Martin Parkinson, head of Australia’s Treasury department, gave a pointed reference yesterday to the destabilising impact of the globe’s low interest rate environment.
Speaking at Chatham House, the title of Parkinson’s speech, THE 2014 G20 GROWTH AGENDA: WHY BUSINESS AS USUAL IS NOT ENOUGH, gives some insight into his view of the complacency that is beguiling global legislators fixated on monetary policy and regulation doing the heavy lifting of the economic recovery rather than reform led by elected officials.
On low rates, Parkinson highlighted the fact, similar to one we covered yesterday from former US Treasury Secretary Tim Geithner, that the point of low interest rates was to increase risk-seeking saying that “monetary easing does indeed appear to have triggered risk-taking behaviour as intended”.
He further highlighted that the current reality of low volatility reflected the fact that “markets seem to be more concerned about ‘missing out’ on gains” rather than protection from any corrections.
That’s not a problem if the preconditions for such a market exist but Parkinson said:
The problem, however, is that the yield-seeking behaviour is raising the potential costs associated with extremely easy monetary policy. On the one hand, ongoing accommodative monetary settings are likely to continue to stoke risk-taking behaviour; while on the other hand, premature withdrawal of stimulus may undermine the recovery and increase corporate default rates with obvious flow-on impacts to asset markets and the real economy.
It seems clear that global policy makers are concerned about the impact of low rates, both now and when they are reversed.
So as Glenn Stevens said recently, the market may look very different when the Fed starts raising rates than it does at the moment.