GROSS: One Big Idea – policy rates cannot normalize. Portfolio implications: curves remain steep, bullets beat barbells.
— PIMCO (@PIMCO) July 22, 2013
|Policy rates cannot normalize|
|We are in the age of inflation|
Using a different framework, your humble blogger argued for No "rate normalization": a case for a secular trend of low rates in Canada in 2011.
The current policy of financial repression is too convenient for central banks to give up and expedient enough for national governments to embrace. As the idea of nominal GDP targeting gains traction amongst central banks, perhaps first with the Carney led Bank of England, as the the next great policy initiative, there will learn that creating inflation is less about managing "inflation expectations" and more about understanding the dynamics of income distribution and rises in real wages in a globalized world where off shoring and technology makes heretofore regular work uncompetitive. A world where advocacy for balanced budgets for every nation as preferred policy flies in reality's face where imbalances remain and there is no reconstruction of the monetary and financial systems on the horizon. Those managing bank balance sheets in the west worry relentlessly about interest rate risk. This is only sensible. But they should be just as concerned about long term spread compression as dynamics conspire against policy rate normalization.