Mann

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

1

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.

2

Time to Weaken the Punch, Take Away the Bowl?

• Traditional macro metrics • Cost-benefit framework

3

Inflation: Time to Weaken the Punch?

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Unemployment: Time to weaken the punch?

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GDP: Time to weaken the punch?

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GDP Decomposition and Q1: Very hard to make the 2014 Projection for 3% (# Exports hiccup or global comment.

Positive imports a bad sign.

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Time to Weaken the Punch?

• Based on traditional macro metrics--no – Underperforming inflation – Underperforming GDP – Unhappy with unemployment measures

10

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&#x20AC;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

13

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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UST Market and QE hosts are tiredâ&#x20AC;Ś unintended largest holder of long maturity

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UST, QE and Foreign Demand: Hosts are crowding out the guests, esp FOI -.$/0123405$.164078139$:;2<=1$7<$>?@A7<=3$ B7@@7?<C$D16ED16$

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UST, QE and Foreign Demand Cross-border volatility from QE, unruly guests at the party ($#!!$!!!"

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19

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

21