Hello Sébastien,

Thank you for your insightful comment and kind words of support.

This blog is precisely about sharing investment views and opinions. See here for more information about this blog.

Undoubtedly, monetary policy deserves a special attention in the current macroeconomic and financial environment.

Back to the post. Even more than central bankers actually, I believe that the real ‘rock star’ of Jackson Hole has been monetary policy itself: great music to the ears of financial markets (forward guidance), that feeling of joy (unconceivable ‘risk-free’ returns) and of course a touch of hysteria …

More seriously: how did we get there?

This post is about foreseeable public governance failures and – I believe – the necessity to reconsider some important pieces along the process of public policies.

Please find some additional discussion material in ‘Autorités publiques: chronique d’un échec annoncé – le retour de la BRI’, a previous post that followed similar lines:

As a conclusion we suggest the following propositions:
– The risks associated to excessive unconventional monetary policies have been identified for long, for instance by the BIS;
– By using their main check and balance tool, the famous cost and benefit ratio, as an additional forward guidance instrument, central banks are playing ‘double or quit’. Expect them to quit;
– Unconventional policies have been facilitated by simple governance issues…
– … which are yet universally recognized by corporations, States, international organizations, … What about central banks?
– As the above research papers indicate, the efficacy of monetary policies is now conflicting with financial stability;
– The systemic nature of such risks, as a well as an urgent need of a better international coordination, will put the BIS forum to the forefront;
– Expect this to continue. The BIS warnings, while accurate, have been globally neglected;
– Governance failures should speed up the process of systemic convergence.

Thank you for sharing, looking forward to reading you on the blog.

Jacques

A big applause to you for your blog and the setup of your investment advisory and research company!
This is a great achievement and I look forward to your comments and to finding out where you stand with respect to the latest economic and financial developments.

You are perfectly right when you allude to the fact that the current Great unorthodox monetary policy does not fit well into any standard governance framework as evidenced by the substantial deviations from rules-based monetary policies in many countries… including Switzerland.

Have policy makers fully recognized the shortcoming of the current monetary policies ? Yes and No.
I think they have acknowledged that currency wars and competitive devaluations do more harm than good at a global level. That said, I also believe that they fail to see that their remedies are contributing to disappointing economic growth (See https://www.federalreserve.gov/newsevents/speech/yellen20161014a.htm).

In her comments addressed to policymakers and academics on October 17th, Janet Yellen suggests that “changes in aggregate demand may have an appreciable, persistent effect on aggregate supply–that is, on potential output.” She carries on by stating that “Several recent studies present cross-country evidence indicating that severe and persistent recessions have historically had these sorts of long-term effects, even for downturns that appear to have resulted largely or entirely from a shock to aggregate demand.”

The question raised by J. Yellen is whether that damage can be undone … “by temporarily running a ‘high-pressure economy,’ with robust aggregate demand and a tight labor market.”

More of the same… This suggests to me that the Fed would not react too restrictively if inflation was to surprise on the upside… fostering a steepening of the yield curve …

Take care,
Sébastien