Cheap Money Revisited
As regular readers might remember, last year I did series of posts on financial capital and the control of long term interest rates. In particular I argued that a truly “Keynesian” policy would be the cheaper money policy pursued by Dalton as Chancellor from 1945-1947. This would involve using debt management techniques to hold down long term interest rates.
This culminated in a very, very, very long post. Essentially my point was that many economists misunderstand the savings/investment relationship and have forgotten the crucial insights of Keynes’ liquidity preference theory. There’ll be more blogging on this soon I’m afraid.
There was a lot of scepticism at the time about how possible this all was.
Well, just quickly, take a look at this new paper from the Fed. In particular this bit on the effects of the Fed’s purchases of US treasury bonds:
Contrary to long and widely held conventional wisdom, large asset purchases can affect long rates, both domestically and abroad. Monetary policy’s effect at the zero bound includes international channels. The reduction in foreign bond yields and the value of the USD might have stimulated the U.S. economy through export channels, for example. From an international perspective, study of the LSAP [Large Scale Asset Purchases] effects implies that central banks should coordinate their asset purchase policies to avoid contradictory or overly stimulative effects. (my emphasis)
Or try this piece from last week’s FT on the world’s shortage of safe assets.
What this means for investors is the premium on safety and liquidity should remain high. Yields on Treasuries, Bunds and gilts can remain at historically low levels. This view contrasts with mainstream orthodoxy that government yields must rise along with soaring debt-to-GDP ratios.
Next to benefit will be highly rated corporate debt with low historical default rates. The longer government yields remain low, the more likely spreads will compress on investment-grade corporate bonds. Liquidity and safety in emerging markets are improving yet yields remain attractive and the upside potential for currency appreciation is strong. This must continue if the global safe asset shortage is to be properly resolved. (my emphasis).
Or examine how Greece (Greece!) successfully manged to sell E1.6bn of bills last week, with a bid to cover ratio of over 3.5x, after deciding to issue six month bills rather than one year ones.
Maybe liquidity preference matters, maybe central banks and debt management authorities can set, or at least hold low, long term interest rates. If so, this requires a fundmental rethink of how we conduct both monetary policy and debt management policy.