In the aftermath of recent hawkish jawboning by central bankers around the globe, and especially FOMC members who now appear set to hike even if only to just spite momentum chasing market algos by "shocking" easy liquidity conditions in tightening as Goldman suggested in May, SocGen's Kit Juckes asks a more existential question: channeling the eagles he wonder if we "Are we just prisoners here, of our own QE?" and points out that as a result of the $15 trillion in CB liquidity injections, the US is "sort of" stuck in a 1990s-style Japanese "lost decade" and the impact on the global economy has been minimal yet "we've all seen the political consequences." As a result, he blasts any idea that the ECB will be able to exit its own "Hotel California" any time soon if ever:
I meet a lot of people while I talk to clients who think the ECB simply won’t be able to escape its current policy setting because a stronger currency is too damaging. I think they’ll try, both to contain the currency, and to exit QE, because pressure within the ECN demands it, and practicality demands that they slow down.
Luckily, thanks to Bullard's guidance from last week, we already know that when the exit attempt fails, and leads to a sever recession, the Fed and central banks will have no choice but to unleash even more QE, and so back to square one.
Here is the key excerpt from his morning note:
I was tidying up at home and ran into a copy of International Economy from the summer of 2009, which featured 31 interviews of economists answering the question ‘is America economically headed for a 1990s-style Japanese “lost decade” of stagnant growth?’ I thought the best observations were that the US entered the current cycle with a savings rate that was far too low (Bacon), and that a zero interest rate equilibrium isn’t conducive to innovation (Mann). The answer 8 years on though, is ‘sort of’. GDP growth has averaged 2%, ¾% per annum slower than in 2000-2007, and real wages have grown by 0.6% per annum, compared to 1.3% in the earlier period. We’ve all see the political consequences.
Apart from being a good read on a day whose economic highlight is apparently going to the FOMC Minutes at 7pm BST, what strikes me, looking back to the immediate post-crisis analysis, is that while several people understood by then that the recessions which follow a financial crisis tend to linger (‘This Time is Different’ was published on September 1 2009), the idea that we could be trapped by zero/low rates(and then by QE) was not yet fashionable. And it’s very relevant now, as the ECB ponders how to taper its bond purchases without causing trouble for Europe’s bond markets and without sending the euro higher. I meet a lot of people while I talk to clients who think the ECB simply won’t be able to escape its current policy setting because a stronger currency is too damaging. I think they’ll try, both to contain the currency, and to exit QE, because pressure within the ECN demands it, and practicality demands that they slow down. The thought the ECB will resist pressure though, is still leading many to look at the way EUR/USD has out-performed the tightening in EUR/USD, and look for cheaper levels to buy Euro. There’s sense in that, but if we break 1.14 in these quiet markets, the danger is that we see another spike higher.
Source: SocGen