by Wolf Richter, Wolf Street:
But the Fed is steadfastly blind to bubbles & their consequences.
The Organization for Economic Co-operation and Development threw the Fed and the Bank of Japan – even as they had their meetings today – a curve ball.
We in the US woke up to a new central-bank term: “yield curve control.” This is what the BoJ promised its rapt audience of hedge fund managers. Another Kuroda surprise. His negative-interest-rate surprise in February was just aping the ECB. But now he has come up with something for which no one had even coined a word.
The BoJ will target 0% yield for the 10-year Japanese Government Bond, which had been negative for months. So it’s trying to push up the 10-year yield a smidgen. Shorter maturities would still sport a negative yield. This would steepen the yield curve. In effect, the BoJ will control the yield curve. By the end of next year, it might own 50% of all JGBs. Why even pretend there’s still a bond market? Maybe it’s just for entertainment.
And the Fed once again refused to raise interest rates by almost nothing from next to nothing, after flip-flopping about it for nearly three years.
But now even the OECD is fretting about these scorched-earth policies that have been dogging the global economy, which just keeps getting worse.
The OECD estimates in its Interim Economic Outlook that for member nations as a whole, GDP-per-capita will grow only 1% in 2016, “which is half the average in the two decades preceding the crisis.”
Per-capita is what counts. It’s what people experience. It’s their slice of the economic pie. Population growth papers over a lot of ills for economists: for example, in the US, 14 million jobs were created since the Financial Crisis, which has been touted endlessly. But the US population grew by 15 million people. Now there are fewer jobs “per capita” than there were at the depth of the Financial Crisis. That’s why per-capita matters.
So 1% GDP growth per capita in 2016 is terrible. And it’s likely happening because of these scorched-earth monetary policies. The OECD blames:
“Slower growth of total factor productivity”
“Slowing of diffusion of innovations across firms”
“And slowing innovation at the technological frontier.”
It adds: “These developments exacerbate the challenges to improving well-being of people in both advanced and emerging economies.” The problem for the OECD is this: people are consumers, and if consumers don’t do well, they can’t consume enough, and in consumption-based economies, that’s a cardinal sin.
Yet its outlook, bad as it is, is “subject to significant risks.” The economy might further deteriorate, it says, because: “Financial instability risks are rising, including from exceptionally low interest rates and their effects on financial assets and real estate prices.”
Bubbles in stocks and real estate! The Fed, however, as always, is steadfastly blind to bubbles.
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