Has the “unprecedented scale and duration of monetary policy easing” by EU, US and Japanese central banks led to what is a historically slow recovery? Is quantitative stimulus really an addictive pain killer that is responsible for “Secular Stagnation?” Deutsche Bank asset management researchers have an answer and it sings from the same song-book as did their chief economist on Monday.
Deutsche Bank researchers all on same page regarding negative impact of central bank stimulus
When Deutsche Bank Chief Economist David Folkerts-Landau was on CNBC, he doubled-down on claims that the European Central Bank had lost credibility and the economic situation around the region endangered the entire system. He advocated a bank bailout that would “break the rules” of the EU, recommending that such action be taken now and not in the middle of crisis.
The following day Deutsche Bank Asset Allocation researchers echoed this meme in an independent research report.
“Many of the premises underlying the view that lower rates represent stimulus do not hold up under closer scrutiny,” the July 12 research opined. In the report titled “Is Unprecedented Monetary Policy Easing Creating ‘Secular Stagnation’?” Deutsche Bank researchers answered their own question with a resounding “yes.”
Five primary points that initially supported the stimulus thesis are false, says Deutsche Bank
Looking at five points of economic analysis, Deutsche Bank’s New York-based Asset Allocation Chief Strategist Binky Chadha along with analysts Parag Thatte and Rajat Dua refute the ECB. Much like Landau did on Monday, the trio layout a case as to why overly aggressive stimulus is bad.
Tearing into the first stimulative premise, that lowering borrowing costs for households increase consumption, the report looks at unintended consequences. “The tax on the other side of the balance sheet is much larger,” they concluded. Low rates mean that savers – particularly retirees – are not getting income. The central bank stimulus sucks spending out of the economy. In this case, the bank thinks low rates result in “a sizable net tax” up to 2.7% of GDP in the US. Central bank stimulus, therefore, isn’t very stimulative and “is negative for spending and growth.”
The report also said interest lower rates are forcing households to save more for retirement because they are not receiving enough interest on their savings to the tune of 1% of GDP.
The thesis behind lower interest rates was to encourage investors to move out the risk curve and gain a wealth effect from risky assets. The exact opposite has occurred, as falling rates has led to a record over-allocation to fixed income – more than $750 billion, the report noted. While fixed income investing was the winner, the loser was equities, which lost -$1.7 trillion in assets.
The popular meme on low interest rates is that it supports housing. But this comes at the expense of Financial stocks, a point made in the report and originally voiced by Landau on Monday. In reality lower interest rates, particularly when they get this low, has “an ambiguous impact on overall growth.”
A significant point made by central bank supporters is that low rates are “positive for confidence.” But with negative interest rates predominating, the perversion has spread in an unwanted fashion. “Repeated easing and pushing out of rate normalization has provided a negative signal and significantly reduced confidence.”
It can be said that confidence among those familiar with market structure are the ones most concerned. “The unprecedented easing of monetary policy looks to be depressing –not stimulating– growth, contributing significantly to making it one of the slowest recoveries on record,” the report noted.
Those “developed” economic regions such as the EU and Japan should “curtail further rate cuts.” This can be facilitated by stronger US growth, which could be on the way, the report noted. “As the dollar shock fades, and the Fed restarting normalization, which we expect will be positive for growth, confidence and asset reallocation to equities” will result, the report predicted.