Mann by Global Interdependence Center

Is the Party Over?

Dr. Catherine L. Mann Barbara 54 and Richard M. Rosenberg Professor of Global Finance International Business School, Brandeis University www.CLMann.com

Monetary Policy and Currency Issues in 2014: QE or not QE? Global Interdependence Center

London, England * May 8, 2014

Time to Take Away the Punch Bowl?

•  Great Party! (really?) •  Or… it’s been a so-so party… –  The hosts are tired… –  Some guests are unruly

•  Time to weaken the punch so everyone will go home.

Time to Weaken the Punch, Take Away the Bowl? •  Traditional macro metrics •  Cost-benefit framework

Inflation: Time to Weaken the Punch? Based on PCE no; mixed views on wages, other prices !"#$%&'()*&$!+*,-.)*&/0$"-&1+(2$3-&4-&.5$$ &#$"

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Time to Weaken the Punch? •  Based on traditional macro metrics--no –  Underperforming inflation –  Underperforming GDP –  Unhappy with unemployment measures

Time to Weaken the Punch? •  Costs (and Benefits) Framework –  Loss on balance sheet assets –  Inability to exit smoothly –  Financial fragility from search for yield •  Unintended consequences of QE

–  Disruptions to the UST market

•  Bernanke, “Monetary Policy since the Onset of the Crisis,” Jackson Hole 2012 11

Asset Markets and QE Asset appreciation is intendedâ€Ś but

Chart from www.StockCharts.com

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Asset Markets and QE: Asset market – real economy disconnect Unintended and with costs •  Business evidence –  Equity appreciation…. But –  Sluggish Equipment/IP investment –  Sluggish Capital imports •  Buyback, dividends, M&A are not capex •  Unruly guests at the party

Asset Markets and QE:

Asset market – real economy disconnect Unintended and with costs

•  Consumption evidence –  Equity appreciation… But –  95% of financial equity owned by top 10% •  42% owned by top 1% (Wolff)

–  Concentration of financial wealth <=> concentration of financial gains –  Sluggish consumption –  Sluggish consumer imports 14

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Time to Weaken the Punch? •  Not based on traditional macro objectives •  But, hosts getting tired –  Size of balance sheet –  Concentration in UST maturities –  Crowing out foreign demand, esp. central banks

•  Also, some unruly guests –  Equity appreciation from engineering –  Concentrated asset channel =>gains to top 10/1 % –  Disconnect between assets and real economy –  Cross-border UST volatility from traders 20

Time to Weaken the Punch? •  Party on? •  Keep weakening the punch •  Until just water in the bowl