Several weeks back, we spoke a bit about the extent to which Mario Draghi’s “QE-Infinity” (subject to the capital key) could actually pave the way for fiscal stimulus to take the reins from monetary policy when it comes to shouldering the burden of engineering sustainable growth and averting a deflationary spiral.
Last month, as Draghi spoke after the September ECB statement, critics were quick to charge that the legendary central banker had effectively undercut his own exhortations for fiscal policy by announcing open-ended QE.
The argument (if that’s what you want to call it) essentially says that if governments know central banks are in the game forever, they will have no incentive to move aggressively forward with fiscal stimulus.
Amusingly, that argument emanated last month from some of the very same critics who have spent the last half-decade criticizing central banks for encouraging fiscal largesse with arm’s length debt monetization.
To those critics we would ask: Which is it? Do central bank asset purchases encourage irresponsible fiscal policy by effectively underwriting the issuance of government debt? Or do central bank asset purchases discourage fiscal stimulus by sending a message to politicians that monetary policy will continue to shoulder the burden, thus alleviating the need for governments to act?
For BofA’s Barnaby Martin, one “overlooked” aspect of QE is the way in which it “‘transforms’ sovereign debt-to-GDP ratios by moving bonds from risk-averse investors towards more risk-tolerant central banks”.
“If QE is sizable enough, the transformation in debt-to-GDP ratios can be meaningful”, Martin wrote last month. You can see that clearly in the following two charts, excerpted from his latest note, dated Thursday:
“QE helps ‘de-risk’ financial markets, by moving bonds from risk-averse investors towards more risk-tolerant central banks (buy and hold)”, Martin said Thursday, in the course of reiterating a handful of points he made previously. “This means that over the longer term, higher sovereign debt levels can be attainable, while keeping bond market ‘tantrum’ risks in check”, he adds.
That contention will drive some QE critics crazy. There’s more than a little evidence to support the notion that the further down the road we get towards central banks cornering government bond markets, the higher the risk of tantrums as liquidity disappears and those markets simply cease to function. Indeed, we got a mini-tantrum in JGBs just four days ago.
Intermittent flareups notwithstanding, Martin reminds you that although “Japan has one of the highest government debt-GDP ratios across the globe… volatility of JGBs has been relatively low since 2010”. That, he says, is “partly because” of BoJ ownership of JGBs.
After detailing the extent to which the fiscal response in Europe has been “piecemeal” thus far and will likely take time to morph into a bloc-wide, coordinated push, BofA characterizes the future of the monetary-fiscal policy nexus as a “public-private partnership”.
“The reality… is that central banks can’t step away from supporting the market”, Martin says. “They will need to be present for a long time, in our view, laying the groundwork for potentially higher debt levels in the future…à la Japan”.
If this sounds like MMT (modern monetary theory) to you, that’s because, taken to its logical extreme, it is.
“In fact, low rates and QE will become essentials in helping governments create ‘fiscal space’ and manage the transition to higher debt levels and, at the extreme, participate in ideas such as MMT, in our view”, BofA says.
MMT matriarch and Bernie Sanders advisor Stephanie Kelton would be proud.
“Greater coordination between fiscal and monetary authorities is almost certainly the wave of the future”, she told Bloomberg in a July interview from (appropriately) Tokyo. While Kelton said central banks won’t admit to having lost their independence, the bottom line is that “you’re going to see central banks responding in more accommodative, coordinating ways”.