Thursday afternoon I had the privilege of being on Bloomberg TV, with anchors Scarlet Fu and Matt Miller. I was joined by an old market friend Bob Sinche.
We had a lively discussion (what did you expect?) on two issues. The first was on the ECB. At his earlier on Thursday, Draghi indicated that the question of extending QE and tapering was not discussed. Bob argued that this was disingenuous. Of course it is being discussed, even if not at today’s meeting. He suggested that many on the governing council do not want to extend the asset purchases. The reason it was not formally discussed was because it is controversial.
I had a different read. Of course it was not discussed because the decision would not be made for two months. There is no need to discuss in October what may be decided in December. It is not the ECB’s way. The information set that the central bank has in December will be different than today, including updated staff forecasts.
However, a couple of points seem clear to me. First, Draghi noted that inflation is still not in an uptrend. This is an important point since boosting inflation is the chief goal of QE. Bob, I think, is right, that there are other goals, like the size of the central bank’s balance sheet, but also the transmission mechanism. Draghi has linked the decision on ending the asset purchase to the ECB’s mandate. It defines price stability as inflation is close to be below 2%. It stands at 0.4%.
Second, Draghi said that the risks to growth are on the downside. This to is part of the case he is building to extend the asset purchases beyond March.
The other discussion was about the behavior of Baby Boomers. Bob took the position that Baby Boomers are driving the asset prices higher, and they are boosting their savings. Low interest rates, so the argument goes, have to boost the quantity of saving because the return is so low.
I come from a different perspective. First, I am not comfortable talking about elevated asset prices as inflation. It is not the same thing as medical services, rents or food prices rising. Higher bond prices mean lower yields. To people who borrow money that is not inflation; that is a lower mortgage or car loan. Only half of American households own equities. You are a smart investor and your portfolio equity portfolio increased by 6% this year. Is that inflation? Rising inflation eats away at the purchasing power of money. Do rising equity prices do that? And, by the way bond yields have been falling not rising in recent months.
I do not know how to talk about savings without talking about the disparity of wealth and income the US. Savings is also highly concentrated. The biggest buyers of equities in the US are not the Baby Boomers but companies buying back their own stock. Typically, as people get into their 60s, they are not boosting savings as much as drawing their savings down.
The participation in the labor force has fallen partly as people (weighted toward men) retire early. This is also part of the story. Lastly, I note that the US , which is the difference, economists tell us, between the country’s savings and investment, is rising. We know from the figures that investment is weak, so the widening of the current account deficit suggests that as a whole, savings is falling faster than investment. The clip to this discussion can be found here.