In his latest Viewpoints note, Jim O’Neill reflects on new policies that have been introduced in the last five years.
“It seems to me, policymakers have made a probable significant error and need to consider important changes,” writes, O’Neill, Chairman of Goldman Sachs Asset Management.
He questions if policymakers have actually created hindrances to the growth that they are trying to encourage.
Insurance companies, pension funds, and banks are all essentially being forced by regulators to take less risk and buy govenment bonds. Furthermore, banks are also being forced to cut back lending and adopt more cautious strategies, which means they cannot put money into the economy.
Meanwhile, the world’s central banks have embarked on easy monetary policies like QE which are aimed at lowering long-term interest rates, which in turn should encourage lending. But O’Neill describes QE as a “questionable pursuit.”
Because, one measure of the success of QE – lower government bond yields – is also a measure of increasing caution amongst investors. And based on all of the new policies, lower rates seem to reflect caution. O’Neill writes:
Particularly in the context of the pension fund “gap” and the vexed question as to why companies have so much cash in the west, and how do we get more investment and employment in the private sector? If the primary hope for bringing a rosier economic future lies in the behaviour of our companies, the last thing policymakers should be doing is introducing policies to make them more cautious. Expressed alternatively, as one of my GSAM colleagues put it to me this past week, if a company can’t survive with 2.5% bond yields, 1.5% isn’t going to really make a difference.
So, if QE doesn’t really work, then what’s the point of pursuing it?
Perhaps this is why the world’s central banks didn’t announce any new easy monetary policy moves in the last few weeks.
Much of what O’Neill has said so far has more or less been discussed by other economists, experts, and pundits.
However, O’Neill couldn’t help but notice the fact that ALL of the major banks refrained from easing even as the economy deteriorated significantly.
With this in mind, it continues to be intriguing that many central banks “passed” on further easing in the past fortnight. This includes Japan, South Korea, the UK, Australia, the US and, of course, the Euro area. Whether this has anything to do with the above discussion, I don’t know. Just as likely is that many are judging how many genuine bullets they have left to fire, and in any case, is it not better to wait and see whether the ECB fires its attempted bazooka, because only then will it be clear whether others will need to try or not? I also can’t avoid the suspicion that there is a flavour of the “co-ordinated” about it all.
Read O’Neill’s whole note at GoldmanSachs.com.