Via the always fun to read Albert Edwards at Societe General:
With some calm returning to the markets, it’s probably a good moment to step back and consider one of the most important developments in monetary policy in recent years. Who knows, it might even reverse the collapse in young men’s sex lives?
A few weeks back a small but significant glitch was spotted in the central bank monetary matrix. New Zealand’s PM, Jacinda Ardern had finally decided she’d had enough with runaway house prices being fuelled by easy central bank money (in February up more than 20% YoY). She instructed the central bank to target house price inflation in their decision-making process in addition to the normal considerations of consumer prices and unemployment.
Just like 1989, when NZ was the first country to adopt explicit targets for inflation, this innovation could be the first deep rumblings of what could become an earthquake in the way central banks conduct monetary policy worldwide.
Morgan Stanley’s Ruchir Sharma wrote an excellent op-ed in the FT on this topic. He identifies the major flaw of the current system of inflation targeting: namely that secular global deflationary forces have pushed CPI inflation well below their c.2% targets, resulting in super-stimulative monetary policy. And although that can do little to drive CPI inflation up, it creates housing and financial market bubbles that the central bankers choose to ignore and which typically now precede recessions. For everyone loves an asset price bubble – until it bursts!
The NZ central bank isn’t happy. The WSJ notes that, in an attempt to head off this move,“the bank spelled out several concerns in a letter to the finance minister late last year. One consequence could be lower employment if rates rise, which the bank saw affecting groups already disadvantaged in the labour market most, including Maori and young people”.
This approach is the direct opposite of the Powell Fed, which is emphasising that they will keep policy super-loose to maximise minority employment. Partly as a result, US existing home prices have rocketed some 16% yoy – a rate only briefly exceeded in 2005 at the height of the bubble. But US house price inflation is a mere pimple compared to the credit-filled boils visible elsewhere (see chart below). What the US can boast of though is a world-beating stock-market bubble. Ultimately, as NZ has found, having too much of a good thing can be a bad thing. I expect central banks around the world to follow NZ after the next ruinous, but inevitable crash.
And there you have it. I do wonder if the forthcoming new Australian Labor government will follow Jacinda Ardern’s example earlier than most, especially since it is going to wipe the Liberal Party off the face of the earth thanks to the bottomless pit of smut that is the Morrison Government.
But probably not. Albo is clearly a pretty gutless pollie with his eye on power and little else policy gumption.