Millennial Macro

Given enough time has a past since the BOJ really began to push the envelop in terms of unorthodox aggressive monetary experimentation, the following post uses Bernanke's recent speech ( Some reflections on Japanese monetary policy ) as a jumping off point to review developments in Japan.  Seeing as Japan could be a precursor for what may be yet to come in the rest of the developed world that still struggles with subpar growth, low interest rates, and a lack of inflation, the BOJ's monetary evolution bears watching. 

The May 2016 post, The Dollar and Treasury Yields in Limbo: Three Possible Scenarios , sought to work through potential scenarios involving the US dollar and treasury yield curve.  The three possible outcomes were: 1)  Global Reflation and Currency Convergence The 10 year yield breaks above 2% and tests 2.5% or greater. The dollar index definitively loses $93 support in a downtrend that marking $100 as at least an intermediate term top. 2).  US growth rebounds relative to the rest of the world The 10 year yield remains near the current range or breaks below 1.55%. The dollar either continues to consolidate between $100 and $93 or trades above $100. 3).  Risk aversion and Panic The 10 year yield trades below 1.55% as it trends towards the 2015 low of sub 1.4%. The dollar index remains range bound or breaks $93 support in a correction before resuming the prior uptrend. Although 2016 began with a fit of risk aversion, once this mood past the trend for ...

Global Trumpism  could have been avoided.  An economy has three broad sources of demand that enable the expansion of aggregate sales (nominal GDP) on domestically produced goods and services.* Domestic private sector (households and corporations) consumption and investment spending Public sector expenditure (which recycles income back to the non-government sectors) Foreign sector purchases (exports to foreign domiciled agents/entities) Aggregate expenditure is funded by: Domestic private sector dissavings in the form of leverage (debt issuance and/or asset sales ), equity issuance, or spending out of existing income Public sector debt issuance, asset sales, and taxes Foreign sector leverage, equity issuance, or spending out of existing income

From the September post, With that said, the dollar's role is the dominant factor in the FX markets as expectations pertaining to the path of Fed policy and by extension real interest rate differentials both influence proceedings globally.  As markets begin to strongly anticipate at least one rate hike in the final months of 2016, it may be worth revisiting the price action in the US treasury bond and FX markets that occurred prior to the December 2015 hike.  By October 2015, treasury bonds began to sell off violently as the dollar started to surge against a broad range of currencies.  Although the dollar and the treasury rate rise eventually did reverse while risk assets bounced back for much of 2016 (see February , May , May  market commentaries), as mentioned too many times already (apologies) the troubling deceleration in NGDP and RGDP has not.

In the event that lower labor and regulatory costs* abroad cause domestic companies to relocate their operations and this results in lower expected and realized economic activity, what would we expect to see domestically? A lower neutral rate An underutilization of labor and capital  Deficient aggregate investment and demand Subdued inflation as firms lack pricing power due to weak NGDP Expectations of a more gradual path for monetary policy Fiscal space as the private sector does not fully make use of all the national economy's available resources

Companies Get Paid to Be Junk in Europe "Yields plunged. Corporate-bond sales ballooned. Values became utterly distorted.  Investors are now literally  paying European companies to borrow . Sanofi, a French drugmaker, just became the first nonfinancial private company to issue debt that yields less than zero, according to Bloomberg News. Henkel, a German household products maker, quickly followed suit." "European central bankers don't seem too worried about these distortions. In fact, they seem eager to see those animal spirits return to generate growth. The ECB is considering  expanding its program , possibly to new asset classes.   The ECB may end up getting too much of what it wants. The Bank of America strategists warn against a rapid rise in leverage" "In the meantime, European central bankers seem to have created an Alice-in-Wonderland credit market that's infecting the rest of the world. It's sending investors into emer...

Helicopter Money: Or How I Stopped Worrying and Love Fiscal-Monetary Cooperation "During private deleveraging cycles monetary policy will largely be ineffective if it is aimed at stimulating private credit demand.  What matters is not monetary stimulus per se, but whether monetary stimulus is paired with fiscal stimulus (otherwise known as helicopter money) and whether  monetary policy is communicated in a way that helps the fiscal authority maintain stimulus for as long as private deleveraging continues . Fiscal dominance and central bank independence come in secular cycles and mirror secular private leveraging and deleveraging cycles, respectively. As long as there will be secular debt cycles, central bank independence will be a station, not a final destination." Out of Many, One? Household Debt, Redistribution and Monetary Policy during the Economic Slump* One could, indeed, go further and regard the financial position of firms and households more generally as a po...