Monetary policy is (barely) carrying the world

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garlandwhizzer
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Monetary policy is (barely) carrying the world

Post by garlandwhizzer » Thu Jul 07, 2016 1:28 pm

Vanguard's web site article suggests low rates and low growth are secular not cyclical. Monetary policy has reached its limits worldwide. Unless aggressive fiscal policy steps up to the plate we may be stuck in the "new normal" for quite some time. Comments?

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Re: Monetary policy is (barely) carrying the world

Post by BolderBoy » Thu Jul 07, 2016 1:43 pm

garlandwhizzer wrote:Vanguard's web site article suggests low rates and low growth are secular not cyclical. Monetary policy has reached its limits worldwide. Unless aggressive fiscal policy steps up to the plate we may be stuck in the "new normal" for quite some time. Comments?
This stuff is pretty nebulous to me. I read the article. What is meant by "fiscal policy"? On the one hand, I'd like to think it means something like the government, "living below its means." But the cynical side of me suspects that 'fiscal policy' means a return to the Keynesian days of massive government spending ('living waaaaay beyond its means'.)

Can you educate me?
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Re: Monetary policy is (barely) carrying the world

Post by galeno » Thu Jul 07, 2016 2:07 pm

The entire world is still trying to come to terms with the information revolution and globalization. Looking at the history of what happened when the industrial revolution overtook the agricultural age, I'm amazed things have gone so well. At least so far.
AA = 40/55/5. Expected CAGR = 3.8%. GSD (5y) = 6.2%. USD inflation (10 y) = 1.8%. AWR = 4.0%. TER = 0.4%. Port Yield = 2.82%. Term = 33 yr. FI Duration = 6.0 yr. Portfolio survival probability = 95%.

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Re: Monetary policy is (barely) carrying the world

Post by kenner » Thu Jul 07, 2016 2:10 pm

Just a heads-up, policy discussions may be frowned upon by the Board.

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Re: Monetary policy is (barely) carrying the world

Post by Tigermoose » Thu Jul 07, 2016 2:19 pm

National banks around the world helped stave off a deflationary spiral by increasing the money supply and propping up asset prices. This increased money supply largely flowed into financial assets, and only minimally into goods and services that make up the CPI. Thus we still have a low demand environment for goods and services, a "new normal" if everything stays the same (which it never does). The "smart people" are now trying to figure out the best way to increase demand and growth and inflation. They tend to fall in two camps:

1. Those who want to cut taxes to increase spending and thus demand
2. Those who want to increase government spending to increase spending and thus demand

In the past, we have been able to open up new markets that led to increased demand for our goods and services (globalization and free trade). One wonders if this is still an available option, or if all the low hanging fruit is gone.

Another option would be to invent technology that leads to increased spending and productivity gains (the railroads, the automobile, computers, etc). This is the best option. We need to reduce regulation and enact policies and that lead to greater risk taking in the creation of new technologies and business practices.

Actionable Item: Stick to your ISP and count on that last option -- it seems to have always worked before.
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Re: Monetary policy is (barely) carrying the world

Post by Dead Man Walking » Thu Jul 07, 2016 4:33 pm

I listened to a discussion of the monetary policies of central bankers on one of the business stations on xm radio. The participants seemed to think that one problem is that many of the central bankers are inexperienced. Of course, they had opinions on the effects of negative interest rates and monetary policy. After listening to these gas bags, I drew the conclusion that no-one knows what the hell is going on, including the experts at Vanguard. I think the experts at Vanguard are covering their butts in case adding international bonds to their all in one funds fails to bolster performance. Consequently, my actionable strategy is to avoid funds that include international bonds even though they are the world's largest asset class. The recent total return of international bond funds seems to be capital gains. As I recall, Jack Bogle stated that the long-term return of bond funds will be similar to the yield. To capture capital gains, one must sell the fund.

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Re: Monetary policy is (barely) carrying the world

Post by Phineas J. Whoopee » Thu Jul 07, 2016 4:42 pm

BolderBoy wrote:...
This stuff is pretty nebulous to me. I read the article. What is meant by "fiscal policy"? On the one hand, I'd like to think it means something like the government, "living below its means." But the cynical side of me suspects that 'fiscal policy' means a return to the Keynesian days of massive government spending ('living waaaaay beyond its means'.)
Can you educate me?
Fiscal policy has to do with government taxation, borrowing or paying off debts, and spending, including the decision of how much to spend on what. It doesn't imply any particular school of economic thought. It's the purview of national governments.

Monetary policy, on the other hand, has to do with the size and rate of change of the money supply. It's the purview of central banks.

Was that educational enough?

PJW

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Re: Monetary policy is (barely) carrying the world

Post by scone » Thu Jul 07, 2016 5:05 pm

Cullen Roche has an article in PragCap where he suggests that the period we are now living in represents a reversion to a much longer term "normal" from a period of unusually good returns. He called the article "The Great Normalization," and suggests that what this period lacks in growth, it might make up in greater sustainability and stability. We shall see. My old history profs would say, it's moot, since "you can't see history close up," but only with the benefit of long hindsight.
Last edited by scone on Thu Jul 07, 2016 5:07 pm, edited 1 time in total.
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Re: Monetary policy is (barely) carrying the world

Post by whodidntante » Thu Jul 07, 2016 5:07 pm

BolderBoy wrote:
garlandwhizzer wrote:Vanguard's web site article suggests low rates and low growth are secular not cyclical. Monetary policy has reached its limits worldwide. Unless aggressive fiscal policy steps up to the plate we may be stuck in the "new normal" for quite some time. Comments?
This stuff is pretty nebulous to me. I read the article. What is meant by "fiscal policy"? On the one hand, I'd like to think it means something like the government, "living below its means." But the cynical side of me suspects that 'fiscal policy' means a return to the Keynesian days of massive government spending ('living waaaaay beyond its means'.)

Can you educate me?
No, that is austerity, and it hasn't really worked in Europe.

With rates this low, I wonder why we don't rebuild this "crumbling infrastructure" I keep hearing about.

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Re: Monetary policy is (barely) carrying the world

Post by zaboomafoozarg » Thu Jul 07, 2016 5:10 pm

This is why I plan for 2%/0% real stock/bond returns for the rest of my life. The golden days are most likely over.

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Re: Monetary policy is (barely) carrying the world

Post by alex_686 » Thu Jul 07, 2016 5:10 pm

Could somebody post a link to the Vanguard article?

Here is a link to Larry Summers (Ex-Treasury Secretary.) why is advocating Secular Stagnation.
http://larrysummers.com/2016/02/17/the- ... tagnation/

Or you can go with the “New Normal” theory put forward by ex-Pimco fund manager of Mohamed A. El-Erian.

In either case, part of the argument is that we are going to have a high supply of savings and a low demand for capital. This will push long term returns down, lead to deflation, and possible asset bubbles.

I would think this is actionable. If this is true we are going to be in for a bumpy ride for the next 10 years.


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Re: Monetary policy is (barely) carrying the world

Post by BolderBoy » Thu Jul 07, 2016 5:25 pm

Phineas J. Whoopee wrote:
BolderBoy wrote:...
This stuff is pretty nebulous to me. I read the article. What is meant by "fiscal policy"? On the one hand, I'd like to think it means something like the government, "living below its means." But the cynical side of me suspects that 'fiscal policy' means a return to the Keynesian days of massive government spending ('living waaaaay beyond its means'.)
Can you educate me?
Fiscal policy has to do with government taxation, borrowing or paying off debts, and spending, including the decision of how much to spend on what. It doesn't imply any particular school of economic thought. It's the purview of national governments.

Monetary policy, on the other hand, has to do with the size and rate of change of the money supply. It's the purview of central banks.

Was that educational enough?
Yes! Thank you.
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Re: Monetary policy is (barely) carrying the world

Post by alex_686 » Thu Jul 07, 2016 5:26 pm

BolderBoy wrote:This stuff is pretty nebulous to me. I read the article. What is meant by "fiscal policy"? On the one hand, I'd like to think it means something like the government, "living below its means." But the cynical side of me suspects that 'fiscal policy' means a return to the Keynesian days of massive government spending ('living waaaaay beyond its means'.)
Phineas J. Whoopee did a good job but let me give another perspective. Currently there is an excess of savings and money. Or maybe there is a lack of investment opportunities out there. Either say, supply and demand for money / credit/ investments are out of whack.

We could do nothing. This could lead to a cleanings restructuring of the economy. The last time we did that was in the 1930s. We can get into a debate if deflation is worse than hyperinflation but deflation is pretty bad.

On the fiscal side the government could deficit spend, soaking up the excess savings and putting it to work. This is what most people think of when they think fiscal policy. However, another alternative would be structural reform. Rationalizing and / or reducing regulations to make investment more attractive. Supply side, cutting taxes, is a third alternative but probably not applicable here.

Monetary policy is the one that has been doing the heavy lifting. To combat deflation the Fed has been buy up the excess savings and has been issuing cash.

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Re: Monetary policy is (barely) carrying the world

Post by carofe » Thu Jul 07, 2016 5:28 pm

People haven't freaked out hard enough because the rebound in 2009 is so recent that makes them be optimistic. I say we are going to be slowly reverting to the mean to the point that the "slowly" will become "crash" as people began to get discouraged. I think in less than 10 years we are going to see a full blown crash.
I know the math shows a slow growth but the human being behaviors and emotions are more chaotic than what the math can predict. A long-term low return will discourage investor a lot, see here in this forum how people are already questioning holding international when they see the poor 20 years return of Vanguard Intl Total Stock Market.

Unless, of course, something else happens. Isn't this excessive saving a human behavior reaction as the result of the 2008 financial crisis?
Last edited by carofe on Thu Jul 07, 2016 5:50 pm, edited 1 time in total.
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Re: Monetary policy is (barely) carrying the world

Post by Tanelorn » Thu Jul 07, 2016 5:48 pm

This video by Ray Dalio, head of the biggest hedge fund, does a pretty good job of explaining these sorts of macro economic issues.

http://www.economicprinciples.org

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Re: Monetary policy is (barely) carrying the world

Post by carofe » Thu Jul 07, 2016 6:28 pm

Tanelorn wrote:This video by Ray Dalio, head of the biggest hedge fund, does a pretty good job of explaining these sorts of macro economic issues.

http://www.economicprinciples.org
Thanks for the posting. It is very educational.
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Re: Monetary policy is (barely) carrying the world

Post by Oicuryy » Thu Jul 07, 2016 6:28 pm

Phineas J. Whoopee wrote: Monetary policy, on the other hand, has to do with the size and rate of change of the money supply. It's the purview of central banks.
So when Vanguard says monetary policy "is reaching its limits" do they mean central banks can no longer change the money supply?

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Re: Monetary policy is (barely) carrying the world

Post by RyeWhiskey » Thu Jul 07, 2016 6:31 pm

Oicuryy wrote:
Phineas J. Whoopee wrote: Monetary policy, on the other hand, has to do with the size and rate of change of the money supply. It's the purview of central banks.
So when Vanguard says monetary policy "is reaching its limits" do they mean central banks can no longer change the money supply?

Ron
No, I think this refers to the effectiveness of changing the money supply to achieve certain outcomes.
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Re: Monetary policy is (barely) carrying the world

Post by technovelist » Thu Jul 07, 2016 6:52 pm

In other words, the central banks have run out of effective ammunition, so when the next crisis comes, they will have no way to soften it, even though they print until the presses catch fire (which they will).

I think this is correct, and the actionable advice is: have some exposure to a money that they can't print.
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Re: Monetary policy is (barely) carrying the world

Post by Elbowman » Thu Jul 07, 2016 7:44 pm

technovelist wrote:I think this is correct, and the actionable advice is: have some exposure to a money that they can't print.
Governments can't print profitable companies, so most bogleheads already have substantial exposure to assets which can't be printed.

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Re: Monetary policy is (barely) carrying the world

Post by AlohaJoe » Thu Jul 07, 2016 8:20 pm

garlandwhizzer wrote:Vanguard's web site article suggests low rates and low growth are secular not cyclical. Monetary policy has reached its limits worldwide. Unless aggressive fiscal policy steps up to the plate we may be stuck in the "new normal" for quite some time. Comments?
This was the same conclusion in last year's "Secular drivers of the global real interest rate" working paper from the Bank of England. Theirs is a 63-page academic paper, so it isn't really fair to compare the short Vanguard blog with it. But they seem to take less of a "secular stagnation is now certain" and more of a "once we accept we are in a new world, there are a set of policy changes that governments will increasingly adopt that may (or may not) work out".

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Re: Monetary policy is (barely) carrying the world

Post by zaboomafoozarg » Thu Jul 07, 2016 8:23 pm

Meh, this is depressing. I think the only shot at retiring might come from making a lot more money.

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Re: Monetary policy is (barely) carrying the world

Post by technovelist » Thu Jul 07, 2016 8:25 pm

Elbowman wrote:
technovelist wrote:I think this is correct, and the actionable advice is: have some exposure to a money that they can't print.
Governments can't print profitable companies, so most bogleheads already have substantial exposure to assets which can't be printed.
Right, but governments can ruin the profitability of companies.
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Re: Monetary policy is (barely) carrying the world

Post by Oicuryy » Thu Jul 07, 2016 8:30 pm

RyeWhiskey wrote:No, I think this refers to the effectiveness of changing the money supply to achieve certain outcomes.
It's hard to believe that "printing" trillions more dollars would not be effective at lowering the value of dollars.

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Re: Monetary policy is (barely) carrying the world

Post by technovelist » Thu Jul 07, 2016 8:32 pm

Oicuryy wrote:
RyeWhiskey wrote:No, I think this refers to the effectiveness of changing the money supply to achieve certain outcomes.
It's hard to believe that "printing" trillions more dollars would not be effective at lowering the value of dollars.

Ron
I don't think anyone is doubting that. The question is whether it would have any positive effects. Negative effects are a certainty.
In theory, theory and practice are identical. In practice, they often differ.

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Re: Monetary policy is (barely) carrying the world

Post by nedsaid » Thu Jul 07, 2016 8:55 pm

garlandwhizzer wrote:Vanguard's web site article suggests low rates and low growth are secular not cyclical. Monetary policy has reached its limits worldwide. Unless aggressive fiscal policy steps up to the plate we may be stuck in the "new normal" for quite some time. Comments?

Garland Whizzer
My Grandparents on my father's side were in business. Neither had a college degree but I think they had a good grasp of economics. They taught me two big lessons in economics that I often wonder if people with PhD's in economics grasp.

First is the law of supply and demand. This law is pretty immutable no matter how we try to manipulate it with legislation and government policy. Supply and demand are pretty good at allocating resources through the setting of prices in the marketplace.

Second is the issue of public confidence. If people lack confidence in the future, they will hang on to their money. Purchases get put off as long as possible and people are reluctant to invest in business for greater future productivity. I think they learned this lesson from the Great Depression.

When times got a bit tight, my Grandfather would talk to other businessmen and encourage them to buy from each other. Buy furniture from me and I will buy a car from you. His idea was why not create our own recovery? Get that money flowing, create transactions, get the economy moving. Grandfather and his circle of friends weren't enough to generate an economic recovery but he was on to something. Really the biggest thing that stimulates the economy is public confidence.

This is what I tried to tell Valuethinker in another thread. I wasn't commenting so much on their particular situation over Brexit but what I perceived as a lack of confidence. The U.K. could sure use some of those "animal spirits" over there, the desire and enthusiasm to make a profit. A little bit of that capitalist greed to get us up in the morning. There are always obstacles and the oracles of doom that tell us every reason that things can't work.

We have heard the lectures about the "new normal." Our best days are behind us, the experts say. Everyday there is a new prophet of doom who articulates in exquisite detail as to why we are all doomed. If it isn't the sex scandals, its the money scandals. If that wasn't enough, there are the sex and money scandals. Even worse, are the money and sex scandals. Blah, blah, blah, blah.

So we are finished because of terrible fiscal policy. Awful monetary policy will certainly do us in. Not only that is bad fiscal and monetary policy. Even worse is awful monetary and fiscal policy. By golly, the budget deficit will do us in. Crumbling infrastructure. The dying dollar. We can't compete anymore. The country is divided.

The problem with all of this is that I have heard it as far back as I can remember. I remember back pretty well to the mid-1960's. How little has changed. Did you realize that we were all polluted to death probably 30 years ago? That our topsoil has all disappeared? That we burned to death because of the ozone hole? That our ice caps melted back in 2013? Remember when we ran out of oil. I still remember the death of equities. The dying dollar and the Federal debt. We were finished, I am telling you, finished.

My Grandparents were so right about public confidence. We could use more of it right now.
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Re: Monetary policy is (barely) carrying the world

Post by Oicuryy » Thu Jul 07, 2016 9:36 pm

technovelist wrote:
Oicuryy wrote:
RyeWhiskey wrote:No, I think this refers to the effectiveness of changing the money supply to achieve certain outcomes.
It's hard to believe that "printing" trillions more dollars would not be effective at lowering the value of dollars.

Ron
I don't think anyone is doubting that. The question is whether it would have any positive effects. Negative effects are a certainty.
The effect of lowering the value of dollars is to raise prices. That Vanguard article seems to imply that higher inflation would be a positive.
Vanguard wrote:Even though monetary policy remains incredibly easy, with negative rates in some countries, inflation expectations continue to drift lower.
...
We believe extreme policy experiments such as negative rates will not meaningfully boost either inflation or growth.
Vanguard must believe that money "printing" would not be inflationary.

Ron
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Re: Monetary policy is (barely) carrying the world

Post by protagonist » Thu Jul 07, 2016 9:46 pm

zaboomafoozarg wrote:This is why I plan for 2%/0% real stock/bond returns for the rest of my life.
If you believe that, why are you investing in stocks and bonds (assuming that you are)? CDs are currently beating inflation without the risk or volatility.

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Re: Monetary policy is (barely) carrying the world

Post by LadyGeek » Thu Jul 07, 2016 9:56 pm

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