Central banks pushing on strings again

by Chris Becker

This month has seen the antipodean central banks both cut rates, with almost no flow through to mortgages to relieve consumer debt and an appreciation in their respective currencies, in perfect opposition to their stated goals.

This is not a new trend – far from it. What’s supposed to happen when the local economy slows is you pull the lever, Kronk, lower interest rates stimulate consumer spending, reducing savings rate as a deluge of money floods the economy, inflation goes up, wages go up, more spending and whoosh, in come the accolades from the captured business media elites.

Now levers are pulled left right and centre and nothing seems to happen, further hindered by a lack of communication from both monetary and fiscal authorities into the truth of the matter at hand – that a lack of confidence in the direction of the economy is what is holding back consumer spending, not lower rates.

Furthermore, communicating and smoothing the confidence game that is the market is now becoming more of a parasite/host relationship, instead of a divorced, clinical approach in the past.

At Forexlive they put it a little less eloquently:

Back in the day a central bank would move rates when they saw fit and certainly didn’t massively advertise the fact. Traders and the population were left to infer expected action from what the economy was doing. If inflation was high then you’d get ready for hikes. If the economy was wobbling, you’d get prepared for cuts. Forward guidance was minimum but everyone knew where they stood on it. It made for some hairy monetary policy decisions but that’s what traders thrived on.

Nowadays no one should be expecting a big downside move on a cut, nor big upside move on a hike, unless it comes out of the blue. Forward guidance brings the move a rate cut would bring forward so when we get the actual rate cut, we’re expecting it. All that’s happened is the move has shifted forward in time.

As far as the currency is concerned, this rate cut has been a waste of time and now they may be forced into intervention to get it lower. We know how that’s worked out for them previously.

Forward guidance can work but it depends on who’s doing it. Look at Draghi back in 2014 when the euro was at 1.40. Remember Trichet and his vigilance/strong vigilance clues? The difference is that the ECB and the euro is huge, and with all due respect, the RBNZ and NZD isn’t. Draghi can utter a word and the market can move a thousand pips. Wheeler can utter the same word and the market can go “meh”.

You can’t stop change but I wish central banks would kick forward guidance out the window. They need to get shot of fan charts, dot plots, guessing games projections and just concentrate on what they should be doing, not on what the market may think or do if they act. If they did that then monetary policy would have a greater, and most probably a more positive, effect on their economies.

But would it really? Pushing on a string is what is really happening as this post-GFC global economy continues to mature, where rate cuts seem to be having the opposite effect.

From Chris Demasi at Roger Montgomery Investment:

According to a recent Wall Street Journal article based on data from the Organisation for Economic Co-operation and Development, Moody’s and corporate regulatory filings consumers in countries with negative rates are actually saving more now than in 1995.

And a measure of corporate cash coffers compared to revenues for Europe and neighbouring countries has been climbing over the past 5 years. At the end of 2015 the ratio was at a level not seen since 2010, representing almost 1 trillion Euros in corporate bank accounts.


Interestingly, the Australian household savings rate is in decline:


But retail sales growth is tapering:



While corporate bank accounts burgeon, with surplus funds only used to buyback shares, not for investment, with more than 25% of assets being cash at hand – the second biggest in the world. So cutting interest rates to stimulate business investment wouldn’t work because why borrow money at record lows when you’re sitting on a mountain of it like Scrooge McDuck?

And indeed the latest figures bear this out, with business lending at record lows:



Workers are faced with the same problem, yet it is compounded by the slow state of the current and projected economic environments. When central banks, government officials and the financial community have low expectations for economic prosperity, the confidence of businesses and consumers is also sure to fall. Confidence in the economy is a necessary condition for spending, and today’s lack of confidence means more saving.

Unfortunately for central bankers hoping to boost spending by offering cheap loans, they may have only boosted the incentive to squirrel away even more money. Counterintuitively, higher rather than lower interest rates may be the key to stimulating these economies. But that has a whole other set of issues to deal with.

First of which, particularly here in Australian and New Zealand is an enormous mountain of debt that needs to be serviced. Raising interest rates may stimulate one third of the economy that owns its house outright and has no debt, but for the rest, only runaway inflation can solve their debt binge problem. And no central bank governor wants that millstone around their neck, as they cling mightily to the 2-3% theoretical zone.

One hopes that a new Captain at the helm of the RBA when Glenn Stevens steps down can be a little more willing to admit defeat in the rates war and get more proactive and honest with both the FX market and the households of Australia.

Latest posts by Chris Becker (see all)


  1. All the other countries that have increased savings rates likely had some sort of shock that killed their dreams of house prices climbing forever higher. We haven’t had that, so we’re just borrowing more to buy houses…

    • yep deflationary shock – why buy when i can rent much cheaper? and then save even more?

      that dynamic is yet to play out in Straya/UnZud and the countries will be worse off in the long run if it doesnt soon

      • Mining BoganMEMBER

        I’ve been trying to explain this to my cohorts. They just don’t get how much better off I am financially renting. Not even when I tell them I’m a Triumph Speedmaster ahead every year.

        No, the two respones are “but you don’t own any assets’ and ‘what about the tax’. It’s embedded.

        Shoulda told them I’m a Harley up but they all know I don’t rate them.

  2. If you are looking for free coffee, just drop by any of the house auction in the Eastern Melbourne suburbs this weekend! Unbelievably true.

    • Not on your life… You don’t know where those REA hands have been. And definitely pass! when they offer “the milk” 🙂

  3. Simon Jenkins as a former editor of the Times and appointed to the BBC board by Sir John Major is no left winger. Yet he writes:…………””Just give people the money. Give them cash, dole it out, increase benefits, slash VAT, hand it to those most likely to spend it: the poor. Put £1,000 into every debit account. Whatever you do, don’t give it to banks. They will just hoard it or use it to boost house prices.

    Britain is suffering from a classic liquidity trap. There is insufficient demand. Yet all the Bank of England did on Thursday was wring its hands, blame Brexit and go on digging the same old holes.

    They are labelled lower interest rates, quantitative easing and more cash for banks. Those policies have been in place for some seven years. They have failed, failed, failed. Not one commentator yesterday thought cutting interest rates to 0.25% would make any difference to the threat of recession.
    Worse, by cutting annuity yields it would impoverish many old people who would otherwise spend. The Bank’s cumbersome monetary bureaucracy was set up to keep inflation under control by curbing bank lending. That failed during the credit crunch. Now it is failing in the opposite direction. Channelling policy through the banks has proved useless in protecting the economy from deflation and recession.”” https://www.theguardian.com/commentisfree/2016/aug/05/recession-bank-england-money-uk-households?CMP=fb_gu

  4. I was under the impression that lower interest rates was to facilitate bank equity and capital dramas… the chimera of other stuff like mortgagees not going under is was just good PR in the past…

    Disheveled Marsupial…. now that things are a bit more worrisome… the passing on thingy is roadkill…

    • Meh – you know that, I know that, most of the rest of us here know that. However – for now – the “passing”-roadkill as you aptly call it, is merely a distraction wich still works with the stupidly indebted. As it turns out – there imperial f*ckload of those, too.. Nice stable, voting population with predictable needs.

      Keep making those nice soothing sounds, and they’ll keep voting for you – because you’re the only one who cares about them – poor temporarily embarrased millionaires.

      • Chortle…. how can you be stoopid* when everyone else is doing it and the – market – rewards them…..

  5. “….Raising interest rates may stimulate one third of the economy that owns its house outright and has no debt, but for the rest, only runaway inflation can solve their debt binge problem…”

    Raising interest rates will NOT stimulate the economy.

    Interest rates rising are however a sign of an economy recovering and competition for resources like labour heating up.

    Debtors with massive debts do not need runaway inflation. They simply need an economy in which they don’t lose their jobs and their wages are not declining. If they can pay their debts now they can keep paying them.

    What we do need is recognition that the money supply contraction that is inevitable as credit creation slows must be offset.

    Offsetting the money supply contraction as private credit creation slows and people pay down their debts is essential but we are still not getting a direct and coherent discussion of what that means.

    Until we do we are not going to make ANY progress.

    Sure the public sector can do the standard routine of money creation behind the facade of issuing bonds – govt issues bonds, banks (primary dealers) buy bonds and the RBA buys some/all of the bonds with created money to ensure that the bond sales do not push up the overnight rate above the target.

    But that process draws out all the public debt hysterics so it is about time to get rid of the public debt charade that is designed to strangle public policy options.

    So why not cut out the middle man and let the RBA buy some govt bonds direct rather than via the bank middlemen.

    The govt can use the proceeds to raise the tax free threshold and pay a bit more to dole bludgers and pensioners etc.

    Or it can finish the NBN properly, or build some decent multi-model freight connections up and down the coast and inland.

    APRA/FIRB/AOFM should restrict unproductive capital inflows to prevent an orgy on imports (Flawse) as the process proceeds.

    The solutions are simple if we just start talking about them instead of studiously ignoring them.

    The problems are monetary and the solutions are fiscal.

    • Great post.
      “Debtors with massive debts do not need runaway inflation. They simply need an economy in which they don’t lose their jobs and their wages are not declining. If they can pay their debts now they can keep paying them.”
      This is so true but here’s the issue. People see free/cheap money and forget about their debts(mortgages) and paying them down even though we are living at times when repaying debt should happen at a quicker rate with such low Interest rates. Those overseas holidays and shiny SUVs don’t come cheap you know!
      A national private debt awareness campaign is needed!

      • Nah – f*ck them! They won’t learn a thing unless it really bloody hurts! 30-bloody-years they had nothing but “endless growf” and it’s going to go “forever mate”!
        Take their egos dowm a few sizes! It’ll do everyone a whole lot of good long term.

      • PaulF,

        While I say raising rates will not stimulate the economy that doesn’t mean I think lowering the rates will either.

        Interest rates will rise as a consequence of a more rational use of fiscal policy as a more rational use of fiscal policy will get economic activity happening. Furthermore, if restrictions on unproductive capital inflows are in place that will also place upward pressure on rates.

        Rises in interest rates due to restrictions on ZIRP/NIRPO inflows and as a result of increasing economic activity will reduce demand for new credit and also encourage debtors to pay down their debts more quickly.

        The critical thing as this adjustment occurs is to not to constrict the money supply but to support it with an alternative to private bank credit creation as public money. That alternative is introduced to the economy by directly monetising at least part of the fiscal deficit.

        This is no magic pudding as it will not take long before the private debts will have been paid down with (in part) the larger fiscal deficits and the economy will be operating at capacity – we are not that far off with unemployment at 5% (though there is a lot of underemployment).

        Once we are at that point then the normal constraints on fiscal policy will arise – if deficits are too large they will tend to overheat the economy and produce inflation.

        But chances are there will still be plenty of room (as a growing economy needs a growing money supply) for much lower charges on tertiary education, health and superior infrastructure including the NBN.

        The public should benefit from the seigniorage associated with new money creation not private asset prices.

      • Thanks very much for that Pfh007 and i see your points.
        What are the chances of this happening ?! Do you see us going that direction(willingly or unwillingly!)?

      • @Ino, It is frustrating trying to explain to friends/family about such concerns and why they should look at the current historical low rates as an opportunity to demolish their mortgages… All i get is you worry too much and who knows what tomorrow brings …. To each their own i guess!

      • paulF,


        I would have thought that at the very least we would be talking about the issue directly – almost a decade after the GFC – but it is still a debate that is barely begun.

        Recently I read Mervyn King’s book “End of Alchemy” and what was stunning was that he was all over the nature of the problem but when it came to really getting to the meat of the issue – how do we get money into and circulating in the economy if the private bank credit creation method is broken – he sounded just like Governor Glen. Completely lost other than saying government needs to borrow more and spend it sensibly….. is that the best they can come up with!!!!!!

        It seems that the issue is so fundamental to the economic system that they understand and have worked in their entire lives that they cannot really see it, let alone discuss it publicly. I don’t think it is deliberate either – it is really just myopia and group think.

        Which of course leaves us with the depressing reality that what is likely to happen is that we continue to get clowns like Morrison rabbiting on about ‘fiscal conservatism’ and trying a bit of austerity when credit creation is slowing despite the constant cutting of rates towards zero.

        An economy grinding along the bottom while the great brains of public economics insist that there is nothing fundamentally wrong with the current model.

        But in the end I am hopeful that some country is going to experiment with commonsense and a new monetary approach and when it is seen to work, there will be a rush to get on board.

        Don’t be surprised if this economic water torture continues until a penny drops and then everyone will marvel how it took sooooooooo long for people to just try something different.

        We might get there faster if economics was not so dominated by maths/science blockheads who really struggle with grey, fuzzy and most importantly changing one’s mind when it is clear that everything you hold dear may have been wrong.

        It’s not easy – it took me a good 10 years to really really understand how much of what I believed was true was actually wrong wrong wrong and yep I have a friend who reminds me of that on a regular basis.

    • “Debtors with massive debts do not need runaway inflation”

      We aren’t in a situation where debtors are desperately deleveraging, rather they are still leveraging up. Debt levels are rising and lower rates only encourage (or force) us to take on more debt. Higher inflation is likely to eventually crush those with unsustainable debts if it causes rates to rise. I suspect RBA , like the Fed, will make excuses to avoid raising rates until long after the economic data justify it.

      And therein are the seeds to the next crisis…

  6. It is all about confidence in the economy, which intern will generate the demand for consumers and businesses. At the moment, the confidence is just not there. The world is in too much debt right now. Lowering interest rate will play the trick for a while, but consistently low interest for long period to try to pump up growth, suggests something more serious is at work. Fiscal policies will help, and it must be used instead. Good unbias fiscal policies and wise government spending are the best bet to recover.

  7. I don’t understand the pushing against a string concept. If someone could (please) explain.

    • The idea that fiddling with interest rates somehow achieves a predetermined outcome e.g. more or better market activity which translates in to Growf… The drama is smart monkeys learn new tricks, so old behavioral tools don’t have the same effects.

      Disheveled Marsupial….. pissing it up the wall or into the wind works just as well….

    • I think it has to do more with asymmetries in the effectiveness of monetary policy. It is far easier for a central bank to reign in inflation by raising rates (i.e.,pulling on a string) than it is to fight deflation by lowering rates (i.e., pushing on a string); especially near the ‘zero’ lower bound (which is no longer the lower bound anymore).

      • That was what was in the old text books, but in operation it was more about ideology and political machinations ie, inflation is never a problem if its taxed accordingly and deflation is just a mater of targeted state fiscal expenditure.

        Disheveled Marsupial….. the drama has always been about winnars and loosers….

    • I thought it was an anology in central bank speak which means that when you push on a string it will bend in the direction other than the direction you are pushing. Keynes coined the phrase when he used the analogy to describe the uncertain effects of monetary policy to stimulate demand without concurrently expanding fiscal policy in the 30’s depression.

      So to fit the analogy, the RBA lower interest rates in order to lower the exchange rate and stimulate productive investment as the target, but instead it bends the other way and increases exchange rates (and the casino) and pushes cheap money into speculative investment (real estate and the casino).

      Pulling on a string where the policy direction is certain became monetary policy speak when fractional reserve banking was vogue and I believe the original Keynes meaning was bastardised.

      IMO both are out dated jargon which has little to do with modern times when currency is fiat and exchange rates float. It’s apt though as central banks are a relic of the past and behave accordingly which is why the global economy is in the toilet.

      Thank Gawd someone’s asking questions

  8. Jumping jack flash

    “This is not a new trend – far from it. What’s supposed to happen when the local economy slows is you pull the lever, Kronk, lower interest rates stimulate consumer spending, reducing savings rate as a deluge of money floods the economy, inflation goes up, wages go up, more spending and whoosh, in come the accolades from the captured business media elites.”

    Indeed. And never forget this is only possible if the entire economy is based on debt acquisition, debt expansion, and debt transfer/spending. Adjusting interest rates would do absolutely nothing for an economy where income was earned and money created from producing useful items cheaply and competitively and selling them overseas.

    The main problem seems to be around the spending and wages part. To risk stating the obvious, lowering interest rates only works to stimulate spending if more money is borrowed as a result, and then spent.

    And from what we have seen for the past decade, not much of the debt has actually made its way back into wages. If you remove the foam of the resources boom, wages have been fairly flat from 2008, and the amount of debt created has skyrocketed.

    So once these problems are identified, they need to find out why it is happening this way, and then counter it.

    For the borrowing part, why aren’t people borrowing at these low, low, rates, and if they are, why aren’t they spending it, or transferring it to someone else to spend it?
    Are the people saturated with debt? If they are, then lets import some debt-free people, or better yet, just their (debt) money.

    For the wages part, why doesn’t increased debt creation translate into increased wages? Are people buying everything direct from China using eBay or AliExpress?
    Are the 457s sending all their wages overseas back to their families instead of using them to leverage more debt to spend?
    Who knows, but whatever it is it must be stopped.