) which notes that as its data has shown for over two years, “monetary stimulus does not work as intended in an environment where financial intermediation is poor and most firms simply don’t wish to borrow (or spend)”.
Interest rates have recently “dropped considerably, at banks and shadow financials as well as in terms of bond yields”. Non-bank (“shadow”) interest-rate charges have dropped more than 200 basis points in six months. “Yet the result was still a downtick in the share of firms that accessed capital – as well as those that sought to do so – tying the lowest levels we have recorded in our survey.”
There is a clamour of voices demanding that China cuts rates to kick-start recovery, but the truth is that “monetary policy is not the solution to China’s slowing growth; it may have already reached the point of pushing on a string”.
Same here. And in the US. It’s time for something else.