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This weekend, top center
bankers will meet (some
by Zoom) in Jackson Hole,
Kansas to discuss “macroeconomic
Politics in an Unequal Economy. “
Everyone will be looking forward to this
the capo di capo of financial capitalism,
Jerome Powell, will say about the
The Fed’s monetary policies in the wake
global and national imbalances.
Capitalism comes from Latin
word “capo”, meaning head.
Central bankers carry the aura
cardinals since they manage
money mysteriously by creation
central bank reserves. You
know how important central bankers are
are balance sheets that they
manage. For nearly 25 years, the Fed
the toll was around 6 percent
of GDP. It has doubled to over 15 percent
of GDP in 2008, and more than doubled
back to 34.6 percent of GDP in
end of June 2021.
The Bank of Japan (BOJ) is a
central bank champion at 132 for
percent of GDP, with the People’s Bank of
China at 33.9% and Europe
Central Bank (ECB) at 60.6 percent.
These four central banks alone
accounted for $ 30.1 trillion in assets
size or 35.5% of global GDP
(yardeni.com). The Fed, the BOJ and
ECB) together increased their balance
leaf by six times from $ 4 trillion
just before the Lehman collapse in 2008
at $ 24.3 trillion currently. Their
sovereign debt purchases, companies
bonds, mortgage securities and
equity ETFs move the markets.
No wonder everyone hangs out
(literally for hedge funds) on the
words of central bankers.
Last year, Powell’s opening speech at
Jackson Hole introduced the Federal
Open Market Committee (FOMC)
new statement on longer term goals
and Monetary Policy Strategy. I have
highlighted four fundamental developments:
Long-term growth in the United States
the potential had diminished; level of interest
rates had fallen to historically low levels;
unemployment rates were much lower
sustainable levels; and despite the weak
unemployment, inflation remained
low and below the FOMC target of 2
percent set in 2012.
Central bank speeches should be
read not for what was said, but
what is not said. Former Fed Chairman
Alan Greenspan, adored by
Wall Street for having bailed them out in
lower interest rates, says the famous
“I know you think you understand
what you thought i said but i’m not
quite sure that you realize that what you
heard is not what I meant. “
Powell’s 2020 address was revealing
because the words “wealth”, “climate
change “,” race “, were not mentioned
at all in his speech to him. “Inequality”
appeared once in a footnote reference
to an academic article. Most of his
speech lamented the fact that the Fed
failed to raise inflation in the
target of 2% per year, despite
tight labor markets. he was comfortable
that “a long-term inflation rate of 2%
is most in line with our mandate
promote both to the maximum
employment and price stability. “
How is it possible that the center
bankers who have increased their balances
sheets of 9 trillion dollars since March 2020
deny their impact on climate change,
low productivity, wealth and income
inequality? Their standard answer is
that these do not fall within their mandate
maintenance of prices and
stability. The unspoken reason is
fear that if they wander outside their
mandates, politicians will blame
them for everything and take away
their hard-won independence.
Here’s why we can’t disentangle
monetary policy in the face of climate change,
low productivity and social inequalities.
First, all markets are priced
based on the price of silver, namely
the interest rate. We use the Discounted
Cash Flow Model (DCF) for
valuation by updating all futures
cash flow at its present value. The
the lower the interest rate, the lower the
asset value. But when the surrender
rate is zero or negative, the
the value becomes infinite or indeterminate,
this is exactly why we see
bubbling asset markets everywhere.
Second, low interest rates and
high liquidity reduces productivity. No
a sane person would invest
in an uncertain long-term future
(invest in infrastructure or negotiate
with climate change) because it’s so
better to speculate on the asset
bubbles. Speculators know that the center
banks would keep markets stable,
therefore subscribe to market shocks. Too much
a lot of short-term liquidity creates the
liquidity trap identified by Keynes
during the Great Depression of the 1930s.
You are trapped because investors
stay liquid, rather than investing for the long term
productivity-creating jobs and
Capital city. Few of the people allocate capital to
deal with climate change, even at very
low interest rates.
Third, wealth and income
inequalities worsen with a lower interest rate
rates. The rich can borrow cheaply
because they have guarantees,
while the poor pay much more
interest rate due to higher credit
risks. But asset inflation creates the
greater inequality of wealth because
bubbles allow the rich to get richer,
while the poor can’t even afford
basic accommodation. Could store and
bond markets hit record highs
when global growth is negative for
the pandemic, without $ 9 trillion
monetary and fiscal stimulus?
Fourth, carbon emissions come
human overconsumption,
who is on
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