The Colossal Failure Of Central Bank ‘Trickledown’

Submitted by Jeffrey Snider via Alhambra Investment Partners,

With global economic perceptions finally creeping toward financial perceptions (not stocks) despite the enormous and mostly ongoing “stimulus” almost everywhere, it is useful to review once more the assumed general mechanisms.

ABOOK Sept 2015 Japan BoJ1

Step 1 is really the most basic and traditional element of central banking, as liquidity, broadly speaking here, is currency elasticity in its more modern format. Increasing liquidity is supposed to lead to Step 2, more credit/debt. Step 2 flows to Step 3, which is (hopefully) the bulk of that debt “creating” some real economy “demand.” Step 4 is where spending (demand), even if concentrated in certain parts of the economy (redistribution), leads to more jobs and productive investment which broadens out (“trickle out”) the redistributionary flow to the rest.

For the most part, central banks (including the Fed) are stuck on Step 1 almost a decade later. There has been some flow to Step 2 (credit) but it’s abundantly clear that an enormous proportion of that debt elevation has yielded very little toward Step 3, intead a great deal in fostering asset price inflation. Even if you argue that Step 3 has been yielded into the real economy to some limited extent, it is beyond dispute that it hasn’t led to Step 4.

When economists speak of “clogged transmission channels” this is the receiver of that ire; how Step 1 can be so successful yet not transmute into Step 2 and beyond has left economists and monetary policymakers exasperated (and stuck within themselves). The wholesale monetary system, by contrast, isn’t so certain about even liquidity, meaning that there isn’t even any real evidence to suggest that Step 1 has been completed. The most direct evidence offered about liquidity is only that there hasn’t been another panic, but that is an exceedingly low standard to the point of irrelevance. If monetary theory is to do what it proclaims, that is nowhere near enough (especially as even that minimal capacity is highly questionable again this year).

A great deal of focus in central banking has been trying to go beyond Step 1, to induce some form of bank “reserves” to become the bedrock association of traded flow toward debt creation. The Japanese have been here for a quarter century, with nearly all of this century so far spent within some QE or another with that common intent. The results in the real economy particularly since QQE/QE10 have been disastrous.


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