It is always good to know that my concern about the irrationality of stack markets is shared, and today the IMF has made clear its concerns, laying on the towel very thickly to make it clear just how worried it is. In a report issued to coincide with what would have been Davos, but isn't, it said:
While there is for now no alternative to continued monetary policy support, there are legitimate concerns around excessive risk-taking and market exuberance. This situation creates a difficult dilemma for policymakers. They need to keep financial conditions easy to provide a bridge to vaccines and to the economic recovery. But they also need to safeguard the financial system against unintended consequences of their policies, while remaining in line with their mandates.
Translated, that means QE is going to continue, but the IMF is well aware that there are very real risks in markets. This is, of course, precisely my motivation in discussing alternative bond investment structures this week.
The IMF added:
With investors betting on persistent policy backstop, a sense of complacency appears to be permeating markets; coupled with apparent uniform investor views, this raises the risk of a market correction or “repricing.” A sharp, sudden asset-price correction–for example, as a result of a persistent increase in interest rates–would cause a tightening of financial conditions. This could interact with existing financial vulnerabilities, creating knock-on effects on confidence and jeopardizing macro-financial stability.
Again, to de-jargonise this, what they are saying is that if interest rates do ever rise there could be a major financial crash as it becomes apparent that the current stock market bubble is nothing more than a bit of financial engineering in response to low interest rates that has no real value behind it, with which suggestion I would completely agree.
So what to do to prevent this? The IMF says:
Policymakers need to use this time to safeguard financial stability by employing macroprudential measures (for example, stricter supervisory and macroprudential oversight, including targeted stress tests at banks and prudential tools for highly levered borrowers) and developing new tools as needed. For example, policymakers are considering whether the macroprudential framework for nonbank financial institutions may need to be strengthened to address weaknesses that became apparent during the March turmoil.
That is also just jargon. Basically, it means require banks to increase capital, reduce stressful loan books, and pray.
Alternatively, as I have suggested, come up with new models that reduce the need for QE and take excessive cash balances out of the market altogether whilst providing funding for the Green New Deal. Now, which of those looks and feels better?
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What will crash markets will be the threat of inflation as central banks will have to let the term structure of interest rates rise and limit flow of money.. the asset class that has most to lose with rising inflation and interest rates is Government Bonds (and assets which use low discount rate indefinitely so tech as well) Theyhave a long way to fall.. indeed you are proposing to launch long dates pseudo gilts at the back of a 30 bull market in bonds.. and you think they are low risk!!! Not in terms of mark to market or purchasing power, they are very risky
I am offering a fixed interest deposit
Tell me where the downside risk apart from inflation is?
Tell me too where this inflation might come from?
Gilts are risky….. but riskier than equities?
No, because their risk is predictable
There’s an interesting article about Gamestop today. Gamestop is an ailing American bricks and mortar video games business that plans to close 450 shops this year. However it’s not ailing when it comes to its share price. Amateur investors, organised on reddit, have started treating this stock as a kind of Bitcoin. Institutional investors attempted to short the stock but have been left frustrated as the amateurs keep piling money in to it which is creating a temporary (?) virtuous circle as the stock keeps going up as more money piles in. https://www.theguardian.com/business/2021/jan/27/gamestop-stock-market-retail-wall-street
It seems like a ponzi-like scheme destined to crash to my mind.
It also seems emblematic of the stock market as a whole which has little reflected real world impacts over this last year. There’s definitely an absolute glut of money with few clearly good options for investing it.
Someone will be left carrying the empty parcel when the music stops
Yep – just like in 2008!
Indeed, the idea is the Redditors are bankrupting the hedge funds by buying up the stock they’re shorting making the price go way, way above anything they’d ever envisaged having to buy it back for. Crowdshorting, the technique’s become known as, and it’s spreading. A welcome enterprise, I’d say. However, some are counting the minutes till the hedgefunders lean on their political mouthpieces to get the practice outlawed. That could still be a good thing if it exposes how rigged the game is and in whose interests. Nonsense like shorting and naked shorting will only end when enough people get mad about it and they won’t do that while they have no idea about it. It’s great this is getting MSM coverage.
I hope some innocent people aren’t hurt
But stock lending and shorting have always struck me as highly abusive so in principle drawing attention to it makes sense to me – if it is then acted against
Yes – come on Gene – let’s see you cards!
“funding for the Green New Deal”
Could you give an indication of how much you have personally invested in these wonderful new green energies? As a sign of your confidence in them? It would seem odd if your wealth were tied up, useless in bricks and mortar when there is apparently something so much more socially useful that could be done with the money.
I am creating the means to deliver that investment
I’m not so sure about a financial crisis. The banks are awash with deposits, so they have no problem settling with other banks. The freezing of the interbank market is what did for the banks last time round, banks could not borrow on overnight markets. Right now I doubt any bank needs to borrow at all. Bank runs are unlikely and even if they do happen the central banks are more ready and able to help following the 2008 aftermath.
The markets are frothy but only reflect all the excess money sloshing around since QE. Faced with almost zero rate savings accounts at banks and building societies many have opted to go for shares instead. Yields are anywhere from 2-7 % ,much better than the paltry 0.1% to 1 % You will get either investing in a instant or fixed rate saving account, so the decision is perfectly rational. No one will be increasing interest rate any time soon so I cannot see what the IMF is worried about there either.
Besides when has the IMF been right about anything?. As world institutions go this one has to be up there in sheer ignorance of economic matters and having a proven record of imposing the worst suffering on the poorer inhabitants of planet known to mankind.
Sorry Vince, but I really think you are missing the point
Their worry is extremely well placed and there is a herd mentality in denial – and it looks like you are one of them
Well its just an opinion on how the current system works, I’m not saying I like the set up, I certainly do not condone it all. Equality is worsening because of it, so I fully see the worry, but not enough people care or understand that there are options here. You have to say that there is incredible effort and resources used to keep this rigged system going. And keep going it will, unless we make a concerted effort to stop it and create something better. Vested interest make a good argument for not tampering with it.
Which is what you and other MMTers are trying to address.
But one thing is for sure the IMF never cared for a better, more equal global economy.
I think the IMF is changing
I always presume it possible
There are one or two voices in there trying to do better, Lagarde seems to have had some good effect. Most significant they actually pleaded guilty to acting incorrectly in the past re scandalous and ruinous austerity rules they placed on stressed govts. The damage they caused was unacceptable. It has lost credibility in many parts of the less well off world because of that. It has a huge task to make up for that.
Accepted
First thing this morning I picked up the newly arrived March edition of Prospect Magazine from the doormat , and read a short article by one Nicholas Macpherson, sometime Treasury Permanent Secretary, entitled “In Praise of Lost causes – Austerity”, with the strapline “Free money is in vogue, but there is no such thing “.
Mr Macpherson writes
“The case for fiscal rectitude remains as strong as ever…….the UK has to rely on the kindness of strangers, as Mark Carney put it, to finance deficits. Foreign investors own a little under 30 percent of Britain’s debt. Lose their confidence and we have a problem……the government should be careful. …….When [interest rates rise] ……the consequences could be painful. In the end expenditure has to be paid for.
In other words, to retain the “confidence” of the money markets, we must stop, in Mr M’s exact words, our “profligate interventions.”
Then about an hour later, I pick up my tablet and read the Guardian article about the IMF report you refer to, Richard, and this is headlined
“Keep Covid rescue programmes or risk triggering stock market crash, warns IMF”.
Which I understand to mean that in order to retain the confidence of the money markets, we must keep on with our profligate interventions.
You would have to have a heart of stone not to laugh, but I confess to being a little confused by this contradictory advice. Any guidance you may have to offer would be appreciated.
I hoped what I have posted just now is some answer to that
There are massive ideological differences in play
https://www.prospectmagazine.co.uk/magazine/in-defence-of-austerity-recession-debt-deficit-treasury
A classic statement of “the Treasury view” — against which Keynes was arguing more than ninety years ago!
Former Treasury person Macpherson states, “[T]he UK has to rely on the kindness of strangers, as former governor Mark Carney once put it, to finance deficits. Foreign investors own a little under 30 per cent of Britain’s debt. Lose their confidence and we have a problem.”
Could it be that those foreign investors own 30 percent of Britain’s debt because they’ve sold a lot of goods to the UK for which they were paid in pounds, and they prefer to be paid interest on their sterling holdings?
Macpherson writes, “Interest rates are unlikely to rise soon.” True — and who is it that sets interest rates? Doesn’t the Bank of England have the target interest rate under its control?
Macpherson sums up, “The PM may not like the term “austerity.” But in the end, expenditure has to be paid for.” The UK is monetarily sovereign. Its government can pay for any goods and services that are available for sale in sterling. The real question — especially post-Brexit and during COVID — is whether Britain has the real resources to produce the goods and services needed by the populace?
It’s so crass it’s sickening
How much are we owed by other nations? Surely the 30% we (allegedly) owe has to be looked at in context…
Not as much…
Like the US, we are a reserve currency
Agreed about the IMF – and Strauss-Khan did not exactly help matters either – what a disappointment – very capable but just what we didn’t need – another liberal who can’t keep his flies done up.
Had Khan not got himself into such a mess, I wonder what might have happened post 2008 – maybe a stronger response to the Credit Crunch?
Dear Richard, A month or so ago you I believe you told me that there had been no government bonds issued in 2020 , and government expenditure was being financed by the capital balance at the BoE. I see that Bonds have been issued, and for instance in this article https://www.ft.com/content/24b5a235-cbfd-412a-98b3-1fed533af027 the numbers are laid out. Did I misunderstand waht you were saying? Thanks
I said no net government bonds – in other words, all that had been issued had effectively been funded by the Bank of England or redemption proceeds. That is true.
How much is this a repeat of last time, with QE money being pumped into existing assets rather than into genuine investment that might create new jobs, tackle climate change and address real world problems. Those pumped up assets prices are unlikely to be sustainable and in the case of much commercial property in cities seem destined for a serious crash.
The financial markets seem locked into thinking that things will revert to what they were before.
They won’t…
Hence the need for thinking beyond QE, which is what I am trying to do when so few seem to be
You finish by mentioning the Green New Deal, Richard, and so I thought you might be interested in this clip of AOC talking to about Biden’s latest climate announcements on ‘All In’ with Chris Hayes on MSNBC last evening.
https://www.msnbc.com/all-in/watch/aoc-i-m-extraordinarily-encouraged-by-biden-s-climate-executive-actions-100133445634
While there it’s also worth watching the second clip where AOC talks about how the Republican Party of the current congress has changed from the previous congress (i.e. before Biden was sworn in) when it was simply in fealty to Trump. What we now have is much worse, as she explains so well:
https://www.msnbc.com/all-in/watch/aoc-there-are-legitimate-white-supremacist-sympathizers-at-core-of-house-gop-100131909634
Scary stuff Ivan
And I fear she is right
Well as I said, at least you are having a go.
And what is becoming more evident to me from your efforts is that you are revealing exactly whose interests current investment practice is aimed at and the few it actually benefits.
It’s been wonderful watching reaction on this thread of those who represent vested interests and talk about the benefits of ‘competition’ except when of course it is perceived to threaten the trough they have their noses in.
It shows just how badly investment culture and practice is set up – to exclude Government and the people and be exclusive to the private sector only and ‘financial specialists’.
We are not constrained by ‘our’ imagination at all; rather we are constrained by market bias, private sector monopoly instincts and their yields.
I am confused about this too. MMT says that government spending creates money and taxes destroy it? Commercial banks issue credit as agents of the state, which has value because the banks hold reserves with the Bank of England that can be used to pay taxes. So if share prices fall, there is no change in money in the system: when prices were high, people transferred money from one bank account to another in exchange for a number of stocks. As prices fall, all that means is people who previously sold the shares are now only willing to transfer a smaller amount of money in exchange for a stock. The money is still there.
So the question then is why would people be unwilling to exchange as much money for stocks. This would come about either because the government is withdrawing money from the system, by requiring people pay more tax: if an investor has less money as taxes have gone up, then they will have less to spend on stocks; or, it is because they can get a better risk-weighted return elsewhere. This would happen if interest rates go up. But MMT also says that interest rates are more likely to cause inflation than counter it. Inflation has fallen dramatically in recent years and even further in 2020, and higher interest rates would definitely affect the ability of companies to borrow, and people to service mortgage charges. So there is no way interest rates are going up soon, which means inflation won’t rise soon either. Inflation could be triggered by a major supply-side shock, which might (wrongly) encourage central banks to put up rates. What would that supply-side shock be? Oil prices are very low, economic demand is massively supressed and will continue to be so for a long time to come.
So that then only leaves rising taxes as the risk (reduced government spending generally only directly affects poor people who don’t own financial assets). I agree taxes may go up a little, and that could cause some stock prices to adjust. But can we really see neoliberal governments in the US and UK raising taxes enough to crash the stock market? I don’t see it. In 2008 the financial crash was caused by private debt-fuelled speculation in US house prices, which escalated far beyond levels providing a reasonable return on investment, and leveraging that debt to create more private debt, and it happened in a world with higher interest rates and before QE was really invented. Today shareprice:earning ratios and house prices are perfectly reasonable in a zero interest rate world. Companies like Amazon do provide an incredible service, and whilst there should be much greater competition and taxation of their profits, there is plenty of scope for new technologies to come along and for existing techs to enter new geographic markets as poorer countries hopefully catch up with rich ones.
I would have thought applying MMT to the stock market suggests most of it is not overvalued as a whole (accepting some oil companies are on the way out, and those who fail to build climate change into their balance sheets). I completely agree with almost all of this blog, but I am yet to be convinced on this one.
The reason why shares are overvalued is because of the risks in the underlying economy that mean the government may dec ide not to bail out businesses that are core to government plans – which not all are
So the risk is from corporate failure which the IMF thinks under anticipated with shares over valued as a result, with that trend exacerbated by low interest rates forcing share values up
MMT is good, but it cannot address external shocks. Corporate failures are external shocks and the risk is real, especially if governments buy the idea of zombie corporations (which they might as the right wing loves the idea)
“While there is for now no alternative to continued monetary policy support”
Hmmm? No alternative? How about ceasing monetary support (stop buying bonds from the private sector) and lets indulge in a bit of OMF funded fiscal policy instead?
But we can’t. We’ve pimped the stock market to dangerous levels and we can’t allow any inflation at all because we have no way to deal with it.
I suppose we could do what the Fed did and reassure Wall St that even if inflation rises significantly, we will do nothing about it.
A interesting volte face if ever there was one. Suddenly, the big 70s bogeyman doesn’t matter when their friends money is on the line.
Is there a way to safely deflate stock prices without causing a rout ?
And if there were to be a rout, would we care?
After the GFC the only thing that affected my day-to-day was the Austerity, not the S&P.
MMT can also pimp stock exchanges – it does run deficits after all, and that means there are savings and so the outcome is the same
@Wilson Logan
You say we cant do OMF because “We’ve pimped the stock market to dangerous levels and we can’t allow any inflation at all because we have no way to deal with it. “.
Could you unpack and explain please.
Actually that is precisely why the IMF is saying we have to do
Should that be “….precisely what….” ?