John Pattullo, Co-Head of Strategic Fixed Income sowie Fondsmanager der Strategien Strategic Income und Global Dividend Income bei Janus Henderson Investors, sieht die globale Finanzkrise von 2008 nach wie vor nicht als beendet an, denn die meisten Länder haben heute mehr Schulden als vor 11 Jahren zu Beginn der Krise.
19.06.2019 | 09:20 Uhr
Nachdem
es durch QE nicht gelungen ist, nachhaltiges Wachstum zu generieren
oder die Inflationsrate zu erhöhen, verlagern sich die Bemühungen nun
auf verschiedene Formen der Fiskalpolitik. Pattullos Argumentation
zufolge verspricht nur eine aufeinander abgestimmte Verbindung von
Geldpolitik, Steuer- und Strukturreformen Erfolg.
Er stellt dazu Richard Koos Theorie der „Bilanzrezession“ den Positionen der Modern Monetary Theory gegenüber, insbesondere Koos Aussage, dass die Befürworter von MMT Recht haben, wenn sie argumentieren, dass es steuerliche Anreize braucht, um den Überschuss an Ersparnissen des Privatsektors aufzufangen - das jedoch nicht bedeute, dass es die Zentralbank selbst sein müsse, die den Stimulus direkt finanziert.
What crisis?
"Do you remember the Great Financial Crisis?“ Ahh — you mean the one we are still in…
It
is rather amusing that we sometimes get asked the above question. We
need to remind some clients that we are very much still in the crisis.
The
crisis happened for a number of reasons but primarily because of the
enormous amounts of debt raised by households, corporations and
governments. Hence, a lot of the economic ‘growth’ was financed by
increasing debt in an unsustainable way. Remember the ‘Great
Moderation’?1 Hmm…
Eleven years on, as the chart
demonstrates, the vast majority of countries have more debt than before
the crisis began — a few have managed to partially reduce their debt.
So, how on earth can the crisis be over?
Debt loads higher than pre-crisis
Source:
Thomson Reuters Datastream, BIS, Janus Henderson Investors, change in
aggregate debt, 2008 versus 2018, annual, as at 31 December 2018
Note: Aggregates for household, corporate and government
There
are no easy solutions to reducing too much debt. A number of options
are available, such as growth and inflation (which are hard to come by),
austerity, default and/or financial repression2 (more on this later). But the not so distant past may have lessons that can help.
Japanification alert!
It was back in 2011 that we started talking about Richard Koo’s balance sheet recession3
thesis. It is extraordinary how reading one book (The Holy Grail of
Macroeconomics: Lessons from Japan’s Great Recession, 2009) can
completely change your view on economics and the bond markets.
In
2009, he prophetically forecast that Europe would turn Japanese. We
have talked about this for years but it is only recently that our inbox
has become full of ‘Japanification’ articles on Europe. This backdrop
explains why we have maintained a much longer duration in our portfolios
for much of the time compared to many in our peer group, given our
rejection of mainstream conventional economics.
Rather bizarrely,
we are pleased to still get some push back on our views from the
(older) part of our client base, which means there is still money to be
made in bonds. Some of our clients remain short of duration or have
tried their luck diversifying into alternatives, away from quality, long
duration bonds. Most though, who are younger than me (49 in May —
urgh!), agree with our disinflationary outlook.
We feel that the
long-term secular drivers such as demographics, technology, excessive
debt and low productivity, will dominate and lead to lower global bond
yields. We doubt whether we can sustainably breakout into higher
inflation and growth but it does not mean that politicians, with a
democratic mandate, could try something completely different (more on
this later).
Wot no growth, wot no inflation?
Here’s the title slide from our 2013 UK New Year Conference presentation.
Our 2013 presentation cover — still relevant today?
Source: Janus Henderson Investors, January 2013
In
the presentation we highlighted how small the money multiplier could be
compared to the fiscal multiplier in a severely depressed economy. Our
message was that fiscal policy tools should be employed to restore
growth but there was no political will at the time for such measures.
The
Global Financial Crisis was no ordinary recession; this was a ‘balance
sheet’ recession whereby individuals and corporates changed their
behaviour towards borrowing and spending after the trauma of
experiencing negative equity. In such circumstances, lowering interest
rates does no good and policies focusing heavily on the monetary side
may not be effective, as we have seen.
Monetary policy broadly
became independent in the 1990s (in many countries) with the aim of
taking politics out of the business cycle. Keynesian fiscal expansion
was pretty much dismissed by conventional economists during this period
as being ineffective. As the dogmatic Maastricht Treaty removed the
possibility of fiscal expansion in Europe, the ‘one-clubbed golfer’ of
independent interest rates seemed to be the only policy tool.
While
it is true that quantitative easing (QE) has massively expanded the
monetary base, as Mr Koo demonstrates, it completely decoupled from the
growth in bank lending and money supply. We have definitely created
asset price inflation in Wall Street with no ‘trickle down’ effect into
Main Street. The palliative needed was something along the Koo Theory.
Koo Theory
In ‘Koo Theory’, the government needs to borrow all the
private sector surplus and redistribute via fiscal policy to stop the
economy shrinking into oblivion. This very much chimes with the secular
stagnation4/excessive savings hypothesis of American
economist, Larry Summers. Unfortunately, our policymakers do not
subscribe to the Koo thesis. If all this surplus is not redistributed
you get a deficit of demand and deflation — anyone mention Europe?
Why
then was monetary policy not combined with fiscal policy? Surely, they
should be complementary and not treated as substitutes. Italy, for
example, would have welcomed (still welcomes) a massive fiscal expansion
(even though the Maastricht Treaty prevents it). As Koo points out, you
need structural reform before a fiscal expansion otherwise it will
fail. Indeed, he said that 80% of the necessary change is structural
reform, followed by fiscal expansion. Note that this third arrow of
structural reform was never delivered in Japan.
Somewhat
ironically, the inequality brought about by QE has led to the populist
backlash in developed economies as well as calls for Modern Monetary
Theory (MMT)5/fiscal expansion — but let’s not confuse the two for now.
Anyway, what’s all this MMT chat?
Modern
Monetary Theory is really just a politicisation of fiscal spending with
unlimited constraint. No one constrained the British and the American
fiscal expansion in World War II (WW2); tanks and warships were needed,
so they were made. The idea was that governments spend as much as needed
to achieve the desired outcome and worry about financing the deficit at
a later stage.
So, after the abject failure of QE to generate
any sustainable growth or inflation, the political dial has now turned
to fiscal policy. Now, governments are always keen to inflate away their
debt — by running inflation higher than the nominal yield on the debt
that they issue. This policy is called financial repression and is one
way to deleverage an economy (reduce debt). Interestingly, the reduction
in debt generally happens via growth in the economy (ie, higher GDP),
which reduces the debt as a percentage of GDP but rarely a reduction in
the absolute level of debt.
Since only very low inflation could
be generated, interest rates had to go even lower to try to reflate the
economies but also to enable negative real interest rates (to repress
you and I!). Rest assured, further financial repression is both required
and necessary to reduce global debt levels but the current rate of
progress is too slow.
Times are different now?
The
economic downturn that we are in is not going to recover to previously
normal levels. Given poor demographics and productivity, the future
trend rate of growth in both the US and UK is around 1.5-1.75%. We are
in a different regime after the ‘heart attack’ of 2008 — one of low
growth, low inflation and increasing financial repression. As mentioned
earlier, Richard Koo has called for a wartime response on the fiscal
side as this is wartime economics but currently nobody has the political
mandate to justify such a response, although things are changing fast.
So this brings us back to MMT
The
theory that a government cannot default on its debts if those debts
were issued in its own currency is not new. There is also a vast amount
of economic literature on whether fiscal deficits matter. Still, this is
certainty getting a big (political) push nowadays.
It
is hard to argue that significant expansion in infrastructure, housing,
technology, transport and education would not boost the economy and,
would surely have a much bigger multiplier effect than QE. The tricky
bit is how it is financed and the potential repression (redistribution)
of wealth that goes with it. Could such a stimulus offset the long-term
secular drivers? Possibly, but we are not convinced.
In Koo’s
words, “MMT proponents are correct in arguing we need enough fiscal
stimuli to absorb the private sector savings surplus. However, this does
not necessarily mean we need the central bank to directly finance the
stimulus”*. This is a key point in the MMT debate, which many people
confuse — the stimulus should be funded from a private sector savings
surplus not by the central bank.*Nomura, Richard Koo, research paper titled: “MMT and the EU’s growing sense of crisis”, 23 April 2019
MMT fears — UK to be a test case?
What if the UK tried a massive Corbyn’s ‘People’s QE’6
programme? Well, it depends on its credibility and how it is financed.
This could be accompanied by rising gilt yields, inflation and a
sterling crisis — or possibly not. Bondholders would be repressed as
inflation took off. Yield curves could steepen aggressively while the
rich would be taxed heavily. Could the Bank of England lose its
independence? We feel this scenario is less likely, but that does not
mean we are not worried about markets worrying about it.
A more subtle, more palatable, approach could involve the central bank anchoring bond yields at a low (repressing) level set by law. The government could then issue endless bonds to the central bank to finance the fiscal expansion. This would be a more controlled expansion with some repression. It would probably involve capital controls (to stop capital escaping overseas) and financial regulation, eventually forcing financial institutions to be forced buyers of gilts once the central bank is full!
Neither sounds great for bondholders; but again, and as always, we turn to Japan where they still have not conjured up any meaningful or sustainable growth or inflation. One of their main impediments is the combination of abysmal demographics and lack of structural reform.
America and China have had some success with fiscal expansions, whereas Greece, Cyprus and Iceland have already had several degrees of repression and indeed capital controls. Many forget that UK citizens were repressed for decades post WW2 under varying forms of legislation. France, also massively reduced large government borrowing levels after WW2 by running inflation (at times over 20%) but keeping bond yields at around 6% by law. UK citizens are currently being repressed with bond yields at 1% but inflation at 2%.
So what will work?
We have sympathy for fiscal, monetary and structural reform — working together — but say no to MMT if badly financed. It is the combination of these factors that is key.
Fiscal policy can be effective if credibly financed and used at the right time in the cycle. Further, it must be invested and not consumed. Debate continues about the financing angle with regards to MMT, much of which is political and highly ideological (the heterodox school of economics), to which this is no definitive answer. Politics may also throw a spanner in the works as to the effectiveness (or credible financing) of a fiscal expansion.
Approach and positioning
We
remain flexible in our approach but are mindful of MMT risk and hence
remain very selective by company, and by country when we invest our
clients’ money. Living in the UK, having studied the Japanese experience
but investing in developed world bond markets, may not be a bad
position to assess the scene and provide sensible bond returns going
forwards.
Though forecasting is tricky, today we actually think US bond yields are cheap and, as real yields are positive, there is still capital to be made in US bond markets while that economy slowly turns Japanese. The UK and parts of Europe already have negative real yields (we are being repressed slowly). Our portfolios are barely exposed to UK corporate bonds for good reason and we prefer US corporate (and government) bonds as well as Australian sovereign bonds.
We invest thematically in a secular sense — you will get shorter term cyclical swings such as the two-year Trump reflation trade, which can confuse the narrative — but we continue to believe that most developed world bond yields are heading lower.
Glossary
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