Free Exchange
Can central bankers talk too much?
As the Fed and the ECB have learnt, transparency has its downsides
IMAGINE YOU are a journalist trying to reassure your bosses that you will hit a tight deadline. What would be more effective: a forceful but brief commitment that you will do whatever is needed to get the job done, which leaves them in the dark on all the things that might go wrong along the way? Or a plan detailing every step you will take—but in which they can spot unnerving risks?
That resembles the choice central banks face as they try to convince financial markets and the public that they will meet their goals. Over the past decade their preference has been clear: the more transparency and detail, the better. In 2011 America’s Federal Reserve began holding press conferences after its monetary-policy meetings.
It started publishing the range of rate-setters’ economic forecasts the following year. Across the rich world, forward guidance on the path of interest rates has become part of the toolkit.
Central bankers make ever more speeches, bringing once-hidden debates out into the open.
Some tweet their views.
The theoretical justification for all the talk is strong. The more markets understand how the central bank will react to events, the better they anticipate future policy. Conditions in financial markets should immediately tighten or loosen in response to economic news, making central bankers’ jobs easier. It is as if setting out your plan to your boss makes it easier to implement.
Today, however, the theory is being tested. The European Central Bank (ECB) meets on October 24th, after The Economist goes to press, amid a very public row about monetary policy. In September the ECB said that it would restart quantitative easing (QE), the purchase of bonds with newly created money, and that it would keep buying assets until inflation picks up from its current level of 1% towards the bank’s aim of close to 2%.
Hawks such as Klaas Knot, the head of the Dutch central bank, have been unusually vocal in their dissent. Bond yields, which move inversely to prices, first fell as markets digested the ECB’s guidance. But the bickering has since sent them in the other direction. Market pricing now also reflects expectations of how the political struggle over open-ended QE will play out. Investors have spotted a flaw in the plan.
In America the Federal Reserve may cut interest rates for a third time this year on October 30th. It has been accused by economists at Goldman Sachs, a bank, of constructing a “hall of mirrors” in its communications with markets. The Fed, the argument goes, has this year simultaneously signalled its intentions to bond markets while taking its cues from them. But bond yields are a prediction of what the Fed will do, not an instruction.
As a result, the Fed and the markets have entered a pessimistic spiral, while the real economy has been ignored. In its eagerness to be in touch with markets, the Fed has forgotten that it is in the lead.
Central banks everywhere must also work out how to offer forward guidance when facing sharply divergent forks in the road. A trade truce between America and China could transform the economic outlook. A no-deal Brexit could cause chaos in Britain that spills over to the rest of Europe. Telling markets what to expect of policy is much harder when prediction involves choosing between black and white.
Might it help, therefore, for central banks to talk a little less? Microeconomists have long known that ambiguity can have strategic uses. Employment contracts, for example, do not specify every action an employee must take, nor all the obligations of an employer, possibly because it may be better to leave room for either side to punish the other’s bad behaviour.
In recent years Bengt Holmström of MIT, who in 2016 won the Nobel prize for economics, has argued that central-bank opacity has its uses in credit markets. Most of the time, he argues, these markets, unlike stockmarkets, are “information-insensitive”—they do not respond much to news. In contrast to stocks, there is no upside for the lender when things go especially well, and default is a remote risk, especially when loans are adequately collateralised. “A state of ‘no questions asked’ is the hallmark of money-market liquidity,” he argues.
In a panic, however, money-markets dry up as the risks loom larger. Lenders find themselves having to scrutinise every transaction. Restoring stability might require a promise that is light on detail, and thus hard to pick apart.
At the worst of the euro zone’s sovereign-debt crisis, for instance, Mario Draghi, the head of the ECB, pledged to do “whatever it takes” to keep the single currency safe. Mr Holmström also notes that when the Fed provided emergency lending to banks during the financial crisis, it did not disclose which institutions received support, for fear that any associated stigma could provoke bank runs.
Too much information
Might a similar logic carry across to central bankers’ everyday goals, such as targeting inflation? Inflation expectations, like financial panics, can prove self-fulfilling. Some economists reckon that central banks’ promises to keep inflation low may have become so credible that the public rarely revises its expectations in light of economic news—another case of “no questions asked”.
But the analogy breaks down when it comes to interest rates. Rates vary and markets have to expect something. Central banks might as well steer such expectations. The limits of communication are best seen as the latest round in the decades-old battle between those who want monetary policy to be set by rules, and those favouring discretion. The clearest forward guidance would be a fully transparent algorithm that relates interest rates to economic data. But such a mechanical “reaction function” exists only in economic models. In reality, policymakers have to use their judgment, meaning their decisions are inherently uncertain.
As long as that is true, there is a limit to how much more transparency can make interest rates predictable. And, as the recent experience of central banks shows, talking can have its downsides.
It is worth pondering when silence might be Golden.
CAN CENTRAL BANKERS TALK TOO MUCH? / THE ECONOMIST
INVESTORS START TO PONDER "QE INFINITY" FROM THE ECB / THE FINANCIAL TIMES
Investors start to ponder ‘QE infinity’ from the ECB
Amid weak growth and inflation, fund managers contemplate the limits of bond-buying
Tommy Stubbington
As the European Central Bank limbers up to restart its debt-buying programme, one question looms large for investors: how long can the purchases continue before the bank runs out of bonds to buy?
The ECB is due to start acquiring €20bn of bonds a month in November, just a few days after this Thursday’s policy meeting — Mario Draghi’s last as president, before handing over to Christine Lagarde. Analysts estimate that the quantitative easing programme can run until the end of next year before bumping up against the central bank’s self-imposed limits, under which it can own no more than a third of any eurozone country’s bond market.
But things could quickly get tricky for Mr Draghi’s successor. If the current downturn intensifies and the central bank wants to increase its stimulus, the thorny question of raising this limit would have to be tackled much sooner.
For investors who have bet heavily on a bond-buying programme that stretches as far as the eye can see, any doubts about the future of QE are uncomfortable.
“This is the fundamental question that will frame the first months of Lagarde’s tenure,” said Richard Barwell, head of macro research at BNP Paribas Asset Management. “Are there quasi-legal constraints that will stop them buying, or is this QE infinity?”
Mr Draghi’s plans, unveiled last month, initially seemed to satisfy stimulus-hungry investors — despite their relatively small size — thanks to an open-ended promise to keep buying until inflation moves back to the central bank’s target.
Since then, however, the summer’s almighty bond rally has gone into reverse amid a growing backlash against the QE package from current and former members of the ECB’s governing council. In a blow to bond bulls, minutes from the September meeting showed that policymakers did not even discuss raising the 33 per cent limit, citing concerns that to do so would blur the boundary between monetary and fiscal policy.
But after buying €2.6tn of debt in its previous QE rounds, the ECB is already close to the 33 per cent threshold in some countries. Gauging exactly how close is complicated. The value of the ECB’s holdings needs to be translated from market value back to its nominal value. Moreover, the total universe of eligible debt is not easy to define, given it contains bonds issued by supranational agencies as well as governments.
Frederik Ducrozet, senior European economist at Pictet Wealth Management, estimates that the ECB is closest to the limit in the Netherlands and Germany, where it owns 31 per cent and 30 per cent respectively. In Italy and France the equivalent figure is just 21 per cent.
The levels are uneven because of another ECB rule: it has to buy amounts in proportion to each country’s contribution to the ECB’s capital. That means it holds a bigger slice of the pie in less-indebted economies.
In practice, however, the central bank has had to bend this rule since the start of the QE programme in 2015 because some countries, such as Estonia, had almost no bonds to buy, while low-rated Greek debt was not eligible for the programme.
By bending the rules further, or focusing more of its buying on corporate bonds, Mr Ducrozet thinks the current programme could last until the end of 2020.
“But there’s a political limit to how far they can go,” Mr Ducrozet said, noting that if the ECB were to divert purchases elsewhere, it could face accusations it is favouring certain eurozone states over others.
Extra borrowing from Berlin would help ease the bottleneck by creating more Bunds, but few are expecting a meaningful fiscal splurge from Germany. Eurozone governments are projected to issue a net €161bn of debt in 2020, according to Silvia Dall’Angelo, a senior economist at Hermes Investment Management, meaning the ECB will swallow up all the new bond issuance and more.
Raising the 33 per cent limit, which was designed to prevent the ECB from holding enough of one country’s debt to block a restructuring, could be even more controversial. It would also breathe new life into objections that the ECB is in effect financing profligate governments via the back door with its QE.
For fund managers weighing up whether such objections can be overcome, the change in leadership at the ECB adds an extra layer of complexity.
“If we were operating with another eight years of Draghi, who has nearly always got his way, I think we know how this would play out,” said Mr Barwell. “The complicating factor is it’s not him.”
Even so, Ms Lagarde may be able to pick up where the Italian left off, particularly if the threat of recession helps her convince colleagues that more stimulus is needed.
Recent economic data in the eurozone have made for grim reading while long-term inflation expectations are close to a record low. If the spectre of deflation returns, the ECB would be more inclined to tear up its own rule book, according to Ms Dall’Angelo.
“Remember that at one point everyone thought QE in the eurozone couldn’t happen,” she said.
“But the last few years have taught us that if the situation is serious enough, nothing is impossible.”
THE FUTURE OF THE EU: EMMANUEL MACRON WARNS EUROPE -- NATO IS BECOMING BRAIN-DEAD / THE ECONOMIST
The future of the EU
Emmanuel Macron warns Europe: NATO is becoming brain-dead
America is turning its back on the European project. Time to wake up, the French president tells The Economist
EMMANUEL MACRON, the French president, has warned European countries that they can no longer rely on America to defend NATO allies. “What we are currently experiencing is the brain death of NATO,” Mr Macron declares in a blunt interview with The Economist. Europe stands on “the edge of a precipice”, he says, and needs to start thinking of itself strategically as a geopolitical power; otherwise we will “no longer be in control of our destiny.”
During the hour-long interview, conducted in his gilt-decorated office at the Elysée Palace in Paris on October 21st, the president argues that it is high time for Europe to “wake up”. He was asked whether he believed in the effectiveness of Article Five, the idea that if one NATO member is attacked all would come to its aid, which many analysts think underpins the alliance's deterrent effect. “I don't know,” he replies, “but what will Article Five mean tomorrow?”
NATO, Mr Macron says, “only works if the guarantor of last resort functions as such. I’d argue that we should reassess the reality of what NATO is in the light of the commitment of the United States.” And America, in his view, shows signs of “turning its back on us,” as it demonstrated starkly with its unexpected troop withdrawal from north-eastern Syria last month, forsaking its Kurdish allies.
In President Donald Trump, Europe is now dealing for the first time with an American president who “doesn’t share our idea of the European project”, Mr Macron says. This is happening when Europe is confronted by the rise of China and the authoritarian turn of regimes in Russia and Turkey. Moreover, Europe is being weakened from within by Brexit and political instability.
This toxic mix was “unthinkable five years ago,” Mr Macron argues. “If we don’t wake up [...] there’s a considerable risk that in the long run we will disappear geopolitically, or at least that we will no longer be in control of our destiny. I believe that very deeply.”
Mr Macron’s energetic recent diplomatic activity has drawn a great deal of interest abroad, and almost as much criticism. He has been accused of acting unilaterally (by blocking EU enlargement in the Western Balkans), and over-reaching (by trying to engineer direct talks between America and Iran). During the interview, however, the president is in a defiant but relaxed mood, sitting in shirt sleeves on the black leather sofa he has installed in the ornate salon doré, where Charles de Gaulle used to work.
The French president pushes back against his critics, for instance arguing that it is “absurd” to open up the EU to new members before reforming accession procedures, although he adds that he is ready to reconsider if such conditions are met.
Mr Macron’s underlying message is that Europe needs to start thinking and acting not only as an economic grouping, whose chief project is market expansion, but as a strategic power. That should start with regaining “military sovereignty”, and re-opening a dialogue with Russia despite suspicion from Poland and other countries that were once under Soviet domination. Failing to do so, Mr Macron says, would be a “huge mistake”.
GOLD - THE DECISION IS CLOSE / SEEKING ALPHA
Gold - The Decision Is Close
Summary
- Sideways period might have been the calm before the storm.
- Weekly and daily charts are slightly bullish.
- Commitment of Traders Report remains very negative.
- Sentiment has cooled down in recent weeks.
- Seasonality is very promising until end of February.
Even though the gold price corrected from US$1,557 down to US$1,460, compared to the previous advance this correction has been rather mild so far.
The daily trading range had become significantly smaller and accordingly volatility has been on a decline.
With prices moving sideways, a clear trend has been missing.
Presumably, this might have been only the calm before the storm.
As of Thursday, gold started to break out of its triangle and moved above US$1,500.
Friday's rally towards US$1,517 however was not sustainable and gold closed right at the edge of the triangle.
Technical Analysis: Gold in US Dollars

On the weekly chart, since August 2018 gold is moving within a major uptrend channel. This channel currently offers space up to around US$1,585.
On the downside, below US$1,460 prices would slip into the lower half of the trend channel.
The July consolidation took place just around the middle trend-line of this channel.
Actually, this trend-line should hold for the next few months and catapult gold prices higher.
A clear new buy signal is not yet available and theoretically, the oscillator still has plenty of room to the downside.
A counter-cyclical opportunity is therefore certainly not present in the gold market.
However, the current setup allows for a new multi months rally.
The potential cup & handle formation I present the last time is still possible and could bring spectacular gains in the next few months.
The next price target is US$1,585.



Sentiment: Gold


ELECTING AMERICA´S ECONOMIC FUTURE / PROJECT SYNDICATE
Electing America’s Economic Future
Next year's US presidential election will have far-reaching consequences, not least for the economy. Given the stakes of the outcome, rigorous analysis of the candidates' sharply diverging – and often risky – policy platforms is urgently needed.
Michael J. Boskin
STANFORD – A year from now, the United States will elect its next president. The stakes are high, and the outcome will reverberate across the world in a number of spheres, not least the economy.
Yet, thus far, most discussions of candidates’ economic policy proposals have been based more on feelings or ideology than rigorous analysis.
Barring a major unforeseen catastrophe, US economic performance will play a decisive role in the election. If the economy remains strong – unemployment is at a 50-year low for all workers, and its lowest-ever level for African-Americans and Hispanics – President Donald Trump stands a good chance of winning a second term.
Yet downside risks are mounting. If they materialize, a Trump victory would become less likely. According to recent models by Moody’s Analytics, it would take a tanking economy – or unusually high voter turnout among Democrats, but not Republicans – for Trump to lose in 2020.
As center-left former Vice President Joe Biden, the early frontrunner for the Democratic Party nomination, loses ground to the far-left US Senator from Massachusetts, Elizabeth Warren, Trump’s chances of success may be rising. Then again, in the 1980 election, the most conservative Republican candidate, Ronald Reagan (whom I advised), was also labeled unelectable.
If Trump does win a second term, he cannot always be expected to pursue traditionally conservative economic policies, such as his 2017 Tax Cuts and Jobs Act, which brought the US corporate-tax rate in line with the OECD average. Judging by hints from him and his advisers, however, he can be expected to pursue another round of regulatory and tax reform.
Meanwhile, Democratic presidential candidates favor expanding the social safety net, beginning with health care. While some want to build on President Barack Obama’s 2010 Affordable Care Act – which Trump and congressional Republicans failed to “repeal and replace” – others hope to eliminate private insurance, on which two-thirds of Americans depend.
In place of private health insurance, Democrats like Warren and Vermont Senator Bernie Sanders plan to introduce a government single-payer system. The costs would be staggering – over $30 trillion in the first decade, by some estimates. Sanders would raise taxes; Warren is trying to dodge saying so. Given the price tag, that would have to mean massive income or payroll tax hikes, or a Europe-style regressive value-added tax, any of which would fall heavily on the middle class and weaken economic incentives.
But that is not all: Democrats also plan to introduce expensive subsidies, tax breaks, direct spending, loan forgiveness, and other giveaways, insisting that these proposals can be funded largely by increasing taxes on the wealthiest Americans. Biden wants to double the capital gains tax; Warren would almost double the top marginal income-tax rate from 37% to 70%, and both she and Sanders favor new wealth taxes, which even most Nordic countries have abolished. But their math does not add up, by at least an order of magnitude.
There is one area where Trump and the Democrats both want to spend more: infrastructure. Repairing and maintaining roads, ports, and airports is partly the federal government’s responsibility, but state, local, and private finance should be expanded. Neither Trump nor any of the Democratic candidates seeking to challenge him has put forward a serious plan. With neither party focused on fiscal responsibility, the growing unfunded liabilities in Social Security and Medicare, several times the national debt, mean Americans will face far more damaging tax hikes or draconian spending cuts in the future.
Trump and his Democratic opponents diverge much more sharply on government regulation. Trump has made rolling back excessive Obama-era regulations a high priority. While courts have blocked some of his efforts, as they did to Obama, he has successfully weakened or repealed a number of measures on energy and the environment, health care, and finance that Republicans deemed too costly.
The Democratic candidates, especially Warren, hope to do just the opposite. Some favor stronger regulation and antitrust enforcement concerning Big Tech, while Sanders and Warren advocate breaking up the sector’s largest companies. All support the $10 trillion Green New Deal, an economically, scientifically, and numerically illiterate program, or even more radical plans. A Democratic president could also be expected to tighten financial regulation, and potentially even introduce radical changes to corporate law.
On trade, Trump has placed a high priority on changing dynamics that he considers unfair. It is on these grounds that he negotiated a modest revision to the North American Free Trade Agreement (NAFTA), which awaits congressional approval, and introduced escalating tariffs on China.
But the trade war against China that Trump launched last year has become a drag on business investment, dampening the positive effects of his tax and regulatory reforms. Fortunately, the US and China recently reached a temporary agreement forestalling further tariff hikes while a more comprehensive deal is negotiated. Although the Democrats have often criticized Trump’s approach, they are not proposing further trade liberalization.
A final question to consider when assessing the US presidential candidates is whom each would appoint as the next chair of the US Federal Reserve. Trump – who has repeatedly criticized current chair Jerome Powell for pursuing too little monetary-policy easing – would probably select a dovish candidate.
A left-leaning Democrat might do the same, given the left’s fascination with risky ideas that promote massive amounts of Fed-funded debt. Center-leftists – Biden, Amy Klobuchar, Pete Buttigieg – might reappoint Powell, who has done a good job, or select a moderate Democratic economist, such as former Fed Vice Chair Alan Blinder or former Treasury Secretary Larry Summers.
With so many candidates still on the field, investors and financial markets seem to be awaiting stronger signals about the political future and the considerable, but different, economic and financial risks that a victory by each would entail.
Michael J. Boskin is Professor of Economics at Stanford University and Senior Fellow at the Hoover Institution. He was Chairman of George H. W. Bush’s Council of Economic Advisers from 1989 to 1993, and headed the so-called Boskin Commission, a congressional advisory body that highlighted errors in official US inflation estimates.
FOR JAPAN, THE SWORD IS THE SHIELD / GEOPOLITICAL FUTURES
For Japan, the Sword Is the Shield
Is Tokyo’s remilitarization nearing an inflection point?
By Phillip Orchard
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Bienvenida
Les doy cordialmente la bienvenida a este Blog informativo con artículos, análisis y comentarios de publicaciones especializadas y especialmente seleccionadas, principalmente sobre temas económicos, financieros y políticos de actualidad, que esperamos y deseamos, sean de su máximo interés, utilidad y conveniencia.
Pensamos que solo comprendiendo cabalmente el presente, es que podemos proyectarnos acertadamente hacia el futuro.
Gonzalo Raffo de Lavalle
Friedrich Nietzsche
Quien conoce su ignorancia revela la mas profunda sabiduría. Quien ignora su ignorancia vive en la mas profunda ilusión.
Lao Tse
“There are decades when nothing happens and there are weeks when decades happen.”
Vladimir Ilyich Lenin
You only find out who is swimming naked when the tide goes out.
Warren Buffett
No soy alguien que sabe, sino alguien que busca.
FOZ
Only Gold is money. Everything else is debt.
J.P. Morgan
Las grandes almas tienen voluntades; las débiles tan solo deseos.
Proverbio Chino
Quien no lo ha dado todo no ha dado nada.
Helenio Herrera
History repeats itself, first as tragedy, second as farce.
Karl Marx
If you know the other and know yourself, you need not fear the result of a hundred battles.
Sun Tzu
Paulo Coelho

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