January 24

Do we really have a balance sheet recession? David Beckworth.

The age of de-leveraging. Jason Leach.

How I learnt to stop worrying and love The Bank. Steve Keen.

How will they prop up stocks after QE? An answer? Bruce Krasting.

The Fed can’t go bankrupt. Anymore. FT Alphaville.

More evidence of undercapitalization/insolvency of major banks. Yves Smith.

National debt = great recession 2.0. Dian Chu.

Spain's bank nationalization and the euro zone crisis. Ed Harrison.

The real cost of Chinese NPLs. Michael Pettis.

China vs. inflation: a love-30 match so far. Dian Chu.

Beijing most likely will come to grip very soon that eventually somebody got to pay somewhere, and there’s just no way around it, and that the time has come for some decisive actions with a combination of more aggressive monetary, fiscal and regulatory measures to show it really means business.

For example, instead of the symbolic two 25-bps interest rate hikes in Oct. and Dec., Beijing probably will do an immediate 50-bps rate hike by early February and another 50 bps in early March to blunt the start of the typical yearly run-up of crude oil, and other commodities. Then, depending on the market reaction and new economic data, more hikes could be implemented later on in the year. Fiscal policies such as taxes, and financial regulations and restrictions on speculative activities could be necessary.

Meanwhile, the expectation of a Yuan appreciation is keeping liquidity swimming. So, perhaps China would do just the opposite, as suggested by Andy Xie, a currency depreciation, which would lead to a capital outflow forcing interest rates up. There [are]many more things that China has to do to get the inflation situation under control, which most likely will send shock waves throughout global markets.

Social Unrest Could Make or Break A Party: Nmbers may be rigged or "smoothed out", but can't fool the regular Chinese Joe's and the smart money.

China's runaway chariot. Charles Smith.

SocGen crafts strategy for China hard-landing. Ambrose Evans-Pritchard.

Record Food Prices Causing Africa Riots Stoking U.S. Farm Economy. Bloomberg.

Inflation: not here, not now. John Taylor.


other fare:
of amusement: Gartman investment SAT score 410.

December 13

Living with low for long. Mark Carney, BoC.

Current turbulence in Europe is a reminder that the crisis is not over, but has merely entered a new phase. In a world awash with debt, repairing the balance sheets of banks, households and countries will take years.

For the crisis economies, the easy bit of the recovery is now finished. Temporary factors supporting growth in 2010–such as the turn in the inventory cycle and the release of pent-up demand–have largely run their course. Fiscal stimulus is turning to fiscal drag and, for some countries, rapid consolidation has become urgent. Household expenditure can be expected to recover only slowly. This all implies a gradual absorption of the large excess capacity in many advanced economies.

This is not surprising. History suggests that recessions involving financial crises tend to be deeper and have recoveries that take twice as long. In the decade following severe financial crises, growth rates tend to be one percentage point lower and unemployment rates five percentage points higher.1 The current U.S. recovery is proving no exception.

In such an environment, very low policy rates in the major advanced economies could be in place for a prolonged period–a possibility underscored by the recent extensions of unconventional monetary policies in the United States, Japan and Europe.

Big numbers from the BIS. FT Alphaville.

The eurozone is in bad need of an undertaker. Ambrose Evans-Pritchard.

What the German people are being asked to do is to surrender fiscal sovereignty and pay open-ended transfers to Southern Europe, taking on a burden up to six times reunification with East Germany. "If we pool the debts of the countries in the south-west periphery of Europe, we are blighting our children’s future: the debt levels are astronomic," said Hans-Werner Sinn, head of Germany IFO institute. Any attempt to prop up the status quo will cement the current account imbalances of EMU’s North and South, to the detriment of both sides. "I doubt that the current leaders of Europe fully understand the economic implications of their decisions. They are repeating the mistakes that Germany made over reunification," he told the Handelsblatt.

Transfers to the East are still running at €60bn a year two decades after the fall of the Berlin Wall. There has been no meaningful East-West convergence for the last 15 years. To those who blithely argue that EMU is a good racket for German exporters because it locks in Germany’s competitive advantage, he retorts that a trade surplus is the flip side of a capital deficit. Germany has seen €1 trillion – or two thirds of its entire savings since 2002 – leak out to fund the EMU party, gutting investment at home. This is toxic for Germany too....

So as EU leaders flounder, the task of saving monetary union falls to the ECB. Yet it too has declined the burden, refusing to go nuclear with bond purchases. "Each country needs to be held responsible for its own debt," said Germany’s monetary avenger at the ECB, Jurgen Stark. He was joined last week by Mario Draghi, Italy’s governor and candidate for ECB chief, who said it was not the job of a central bank to carry out fiscal rescues. "We could easily cross the line and lose everything we have, lose independence, and basically violate the Treaty," he said.

Indeed. Maastricht forbids the ECB from buying the debt of eurozone states except for specific purposes of liquidity management. But this saga no longer has anything to do with liquidity. Southern Europe faces a solvency crisis.

Block those metaphors. Paul Krugman.

What we’ve been dealing with ... is a painful process of “deleveraging”: highly indebted Americans not only can’t spend the way they used to, they’re having to pay down the debts they ran up in the bubble years....

What the government should be doing in this situation is spending more while the private sector is spending less, supporting employment while those debts are paid down. And this government spending needs to be sustained:... spending that lasts long enough for households to get their debts back under control. The original Obama stimulus wasn’t just too small; it was also much too short-lived...

But wouldn’t it be expensive to have the government support the economy for years to come? Yes, it would — which is why the stimulus should be done well, getting as much bang for the buck as possible.... [but] the tax-cut deal is likely to deliver relatively small benefits in return for very large costs. ... Tax cuts for the wealthy will barely be spent at all; even middle-class tax cuts won’t add much to spending. And the business tax break will, I believe, do hardly anything to spur investment given the excess capacity businesses already have.

The actual stimulus in the plan comes from the other measures, mainly unemployment benefits and the payroll tax break. And these measures (a) won’t make more than a modest dent in unemployment and (b) will fade out quickly, with the good stuff going away at the end of 2011.

The question, then, is whether a year of modestly better performance is worth $850 billion in additional debt, plus a significantly raised probability that those tax cuts for the rich will become permanent. And I say no. The Obama team obviously disagrees. As I understand it, the administration believes that all it needs is a little more time and money, that any day now the economic engine will catch and we’ll be on the road back to prosperity.... What I expect, instead, is that we’ll be having this same conversation all over again in 2012, with unemployment still high and the economy suffering as the good parts of the current deal go away.

Reconsidering Japan and Reconsidering Paul Krugman. Truthout.

there is a commonsense aspect to this story that gets lost amid the rhetoric and the headlines. Two lessons of our times are that economic bubbles eventually burst, and that the environmental consequences of unbridled growth in this age of global warming are severe. The world needs to figure out how advanced economies can provide for their people without relying on roaring growth rates driven by asset bubbles. If consumer-driven growth was the order of the day in the post-World War II era, going forward it is going to be steady-state economic growth - growing not too fast, but not too slowly - and learning to do more with less.

Like bulls in a China shop. Bob Janjuah.

A terrible way to fix the economy: households deleveraging through defaulting on debt. rortybomb.

What to make of this? First off, I’m terrified at the idea that national wealth is roughly at the level to pay for the servicing of debt but not necessarily pay off any actual debt. Our household sector is at the point where we can make the minimum payment on our metaphoric credit card without paying any of it down, and the only other choice is to not pay it at all.

other fare:
Human extinction: not the worst case scenario. 3QD.

Civilization has bestowed our species with a distorted self-image. Many people seem to have the impression that we operate independently of nature. We are fortunate that we’ve been able to act as though we are independent for as long as we have. If we don’t adjust our way of living so that it becomes sustainable, however, nature will eventually do this for us.

November 17

The inimitable John Hussman, as always, provides great insights (and is always able to come up with new ones) and has a wonderful way with words. Read his whole commentary, The Cliff; but I couldn't resist excerpting this:

From my perspective, an "economic recovery" that requires a tripling in the Fed's balance sheet, continues to average 450,000 new unemployment claims weekly, and relies on fiscal stimulus to counter utterly stagnant personal income, is ipso facto (by the fact itself) not a "standard" economic recovery. We have swept an enormous volume of bad debt under rugs, behind dams, and in back of curtains (not to mention in off-balance sheet vehicles such as Maiden Lane that were created by the Federal Reserve). But it is all effectively still there, festering. Meanwhile, our policy makers are trying to reignite financial bubbles in order to create an illusory "wealth effect" to propagate spending patterns that were inappropriate in the first place.
It is a bizarre notion that a credit crisis can be solved by bailing out lenders while doing nothing about the obligations on the borrower side. Think about it - what we have said to lenders is, here you have these homeowners who can't pay for their houses. Foreclose on them, sell the homes at half the price, and the public will make
you whole (largely through Treasury bailouts to Fannie and Freddie, made necessary by Federal Reserve purchases of these securities).
Heck, if the public is going to be on the hook anyway, at least notice that at equivalent cost to the public, the mortgage could simply be written down to half its value, with the homeowner now able to pay the balance off and the lender getting the public handout to make up the difference. But of course, that would reward the homeowner. So instead, we simply make the lenders whole while people lose their homes and foreclosure investors flip the homes at a profit in return for providing liquidity at the auction. That way, the same amount of public funds can be spent through the back door without Congress even getting involved.
Memo to Ben Bernanke - throwing money out of helicopters isn't monetary policy. It's fiscal policy. How is this not clear?
The proper way to deal with a major debt crisis - indeed, the only way nations have ever successfully dealt with major debt crises - is through debt-equity swaps, restructuring and writedowns. There are numerous ways to achieve this with mortgages. My preference would be swaps of principal for pooled property appreciation rights (administered, but not subsidized by the Treasury). In any event, until our policy makers wake up to the need to restructure debt, so that the obligation is modified for both the debtor and the creditor, our financial system will
increasingly tend toward a giant Ponzi scheme. We are racing toward the financial equivalent of a mathematical singularity, where the quantities become so large and outcomes become so sensitive to small changes that the whole system becomes unstable.

QE outlook

The early evidence: QE does more harm than good. TPC.


I do not believe that QE will have any positive impact on the broader economy, and, as per last, and as with past examples of unintended consequences of ill-advised government policy, will likely cause more damage than benefit; to wit:

- QE has had a psychological impact on asset prices, including equities and commodities, but has not changed fundamentals in any way
- if QE does not help the economy, then the boost to stock prices will have been ill-founded and subject to downward revision
- the dollar-debasement-fear impact on commodity prices will help commodity producers, but will impair margins for commodity-user-companies and will effectively impose a tax on consumers
- companies will therefore be less inclined to expand their workforce and consumers will be less inclined to expand their discretionary spending
- aggregate demand will continue to be lacklustre and hence below aggregate supply
- upside commodity price shocks have historically caused economic slowdowns; the last commodity price shock preceded the recession; this time around, the economy is much more vulnerable, given that core CPI is already below 1% and U6 is already near 10%
- propping up asset prices to revive the economy was the failed strategy of the 2000s (housing); the definition of insanity is doing the same thing over and over again and expecting different results
- excess reserves do not in any way motivate bank lending; deleveraging will persist, driven by both reluctant lenders and reluctant borrowers
- theoretical wealth effects from stock prices have been disputed (Shiller), and, in any case, to the extent that household wealth remains below the past peak, even with recent stock price gains, it is quite likely that homeowners are still perceiving a negative wealth effect (though the hole might not be quite as deep now that stocks are up 10%, they're still in the hole)
- meanwhile, aging baby boomers are a few years closer to their hoped-for retirement age, are twice-bitten, thrice shy of stocks (ICI reports that as of Nov 10 there were 27 straight weeks of outflows from domestic equity mutual funds), and need to continue to save to replenish their coffers
- interes rates are very low, so interest income has been degraded, implying that even more has to be socked away
- misguided concerns that QE is money-printing means dollar debasement could provide a near-term boost to export growth as U.S. export-products become more attractively priced in foreign currencies, but (a) yuan is not budging much, so will not help trade deficit with China, (b) euro has appreciated, but outlook for euro area is not promising and implies risk of currency turnaround, and, most importantly, (c) geopolitical tensions about QE could cause real trade frictions and protectionist backlash
- to the extent that easy monetary policy gets exported to emerging market nations, principally w.r.t. asset prices, those emerging market nations may be forced to impose domestic monetary restraint which will at the margin impair global growth, offsetting *any* "expansionary benefits" of unconventional Fed easy money policies


all in all, though the Fed likely does WISH to reflate the economy, there is little evidence to support the assumption that they have the CAPACITY TO DO SO --- not until the unsustainable debt burden built up over the last decade has been whittled down to levels that are manageable given prevailing income levels and given the demographic outlook; if this viewpoint is reasonable, then this is not likely to be a 2-5 year process but one that lasts rather longer


what if I'm wrong? what should we look for as signs of successful reflation?
- broad-based increase in cap-ex
- sustained increase in lending
- consistent increases in hiring (evidenced in both the household and institutional surveys) in excess of population growth

November 9

Bernanke: Chumps! Bruce Krasting.

I got a laugh out of the $600b number. The dealers were polled on their expectations last week. The response was an even half trillion. So with that as a bogie the Fed does 600 large. They wanted to do just a bit more than was actually expected. So they added on an extra 100b. They gave the market what it wanted and a little bit of extra cream on the top.

Understanding the mechanics of a QE transaction. Pragmatic Capitalism.

Recent Decisions of the Federal Open Market Committee: A Bridge to Fiscal Sanity? Richard Fisher, FRB of Dallas.

I agree that we are indeed in what is referred to in economic parlance as a liquidity trap. Yet, I think it worth noting that we already have low interest rates, and spreads against risk-free instruments are historically narrow. Despite their theoretical promise, reductions in interest rates to Lilliputian levels have not done much thus far to spark loan demand. Loans are desirable when business see an opportunity for tapping credit markets to earn a return on investment that significantly outpaces the cost of credit and other risk factors. Even with the low rates that already prevail, businesses lack confidence that they will earn a superior ROI by investing so as to expand their domestic workforce, in comparison to what they might earn from alternative investments abroad or by buying in their stock or cleaning up their balance sheets. For their part, consumers will borrow when they believe it makes sense to shift consumption forward. But after the sobering experience of the past
three years, they are restrained by a lack of confidence that their future income streams will be sufficient to cover their payment obligations.
On the supply side, we know that businesses are floating on a sea of liquidity. Banks already hold over $1 trillion in excess reserves; holdings of government securities as a percentage of total assets on bank balance sheets are growing; loans as a percentage of assets are declining.
If we had a level of bank reserves or liquidity in the marketplace that was binding or inhibiting loan growth, I could understand the impulse to relieve that stricture. Further quantitative easing through additional asset purchases will surely increase the level of bank reserves, lower rates marginally and add more liquidity to markets while weakening the dollar. The more germane question is whether this works to the benefit of job creation and wards off financial excess....
The remedy for what ails the economy is, in my view, in the hands of the fiscal and regulatory authorities, not the Fed. I could not state with conviction that purchasing another several hundred billion dollars of Treasuries—on top of the amount we were already committed to buy in order to compensate for the run-off in our $1.25 trillion portfolio of mortgage-backed securities—would lead to job creation and final-demand-spurring behavior. But I could envision such action would lead to a declining dollar, encourage further speculation, provoke commodity hoarding, accelerate the transfer of wealth from the deliberate saver and the unfortunate, and possibly place at risk the stature and independence of the Fed.

Bubble, Crash, Bubble, Crash, Bubble... John Hussman.

The Japan syndrome goes global. Stephen Roach, Morgan Stanley.

Warning: retirement disaster ahead. Brett Arends, WSJ.

Bank of America edges closer to tipping point. Jonathan Weil.

The Bank of Canada's revised forecasts

The Bank of Canada's Monetary Policy Report (MPR) released last week laid out its latest views on the economy, which substantiated why it left rates unchanged at 1%.

For starters, after trekking along from 2000-2007, the economy suffered a severe drop-off in 2008/09 which hasn't even come close to being re-couped.

Through June 2010, real GDP remains 4.9% below trend growth, which is up from the 6.6% gap as of June 2009.

And though the economy has turned up since troughing in May 2009, the continuation of that rebound isn't turning out to be as robust as the Bank had hoped and thought.

After growing at an annualized rate of 4.9% during the fourth quarter of 2009, the economy expanded 5.8% in the first quarter of this year, which trailed the Bank's forecast of 6.1%; and then growth decelerated in the second quarter to just 2%, lagging the Bank's forecast of 3%.

The Bank has now revised its growth forecasts down for each of the next five quarters, though it increased its forecasts for the five quarters after that. (This, by the way, is par for the course for the Bank ---- every time it revises its forecasts for growth in the near-term, it must, by the necessity of its mandate, revise its forecasts for later-term growth commensurately in the opposite direction. More on this later.)

Just for point of comparison, I think its worth noting how this forecasted growth, if it materializes as now expected, would compare to trend growth.



Though it does show how underwhelming this recovery has been and is projected to be, obviously trend growth from last decade doesn't hold much relevance as far as the Bank is concerned.

What the Bank is concerned with is how actual economic activity compares to what the Bank views as potential output. And growth of potential output these days is much lower than trend growth of the economy was for the last 5-10 years, because of a slowdown in the growth of the economy's rate of labour utilization, and, more particularly, of labour force productivity.




Canada entered the recession with the economy in a situation of excess demand (actual GDP above potential), but is now experiencing excess supply (actual GDP below potential).

As of July, the Bank believed that the output gap would be eliminated (actual GDP would converge on potential) by the end of 2011. Despite lowering its estimates for the growth of potential output (1.6% in 2010, 1.8% in 2011 and 2.0% in 2012), the Bank now forecasts that the output gap won't be eliminated until the end of 2012.

Here's why this is telling.

The Bank's job is to try to get CPI on target by the end of its forecast horizon, which in this case is to the end of 2012. It therefore needs to eliminate the output gap during that time period.

It previously had thought that it would have CPI on target by early 2012, by virtue of having eliminated the output gap by the end of 2011.

As of July, the Bank was forecasting that growth in 2012 would be 2% because (a) it believed that the output gap would be eliminated by then, (b) it wanted to keep CPI on target, and (c) it believes that the growth rate of potential output would be about 2% in 2012.

Therefore, to keep inflation on track, it would need to keep actual economic activity consistent with the economy's potential growth. Presumably, in order to do that, it would have needed to return to neutral monetary policy in 2011.

But by downgrading its views on economic growth for the last two quarters plus the next four quarters, the Bank is faced with the situation of having to engineer more growth nearer to the end of its forecast horizon in order to meet its objective.

In other words, because monetary policy works with a lag of at least 12 months, its economic growth forecasts for the next four quarters must be based in part on where it has its overnight rate set right now. So, despite remaining extraordinarily accomodative, the Bank doesn't think economic growth will be either (a) as strong as it had previously thought, or (b) strong enough to close the output gap.

Though year-over-year growth of 3.8% in 2010 followed by 2.7% in 2011, which were its forecasts as of the July MPR, would have done the job, growth of 3.0% this year (compared to 1.6% potential growth) followed by 2.4% next year (compared to 1.8% potential growth), which are its current forecasts, won't.

Therefore, the Bank will be required to enhance growth opportunities in 2012 in order to achieve the growth rate of 2.8% (compared to 2.0% potential growth) required to close the output gap.




Given that the Bank forecasts the output gap will not be closed until a year later than earlier projected, it seems safe to assume that the Bank will not return to neutral monetary policy until a year later than it earlier would have assumed.

As such, if its base case scenario had been that once it started hiking its overnight interest rate in July it would do so in sequential meetings until rates had been normalized, it seems that, based on currently available information, a resumption of that projected path of interest rates will likely wait a year.

Personally, given my expectations for deterioration in the U.S. economy (due to continued household deleveraging, continued reluctance on the part of banks to increase lending, fiscal spending headwinds rather than tailwinds, the end of the inventory bounce, spending cutbacks at the state and local levels, reluctance on the part of the business sector to make capital expenditure investments given its overcapacity, and no imminent rebound in the housing market or in the labour market), plus concerns about the unsustainability of household spending in Canada, as well as the prospect of global forces of competitive currency devaluation impairing Canadian trade balances, I am reluctant to believe that the Bank will be successful at closing the output gap over its forecast horizon.

In any case, on a breakeven basis, the current 2-year yield of 1.43% would be consistent with a time-path of overnight rates that involved the Bank staying on hold at 1% until October 2011, at which time rates would be hiked in four consecutive meetings to get to 2%.

October 13

from A long road ahead in regaining lost jobs in the NYT:


Fed Chief Gets Set to Apply Lessons of Japan's History. John Hilsenrath, WSJ.

flashback to 1999:
Japanese Monetary Policy: A Case of Self-Induced Paralysis? Ben Bernanke.

Why is the Fed doing this? James Hamilton.

Why printing money makes sense. Dean Baker, Guardian.

The Japan syndrome. Ethan Devine, Foreign Policy.

China's teetering on the verge of its own lost decade, and a meltdown in Beijing would make Japan's economic malaise look like child's play.

other fare:

Global power: On top of the world. Why the West’s present dominance is both recent and temporary. The Economist.

What Mr Morris shows is that over a period of 10,000 years one civilisation after another hit a “hard ceiling” of social development before falling apart, unable to control the forces its success had unleashed....
There is, on the other hand, a real possibility that we fail to negotiate even the next 50 years without triggering environmental catastrophe, global pandemics or nuclear war. In which case, both West and East will simultaneously crash into the hard ceiling of our own era.

Global aging. Phillip Longman, Foreign Policy.

The Real Perils of Human Population Growth. David and Maria Pimentel.

June or July?

Will the BoC hike on June 1, as had been widely expected as of a few weeks ago?

Or will they wait for the July meeting, given they had previously "committed", and reiterated that commitment numerous times, contingent on their inflation projections, to be on hold until the end of the second quarter... and given that economic and market uncertainty --- b/c of the situation in Europe, as well as FinReg in the U.S. --- prevails?

I tend to think that if the Bank was meeting today, given what the ECB is doing, and given what currencies are doing, and given that concerns about the possibility of a global economic double-dip may have mounted in the last couple of weeks, that it would be relatively costless for the BoC to take a wait-and-see approach for another month, whereas it would potentially look odd to hike in two weeks and then perhaps regret it.

That is, of course, if the decision were made today, in the midst of this recent turmoil. But the decision is not today. So that raises the question of what is the likelihood that some meaningful resolution of the European debt crisis is made in the next couple of weeks? In my estimation, this is a problem that is not going away; there is no short-term fix.

That said, there may be band-aids that could be applied that satisfy the market for a while, leading to a bounce-back from the currently oversold condition in stock markets and overbought condition in bond markets. In which case, that raises the question of what is the likelihood that the ECB and European politicians --- who have gotten the market so rattled in recent days and weeks --- actually come to an adequate resolution to satisfy the markets for awhile. Once again, in my estimation, the odds aren't that good; why would they change their stripes over the next week or two?

But let's leave the Euro situation off the table for now. What are the reasons the BoC might hike despite the Euro, and what are the reasons the BoC might hold off?

Hike now:
- by hiking, the Bank would not be tightening so much as starting the process of normalizing rates, and, even with a few hikes, could remain relatively accomodative for some time
- Taylor Rule estimates, based on current levels of CPI and employment, finally suggest that a rate north of 50bp is appropriate
- Q1 GDP is projected to come in up nearly 6% on an annualized basis, following Q4's rise of 1.2% (or 5% annualized)
- Canadian leading economic indicators are up 3% in the 3mths through April and 11% over the last year
- according to the Labour Force Survey, employment has climbed a whopping 148k over the last 3 mths (through April), and even the less volatile Survey of Employment Payrolls and Hours suggests employment has climbed 44k in the 3mths through Februay (pretty consistent with what the LFS said through Feb.)
- retail sales are up 9% YoY through Q1, including up 5.5% ex-autos & gas; retail sales are not just climbing strongly off trough levels, but have surged past the pre-recession peaks
- housing starts and building permits are up significantly off their 2009 lows, and basically back to 2007-type levels
- the Senior Loan Officer Survey says that banks have been easing lending conditions over the last couple of quarters (after a couple years of tightening)
- the Business Outlook Survey suggest future expectations are as positive as they've been over the last decade

Wait and see:
- as of the end of Q4, real and nominal GDP remain 2.5% and 4.4%, respectively, below the peak levels attained in 2008, so even with recent strong growth, the output gap remains substantial
- recent strong growth may be illusory and unsustainable, given that personal consumption accounts for 58% of GDP while personal income accounts for 53% of GDP, so consumption continues to be driven by debt growth;
- similarly, residential investment accounted for 6.9% of GDP at the end of Q4, presumably higher in Q1, and historically has always peaked right around that 7% level, which may portend a housing market due for some cooling
- C$, trading at 94 cents now, is below the BoC's forecasted level of 96-98 cents --- admittedly, it has only been below the Bank's forecast level for a few days, and, admittedly, a lower C$ should actually be stimulative for the economy, giving more reason for the Bank to remove accomodation, but the fact remains that a sharp fall in currency levels could be a telling indicator for the Bank
- further to last, for instance, oil prices have retreated to $70, the lowest level since last July --- which is good for the domestic demand side of the economy, but is a net negative for a net- exporter of oil, and is reflective of commodity prices more generally
- though merchandise trade exports are, through Q1, up 19% from the 2009 trough, they remain 24% below the 2008 peak --- and are sensitive to commodity prices, which have recently been heading down, as noted, and global economic activity, which is at risk
- similarly, wholesale trade is up 9% from the trough, but still down 5% from the previous peak
- though there has been recent job growth, and the number of unempoyed people, at 1.5 million, is down 6% from the worst point in 2009, there are still 42% more unemployed than at the start of the recession; and the unemployment rate, though down to 8.1% from the peak of 8.7%, remains well above the 5.8% pre-recession rate
- both core and headline CPI in Canada are below the Bank's target of 2%, and with the prevailing output gap and the other trends already mentioned, and with U.S. CPI below 1%, there's no clear reason to believe CPI would be escalating rather than be tame or even falling
- that is especially so given that though monetary reserves are up 30% YoY, M1 is up less than half that, at 13.5% YoY, M2 is up about half that, at 6.7% YoY, and M3 is up less than half that, at 2.9% YoY --- so the money multiplier and monetary velocity continue to decline
- indications of a consumer debt bubble in Canada include the facts that mortgage debt as a % of personal income has surged through the 100% level to 116% (vs. a 1990s peak of 84%) and household debt to 170% of GDP, up from 115% in 2000 (apparently Canadians learned nothing from the U.S.)
- the Fed has reiterated that it "continues to anticipate that economic conditions, including low rates of resource utilization, subdued inflation trends, and stable inflation expectations, are likely to warrant exceptionally low levels of the federal funds rate for an extended period", and it is an open question as to how much the BoC can hike without the Fed hiking without currency movements adversely affecting the domestic economy (more than the Bank would be comfortable with)


Really, what it comes down to is how sure is the Bank that recent strong economic trends off recession lows are likely to be sustained?

Personally, I don't buy into the back-to-normal theory, continue to believe that:
- further leveraging (debt growth) in the Canadian economy will make the fall all the worse when it comes
- the U.S. economy has been living off of federal government stimulus for the last year and will soon fall back when (a) that stimulus wanes, and (b) the next round of credit strains (Alt-A and Prime mortgage delinquencies, defaults and related foreclosures) ramps up, and (c) the crisis at the state and municipal levels becomes impossible to ignore
- China is a bubble waiting to burst (details in earlier posts) --- and the recent stock market moves in China may be suggesting that process is underway
- even if Canada, the U.S. and China didn't have their own inherent risks, the linkages in the global economy are too significant for European retrenching not to become problematic for the global economy at large, and European retrenchment will be not just necessary in the PIIGS, but, because of the prevailing bailout mentality, will bring down the European core countries as well (though German exporters will certainly benefit from a weaker Euro, that won't help Canadian or Chinese exporters, so there will be feedback loop impacts)

So, at the end of the day, what do I forecast?

- the Bank does nothing June 1 other than change its commentary to indicate its intention to hike
- the Bank hikes 50bp in July
- the Bank hikes by 25bp once more in early September
- by autumn, things will be visibly messy again
- there will be a European recession, and a double-dip U.S. recession, a significant China slowdown, and, consequently, another Canadian recession
- though domestic demand in Canada will not lead, it will follow; Canadian domestic demand will be the tail, not the dog --- the Canadian recession will not be driven solely by external demand, but the housing and debt bubble in Canada will be pricked by the next global recession
- further BoC hikes will be off the table for a long while, not until the Fed hikes
- the Fed won't hike until perhaps 2014 (yes, Dorothy is not in Kansas anymore; like The Vapors, she, and the FOMC, are Turning Japanese)


p.s. see Canadian Economic Review

Some thoughts on the MPR

The market reaction to the release of the MPR was all about the unconventional, but I'll start with the conventional.

The Bank reduced its forecasts for growth prospects, as expected, relative to the January MPR Update, to -3.0% expected this year, +2.5% next year, and +4.7% in 2011. It attributes the downgrades primarily to the significant unforeseen foreign weakness propagating through trade, financial and confidence channels (adverse feedback loop), and to delays in implementation of policies to stabilize the financial system (particularly in the U.S.).

But the Bank remains relatively more upbeat than some other forecasters (see previous post), and continues to project a more robust recovery in Canada than in other countries. So, though the recovery will be delayed and more gradual than previously anticipated due to the unanticipated intensification and synchronicity of the global recession (particularly acute in Europe and Japan, with knock-on effects on global trade), the Bank continues to expect above-potential growth in Canada in 2010 (albeit with a lower estimate of potential output growth).

The Bank has a long list of factors that it views as supportive of this prediction, including the scale of its own monetary policy response, the relatively well-functioning Canadian financial system, the past C$ depreciation, fiscal stimulus, a gradual rebound in external demand, the strength of balance sheets in Canada (household, business and bank), and the end of residential housing stock adjustments both in the U.S. and here. More generally, it believes that bold policy actions globally, an end this year to the U.S. housing drag, and a relatively robust China will all be positive factors for the global economy.

However, there are obviously numerous challenges also. Though Canadian households have entered this downturn with balance sheets that are not as stretched as elsewhere, they have reacted with a similar increase in their desired savings rates. And, though Canadian households have generally had lower rates passed on to them, businesses are facing difficult financing conditions. Further, U.S. weakness has mostly been in sectors that have a large impact on Canadian exports (housing and autos). Also, there has been significant unwanted inventory accumulation. And, due to the steep drop in the terms of trade, there has been a similar sharp drop in real gross domestic income (which is forecast to decline 6.4% this year). Investment in housing is expected to fall all this year and business fixed investment is expected to drop sharply. And the output gap, which is estimated to be about 3% currently, is expected to widen to 4.5%.

Perhaps the most notable change in the Bank's report is that it has dropped its estimate of the economy's potential output (i.e. the pace of output growth that would be non-inflationary). Previously, it had viewed potential as 2.4% (for this year, and 2.5% going forward). Because of the structural change going on in the economy (especially in autos and forest products), it now views potential output as just 1.2% for this year, 1.5% next year, and 1.9% in 2010. Clearly, lower potential output estimates, if accurate, will make it easier to close the output gap and thus start get inflation back towards the 2% target (not anticipated for 10 quarters, in Q3/'11).

The Bank notes that if the economy deteriorates any further than currently expected, because its overnight rate is currently at its effective lower bound for conventional monetary policy, it would need to react with unconventional policy. And, given the degree of uncertainty related to such new policies, it would therefore need to use prudence with these initiatives (i.e. it will be cautious about how much it uses these programs, if at all). Therefore, it says that implies that inflation risks remain tilted, though slightly, to the downside.

All this will likely be very sensitive to its assumptions on the stabilization of the global financial system, given that it continues to maintain that such stabilization is a precondition for recovery. And the Bank seems to be unimpressed so far with the pace of progress in this regard. The Bank did not really outline its expectations for further credit losses in the global financial system, nor for the pace of resolution of impaired legacy assets, so its hard to evaluate this element. Another risk is the ever-present one of the potential destabilizing resolution of global imbalances. (The Bank did not comment on the fact that it seems that most government stimulus that has been enacted so far seems to aggravate existing imbalances, i.e. that American stimulus is somewhat focused on reviving U.S. consumption, while Chinese stimulus is somewhat focused on the investment and export sectors.) The Bank's forecasts would also be sensitive to its assumptions on the currency (C$ = US$0.80), oil (from $50 now to $60 at year-end, to $70 in 2011, based on futures) and non-energy commodity prices (increasing progressively with global economy).


Now, turning to the unconventional. The Bank views its commitment to keep its overnight rate at its current low level for over a year (and future conditional statements about the future path of policy rates) as its first main instrument of unconventional policy. It hopes that because long-term rates represent averages of current and expected future short-term rates (plus term premiums), that it can influence the government yield curve lower, and in turn support prices of other financial assets, and, in turn, aggregate demand.

That we already knew on Tuesday. And, unfortunately, there's really nothing in the MPR about quantitative easing (QE) (which would involve purchasing government or private assets, paid for by expanding the money supply), or credit easing (CE) (purchases of private sector assets, but sterilized, so the monetary base doesn't change) that's new or noteworthy either. The only new info is (1) that if it does purchase private assets, it will be restricted to those exhibiting a clear market failure, and (2) is the publication of the principles it will use to guide its actions. Newsflash #1, its focus is on its inflation target. 2) anything it does should be concentrated where it will have impact (perhaps purchasing 5yr GoCs would have more impact than buying 2s, particularly given that the impact the Bank is ultimately worried about is on private sector interest rates). Its principles of (3) neutrality (limit potential distortions) and of (4) prudence (don't unduly risk the Bank's balance sheet), seem to indicate a preference for QE over CE.

Other asset implications? Given how little detail is provided on this new monetary policy framework, its really hard to know. Probably there will be just as many guesses out there in the market today as to what they might do as there were yesterday (GoCs? provies? CMBs? corporate bonds? CP? ABCP? ABS?).

Ultimately, it appears that the Bank's outlook on the economy and inflation, and its conditional commitment to low rates, should be favourable for lower rates along the government curve. And, if anything, it appears that the Bank remains relatively optimistic that global financial instabilities will be resolved soon enough to foster the growth its looking for. Not that it can do anything about it, but that leaves the Bank relying on Timothy Geithner too much for my liking.

Really, what it comes down to is, will the Bank's forecasts be more accurate than those of the IMF and OECD, or not. If so, then no QE or CE. But, if not, it will take longer to get inflation back on target, with potentially a larger miss in the meantime, implying an announement in June (or more likely at another future fixed action date) about what particular QE or CE measure it decides it needs to employ.

But, in any case, it seems clear that the Bank feels there's a greater burden of proof that there's a need in order for it to go down that road. It too may be looking at 2nd derivatives and green shoots and hoping to not need to invoke too many extraordinary measures.

Global Economic Outlooks

The Bank of Canada released its MPR today, which, among other things (more later), lays out its projections for economic growth.

I thought it might be interesting to compare what the Bank is expecting relative to the recently released projections offered by the OECD and by the IMF.

Here are the BoC's forecasts for 2009 and 2010 real GDP growth:

Canada: -3.0; +2.5
U.S.: -2.4; +1.2
E.U.: -3.6; -0.2
World: -0.8; +2.2

Here are those from the OECD:

Canada: -3.0; +0.3
U.S.: -4.0; 0.0
E.U.: -4.1; -0.3
OECD: -4.3; -0.1
OECD+BRIC: -2.7; +1.2

And those from the IMF:

Canada: -2.5; +1.2
U.S.: -2.8; 0.0
E.U.: -4.2; -0.4
World: -1.3; +1.9

a few observations:

the OECD is the most pessimistic, both for 2009, but particularly regarding prospects for 2010 (basically bigger fall in '09 and then no bounceback in '10)

the BoC is more optimistic than either the OECD or IMF not just on how much the U.S. declines this year, but its prospects for next year; neither the OECD nor IMF have projected any 2010 growth for the U.S.

all three sets of forecasts are reasonably bearish on Europe (from -3.6 to -4.2 this year, and more slippage next year)

all three groups of forecasters predict Canada outperforms other advanced economies in 2010, presumably due to its linkages to developing economies

the BoC's forecasts aren't that far off from those of the IMF, but are definitely more optimistic (or, perhaps more accurately, less pessimistic), and the BoC, though it has pencilled in a more gradual recovery than it was previously forecasting, is definitely looking for more of a V-shape than either the OECD or IMF



UPDATE:
the OECD's more pessimistic outlook may be due to its assessment that it takes 4 to 6 quarters for changes in financial conditions to have their full impact on GDP, so the full effect of past tightening in conditions since Sept/08 has not yet been felt; also, it is expecting further large prospective declines in world trade, based on advance indicators; further, it notes that housing recessions are worsening almost everywhere other than the U.S.; it is also concerned that large cyclical increased in unemployment have a tendency to become structural in part, reducing productive potential

notably, the OECD's foresees:
- the U.S. output gap reaching 10% and therefore inflation, after going negative for much of 2009, only stabilizing near 0% at the end of 2010
- strong BRIC rebound in 2010 driving robust rebound in world trade
- the OECD's report noted that it is important to commit to low levels of monetary policy rates for a sufficient period of time, as studies have shown such a commitment to have an effect on lowering the yield curve

On Hold For a Year... We Promise (maybe?)

The Bank of Canada cut its rate in half today, to 0.25%, "which [it] judges to be the effective lower bound for that rate". Unlike the Fed, it did not set a range of 0-0.25; but it's not quite just a straight-up decrease of 0.25%, either. This is because the Bank did not reduce the deposit rate as it usually does when it drops its target overnight rate, so the former remains at 0.25% as well. So, as outlined in its new operating framework, the operating band has been reduced to 0.25% (i.e. from 0.25% to 0.50%) rather than 0.50% previously (yesterday it was 0.25% to 0.75%), with the target now set at the lower bound (0.25%) as opposed to the mid-point of the range (as had been the case). So, all in, this is supposed to be a rate cut of 25bps, but it might be something a bit less than 25 (given the constriction of the band and the unchanged lower bound).

What I find most interesting is not that they say it "commits to hold current policy rate until the end of the second quarter of 2010" (its making this guidance explicit "so as to influence rates at longer maturities"), but that it preceded that with "conditional on the inflation outlook". So, its a non-promise promise. In any case, the only reason they'd deviate from the promise is if inflation surprises to the upside from their current expectations.

As of January's MPR Update, the Bank of Canada expected Canadian growth to be -1.2% this year and +3.8% in 2010. They've admitted (informally) before now that the recession will be deeper than anticipated; they've now put numbers to that. Their new forecast is for -3.0% this year and +2.5% next year (i.e. a smaller rebound off an even lower base), with the start of the recovery delayed until the fourth quarter. The Bank believes we'll have to wait until the third quarter of 2011 to get back to productive capacity, even though they've revised down their estimate of potential growth.

The inflation outlook hasn't changed much, presumably due to the fact that not only has forecast growth been ratcheted down, but so has potential growth. Core inflation is still expected (as in January) to diminish all this year and return to the 2% target in Q3/2011 (instead of the more nebulous "mid-2011"). Headline is expected to trough at -0.8 in this year's third quarter (they said -1.0 in January), before also returning to target at the same time as core. Its hard to know how much these return-to-target assumptions are predicated on their 4.7% GDP growth forecast for 2011. The Bank admits that the risks to inflation remain tilted to the downside (albeit slightly).

The Bank insists that it retains "considerable flexibility in the conduct of monetary policy" despite the low level of interest rates. But we'll have to wait for Thursday's MPR to get a full outline of what that flexibility entails, in terms of quantitative and/or credit easing.

Stumbling blocks for central banks

A post at Worthwhile Canadian Initiative, Say's Law, Walras' Law and monetary policy, by Nick Rowe got me thinking more about reasons, other than just the liquidity trap, that central banks are (potentially) being stymied. Rowe's post is rather long, but the beginning and the end are worth a read --- and, unfortunately, the middle might be necessary to get the gist of his conclusion.

But, in any case, I'll try to summarize my takeaways from his thought experiments.


Basically, there are four sectors in the economy: the financial sector (banks), the corporate sector (businesses), the individual sector (households) and the government sector (which we'll ignore for now, although we know how it is behaving in order to try to fill in some of the gap from declining activity in the other sectors, though it seems unlikely that the marginal increase in government activity (so far) is sufficient to offset the marginal decrease in private sector activity).

The banks are principally in the business of (selling) offering loans to two of the other sectors: businesses and households (they really intermediate between the various parties in those sectors, receiving funds in from them, typically of shorter duration (deposits), and then lending it back out, typically of longer duration; of course, there's some leverage involved due to the fractional reserve system). The main point is banks have already offered too many loans, in the sense that many of those are at risk of not being paid back as expected, and, as such, the banking sector is not, for rational profit-seeking reasons, inclined to offer nearly as many new loans as had been the norm.

Non-financial corporations, meanwhile, in the business of selling goods, have an excess supply of those goods (both in terms of excessive inventories and excess capacity). Because the goods they sell are sold not in barter but for cash, an excess supply of goods implies an excess demand for cash.

Similarly, households have an excess supply of labour; they have more labour that they'd like to sell/offer to the business sector than the business sector is demanding or has need for. As such, individuals' excess supply of labour also implies an excess demand for money.

The central banks have recognized these issues. First, they pursued their conventional policy measure of dropping interest rates. This is normally done to spur increased lending (and to motivate private players to reduce their demand for cash, given that they can now receive less of a return on that cash) and thus spur economic activity. However, the central banks' goal of spurring lending has faced the constraint posed by what the banks are doing (or not doing). (They've also faced the constraint that households are starting to save to pay down debt; in this case, for households, lower rates have offsetting effects, as the lower rates hurt savers who earn less interest income, but helps debtors by lowering their interest burdens; nonetheless, lower rates don't satisfy the central banks' goal).

So the central banks recognize an excess demand for money in the private sector, and they endeavour to increase the supply of money. Except there's a problem with the mechanism which the central banks use to get more money into the system. They do that by buying bills and bonds from the public sector in exchange for the central banks' (electronic) cash (i.e. Q.E. or printing money).

Two problems: First, if, due to low rates, there's a liquidity trap, cash and bills are effectively inter-changeable; so printing money by taking bills out of the private sector's hands accomplishes nothing (exchanging an apple for an apple is no exchange at all). Second, even though bonds are not interchangeable with cash (there is a meaningful difference on the rates of return earned by each) (apple for canteloupe?), the bonds are being taken out of the wrong part of the private sector, i.e. the cash is being infused into the wrong part of the private sector. As Rowe says:
Just because one market is satiated with money does not mean that the economy as a whole is satiated with money. In a monetary exchange economy, there are as many different excess demands for money as there are goods (excluding money). If central banks "run out of ammunition" in one market, they can just switch to one of the other N-1 markets. And the market for very short term and very safe and very liquid bonds is a very peculiar market for central banks to be operating in anyway, just because they are so close to money.

Its the financial system that is the beneficiary of this money creation. But so long as the banking system continues to face the same constraints first mentioned (they have too many loans already on their books, and some portion of them are going bad; also, due to declining asset values and net worth and increasing unemployment, there's a decreasing number of creditworthy customers, particularly those who are in the market to increase their debt), there is no profit motive for them to do what the central bank hopes they'll do; sitting on idle cash is better than putting more loans (there are always new loans, but we're referring to net new loans) at risk of negative returns.

So the printing of money, like dropping interest rates, has no impact on either the corporate sector nor on the household sector, at least not until the problems in the financial sector are dealt with. And clearly that requires not just stop-gap measures such as we've seen to date (which do nothing more than stringing this crisis along and kicking the can down the road in the naive hopes that things start to get better soon and take care of themselves) but real measures to clean up the banks' balance sheets so that they are demonstrably and confidently solvent so that they are not just willing but eager to pursue their main line of business, offering loans (and not sitting idly on cash). This is where fiscal policy, as implemented in particular by Geithner and Paulson, has so far failed (and in Europe too and perhaps elsewhere, though Canada does not seem to face this issue).

Even that, however, while necessary, is not sufficient. Even healthy banks won't be willing to lend to an unhealthy private sector. So, given the limitations to monetary policy, both of the conventional and unconventional sort, fiscal policy must take precedence not just in restoring financial system stability (not the current ineffective Japanese way, but something more akin to the Swedish way), but of fully filling the private sector output gap (to stop the deterioration of the labour markets and give businesses a market for their excess goods).

[The preceding applies less to Canada, I think, than it does to many other economies, principally the U.S., but even for Canada it is at least relevant at the margin. Besides which, as exposed as Canada is as a small open economy that is reliant on exports, the normal business cycle dynamics, as opposed to financial crisis problems, are more than sufficient from global economic deterioration to overwhelm any internal positives Canada retains.]

QE comes to the US

Well, the Fed decided to pull the trigger on Quantitative Easing (QE) to augment its on-going, and now-expanded, campaign of Credit Easing (CE) --- and the bond market loves it.

US 10yr bonds have rallied 50bps from 3% to 2.5% and long bonds have rallied 44bps to 3.4% --- but the process of price-discovery is on-going here only 15 minutes after the announcement. Traders simply don't know yet where this will settle out.

Canadian bonds have of course rallied as well. 10-year yields have fallen to 2.7% and longs to 3.5%. We'll have to wait and see, probably until April 23, whether active QE programs in Japan, the UK, Switzerland and now the U.S. have any bearing on the Bank of Canada's decision about when to launch their own program.

The Fed statement follows:


Information received since the Federal Open Market Committee met in January indicates that the economy continues to contract. Job losses, declining equity and housing wealth, and tight credit conditions have weighed on consumer sentiment and spending. Weaker sales prospects and difficulties in obtaining credit have led businesses to cut back on inventories and fixed investment. U.S. exports have slumped as a number of major trading partners have also fallen into recession. Although the near-term economic outlook is weak, the Committee anticipates that policy actions to stabilize financial markets and institutions, together with fiscal and monetary stimulus, will contribute to a gradual resumption of sustainable economic growth.

In light of increasing economic slack here and abroad, the Committee expects that inflation will remain subdued. Moreover, the Committee sees some risk that inflation could persist for a time below rates that best foster economic growth and price stability in the longer term.

In these circumstances, the Federal Reserve will employ all available tools to promote economic recovery and to preserve price stability. The Committee will maintain the target range for the federal funds rate at 0 to 1/4 percent and anticipates that economic conditions are likely to warrant exceptionally low levels of the federal funds rate for an extended period. To provide greater support to mortgage lending and housing markets, the Committee decided today to increase the size of the Federal Reserve’s balance sheet further by purchasing up to an additional $750 billion of agency mortgage-backed securities, bringing its total purchases of these securities to up to $1.25 trillion this year, and to increase its purchases of agency debt this year by up to $100 billion to a total of up to $200 billion. Moreover, to help improve conditions in private credit markets, the Committee decided to purchase up to $300 billion of longer-term Treasury securities over the next six months. The Federal Reserve has launched the Term Asset-Backed Securities Loan Facility to facilitate the extension of credit to households and small businesses and anticipates that the range of eligible collateral for this facility is likely to be expanded to include other financial assets. The Committee will continue to carefully monitor the size and composition of the Federal Reserve's balance sheet in light of evolving financial and economic developments

Voting for the FOMC monetary policy action were: Ben S. Bernanke, Chairman; William C. Dudley, Vice Chairman; Elizabeth A. Duke; Charles L. Evans; Donald L. Kohn; Jeffrey M. Lacker; Dennis P. Lockhart; Daniel K. Tarullo; Kevin M. Warsh; and Janet L. Yellen.


As dramatic an impact as the Fed has had on the market today with its announcement, the impact is borne of psychology. Ultimately, the Fed's purchase programs are relatively small compared to the size of the total credit markets and money supply. So, while it does go to show that betting against the Fed can be a painful trade, its not yet clear how much buying the Fed will have to do in order to offset the deleveraging going on in the broader economy (total US credit market debt of over $52 trillion). But there's no doubt that the lower yields will help.

Back to the '50s for the Bank of Canada

The Bank of Canada announced this morning a 75bp cut to its overnight target rate, dropping the level to 1.50%, the lowest since 1958.

The extent to which many central banks keep cutting their policy interest rates has to date overwhelmed what even the most bearish economic observers anticipated even just 3 months ago, never mind a year ago.

I've done pretty well this year managing my money market portfolios by staying consistently long (max long, as far as my mandates would allow, for the vast majority of the time), but I've got to admit, I didn't see this coming.

If one held the view that this economic environment would deteriorate to worse levels than recent previous recessionary periods (early '80s, '90s and '00s), it was not hard to envision that monetary policy would need to be at least as stimulative now as in those cycles. So its not terribly surprising that the Bank dropped its rate to below the past cycles' lows of 2.00%. The surprising thing is that the job is likely not yet done.

After today's statement from the Bank, it would no longer be surprising if the Bank took out the historical low of 1.12% set in the '50s by cutting at its next scheduled meeting on January 20th by another 50bps to 1.00%. The statement, which uses language like "deteriorated significantly" (i.e. the world economy), "broader and deeper" (i.e. the coming global recession) and "severely strained" (i.e. the global financial markets), and the absence of any mention of two-sided inflation risks (although there is some acknowledgement of countervailing factors, including the amount of monetary medicine injected into the patient to date, as well as the depreciation of the C$, which will help offset some of the effects of plunging commodity prices and falling global demand for our exports), is quite dovish. And the forward-looking policy bias remains toward further easing, with the extent of such extra stimulus being data-dependent.

In other words, as much as the Bank would surely like for its job to be done, it seems that its actions will be determined by the evolution of the economic outlook, and on that front, there seems little reason for optimism just yet. Will the Bank at some point go on hold to see how well its actions to date are acting? Surely, yes. But it seems clear now that if 2% and 1.5% weren't going to be viewed by the Bank as lower bounds, then there's little reason to expect 1% to either.

Look out below, as the only lower bound that will truly stand in the Bank's way is 0!