(The opinions expressed here are those of the author, a
columnist for Reuters)
By James Saft
Oct 10 Monetary policy in developed markets like
Japan and Europe is failing, and faltering in the U.S., in
substantial part because globalization has altered how
investment is made and where.
The upshot is that fiscal stimulus is the next magic bullet
of choice in the slow-motion older economies, but one which may
misfire or miss the mark.
One of the huge puzzles of the long, shallow recovery is why
capital investment in the large economies no longer responds
with vigor to cuts in interest rates or other newer tactics like
In years past if a central bank like the Federal Reserve cut
interest rates, domestic businesses would respond by bringing
forward and increasing capital expenditure, investing in new
capacity to take advantage of newly cheap borrowing terms. Now,
rates are in negative territory or barely above zero in huge
swaths of the global economy, yet investment remains low and
relatively unresponsive to traditional or extraordinary monetary
Yet, central bankers in developed markets are implying, both
in word and deed, that they will stick with and even increase
their bets on extraordinary policy.
"We could be stuck in a new longer-run equilibrium
characterized by sluggish growth and recurrent reliance on
unconventional monetary policy," Fed Vice Chair Stanley Fischer
said last week.
From the Bank of Japan now seeking to control long-term
rates while pinning short-term ones to a massive Fed balance
sheet which even it implies is a fixture rather than an
emergency measure, signs are plentiful that, having seen little
benefit from monetary policy, central banks, like the man with
the hammer, will continue to treat screws like nails.
The reason this isn't working is that while central banks
can make borrowing in their markets more attractive, they can
only do little about the attractions of investing there.
"Developed economies could be in a liquidity trap not only
because interest rates are close to zero, but because of the
changed nature of where capital expenditures are taking place
now in a globalizing world," Stephen Jen and Fatih Yilmaz of
hedge fund Eurizon SLJ Capital write in a note to clients.
It isn't simply that near the zero lower bound for interest
rates, further moves bring diminishing or negative returns. It
is also that for those agents who want to invest, the way the
global economy is organized now makes it both easier and very
likely more productive to put the money to work not in sclerotic
aging economies but in emerging markets.
WHY INVEST IN JAPAN? OR EUROPE?
This means that low rates have a lower impact on capital
expenditure than once they would have, a point supported by the
historically high ratios of corporate cash to investment or
profits to investment.
Japan's experience with Abenomics backs this up. While the
theory was that Japan would cheapen the yen and corporations
would take the profits and increase production and employment,
the reality was different. Why invest in Japan, which is aging,
instead of lower-cost locations closer to future demand?
In addition a long-running deindustrialization in developed
economies mean there is simply a smaller base of manufacturers
to take up the offer of cheap loans. And the services which have
grown up to fill the gap are less capital-intensive and more
reliant on intangibles like intellectual property.
The U.S. and euro zone have had a similar, though less
extreme, experience to Japan's.
"Since monetary stimulus has reached its limitations, there
will logically be a shift toward fiscal stimulus, and that is
indeed what we expect to see in the coming quarters, especially
in Japan, the UK and the US," Jen and Yilmaz write.
The risk with this line of thinking is that fiscal stimulus
may face some of the same problems as monetary in stimulating
growth in a globalized and aging world. A dollar of highway
spending in the U.S. of 1970 offered benefit to a much broader
industrial base than the same dollar spent today. And in aging
economies not only is a dollar borrowed and invested in fiscal
stimulus facing the same demographic constraints as one borrowed
and spent by industry, it piles a larger debt up which will need
to be serviced by a narrower working cohort later.
This is not to say that infrastructure investing isn't
needed, but that all forms of investment in developed economies
may garner less bang for a given buck than in the past.
One irony, of course, is that just as central banks struggle
under constraints due to globalization, political forces may
conspire to roll back its power. From Brexit to Trump and
Clinton's varyingly tough talk on trade deals, we might see a
less globalized world.
That would restore some power to monetary policy but only by
wrecking economic growth in the process.
(Editing by James Dalgleish)