Monetary Policy After Debt Crises Implications for the Euro-area and Japan.

Transcription

1 Monetary Policy After Debt Crises Implications for the Euro-area and Japan. Institute of International and European Affairs, Dublin, 28 July 2016 John Greenwood Chief Economist, Invesco Ltd 1

2 Debt/GDP % Two overlapping bell curves Model of a debt crisis in three phases Private and public sector debt ratios Phase 1 Phase 2 Phase Private sector Public sector Time Source: Invesco for illustrative purposes only 2

3 Since 2008 the US Private Sector has been Deleveraging; Public Sector has yet to start. Phase % Phase ?? 101% Private sector Public sector 241.5% at 2016 Q Q1 3

4 Some key propositions 1. Deleveraging since the Minsky moment in 2008 has blocked credit and money growth, slowing nominal and real GDP. 2. QE can solve that problem by creating new money independently of the banking system. 3. This may not be achieved by cutting interest rates or by private sector credit creation. 4. QE, done properly, can create new money without increasing private sector leverage. 4

5 QE Did Not Reduce Bond Yields 5

6 The US Monetary Problem in % 40.0% 30.0% 20.0% MONEY GROWTH RATES IN THE UNITED STATES, M1 %YOY M2 %YOY Monetary Base %YOY 10.0% 0.0% -10.0% -20.0% -30.0% Cumulative decline in M2, : -38% Cumulative decline in M1, : -32% Source: Friedman & Schwartz, A Monetary History of the United States 6

7 In , US Bank Lending Fell by 14%. Today it is Growing at 8.8% YOY. Cumulative decline in bank lending, : -14% 7

8 One Role of QE1-QE3 in the US was to Ensure M2 did not Contract in line with Bank Credit. QE1 QE2 QE3 8

9 Two Key Rules for Successful QE Rule 1: Buy securities from non-banks Rule 2: Buy long term securities 9

10 Projected ECB Balance Sheet and M3 Growth with EUR 60 bn monthly Purchases (as at January 2015) ECB balance sheet, % y-o-y (LHS) M3, % y-o-y (RHS) /13 07/13 01/14 07/14 01/15 07/15 01/16 07/16 0 Compiled January

11 Actual Eurozone M3 Growth has Fallen Short of Projections 11

12 Two Types of QE Implemented Two Types of QE Operation Central Bank Targeted Securities Main Holders Federal Reserve Bank of England 1. Mainly long-dated USTs; some T-Bills 2. Mortgage Backed securities Non-Banks 1.Long-dated Gilts 2. Commercial paper Non-Banks Bank of Japan ECB & Euro-area National Central Banks 1. JGBs, Finance Bills Banks 2. ETFs, J-REITs Non-Banks 1. Sovereign Debt Banks 2. Corporate bonds (from June 2016) Non-banks 12

13 A Well Designed Asset Purchase Plan (QE) Liquidity-Enhancing Assets Central Bank Liabilities Government Securities (+) (+) Reserve Deposits of Banks Assets Commercial Bank Balance Sheets Liabilities Reserve Deposits at Central Bank (+) (+) Deposits Vault Cash (Notes & Coin) Net Worth Loans & Investments Assets Balance Sheets of Non-Bank Public Liabilities M3 increases Bank Notes & Coin Deposits (+) Government Securities (-) Other Assets Loans from Banks Bond Issues Net Worth Source: Invesco, for illustrative purposes only 13

14 An Asset Swap Operation Not Liquidity-Enhancing Assets Central Bank Liabilities Government Securities (+) (+) Reserve Deposits of Banks Loans to Banks Foreign Assets Assets Commercial Bank Balance Sheets Liabilities Reserve Deposits at Central Bank (+) Customer Deposits Vault Cash (Notes & Coin) Net Worth Government Securities (-) Loans & Investments No change in M3 Assets Balance Sheets of Non-Bank Public Liabilities Bank Notes & Coin Deposits Government Securities Equities Owned Bonds Owned Other Assets Owned Source: Invesco, for illustrative purposes only Loans from Banks Bonds Issued Net Worth 14

15 Since March 2015 the ECB has Purchased at least 40% of its QE Securities from Banks SECURITIES HELD BY BANKS March 2015 Start of ECB s QE +723 bn ECB s HOLDINGS OF SECURITIES -287 bn 15

16 Since March 2013 the BOJ has Purchased at least 30% of its JGBs from Banks SECURITIES HELD BY BANKS March 2015 Start of BOJ s QQE tn BOJ s HOLDINGS OF SECURITIES tn 16

17 Italy: Total Bank Assets Still Declining 17

18 Spain: Total Bank Assets Still Declining 18

19 The Failure of the ECB s LTRO plan, Eurozone: Total assets of ECB & commercial bank lending LTROs expand ECB balance sheet but commercial bank loans decline from +3% to negative territory Source: Datastream as at 17 October

20 Japan s QE Program of and QQE from April 2013 QE1: QQE from Apr 2013 April 8,

21 Bank of Japan Asset Purchases (1) have been mainly from banks (66 tn) JPY tn (March 2013) JPY tn (Feb 2016) 21

22 Bank of Japan Asset Purchases (2) have included short-term securities 22

23 Result: Despite QQE & the Doubling of BOJ s Balance Sheet, there s been No Impact on M2 MONETARY BASE START OF QQE M2+CDs BANK LENDING 23

24 Neither QE in nor QQE in have led to faster money growth (M2+CDs) QE QQE from

25 Consequences of QE1 & QQE for Japanese Commercial Bank Balance Sheets QE1: QQE from Apr 2013 November 19,

26 How QE Works to Revive Economic Growth - the Conventional View Expected Effects of Central Bank Asset Purchases 1. DIRECT PASS- THROUGH EFFECTS 2. PORTFOLIO BALANCE EFFECTS PRIMARY IMPACT Increases broad money. Support to chosen market(s) e.g. sovereign debt, MBS, ABS, Corporate bonds etc. Yields down, prices up due to Central Bank purchases. SECOND ROUND EFFECTS Banks respond to lower yields by increasing credit supply (loans, ABS etc); demand for credit increases. Money supply increases further. Investors respond to increased holdings of deposits by buying riskier, longer term assets (equities, real estate etc). Lower yields increase asset prices wealth effect weaker fx rate. 26 Source: Invesco, for illustrative purposes only

27 BOJ s view of the Mechanism of QQE Source: BOJ, May

28 Summary & Conclusions (1) QE design is key The BOJ s QE program of failed to revive the Japanese economy. QQE since 2013 has not fared any better. Similarly, the ECB s LTRO program of failed to revive the Eurozone economy, and so far QE has been disappointing. In both Japan and the Eurozone the focus was (mistakenly) on purchasing securities from or lending to banks. In QQE the BOJ is also buying a large share of its securities from banks. The result is an asset swap, not a liquidity enhancing expansion of the money supply. Similarly, in the ECB s QE (even after the March 2016 expansion) purchases are mostly: - from banks (or lending to them via TLTROs). 28

29 Summary & Conclusions (2) QE design is key By contrast, Fed and BOE asset purchases were largely successful because the assets purchased were: - long term assets - acquired from non-banks. The results were liquidity enhancing -- new injections of funds into the financial system, even though the commercial banks were reluctant to lend. This helped to lower leverage by increasing the volume of broad deposits (money) available for spending by households and non-bank firms without increasing lending. 29

30 Important information This presentation is for Professional Clients only and is not for consumer use. The value of investments and any income will fluctuate (this may partly be the result of exchange rate fluctuations) and investors may not get back the full amount invested. Past performance is not a guide to future returns. Where John Greenwood has expressed opinions, they are based on current market conditions and are subject to change without notice. These opinions may differ from those of Invesco/Invesco Perpetual investment professionals. Where securities are mentioned in this document they do not necessarily represent a specific portfolio holding and do not constitute a recommendation to purchase, hold or sell. Invesco Perpetual is a business name of Invesco Asset Management Limited, Perpetual Park, Perpetual Park Drive, Henley-on-Thames, Oxfordshire RG9 1HH, UK. Authorised and regulated by the Financial Conduct Authority. 30