EFTA01388569

The limits of monetary policy '23 .'season' ■ 803 100 ... 00.II,vocut e0 SO 40 • 9.3E • Era ■Frxr 9oF faecal: Er:8 tott:aft ;ad tow air $r..:rroctr Eil:nr,*cra Nm,: . owatila Ain't Mastgerrwr ImoiEreent 01 ca.tai e All of which makes it rather odd that so many hopes should still rest on central banks. After all, Japan already tried OE from March 2001 to March 2006. According to most empirical studies, this was of limited help in either boosting output or inflation. Indeed, it may even have strengthened the performance of Japan's weakest banks -further delaying the necessary clean••up of bank balance sheets. Markets were fairly unimpressed. Japan's initial dose of QE simply seems to have acted as a sedative. One down-side of loose monetary policy and not just in Japan - is that it can reduce the pressure for reforms. 2. The limits of central banking. So far, we have seen that there is little monetary policy can do to boost long-term growth potential. At most, it might provide breathing space for structural reforms (but with the caveat noted above). For investors, however, a more immediate question is whether central banks are also losing their ability to cheer up markets. Here, the evidence is mixed—and to see why, look no further than at Japan's previous attempt at QE. Japan's structural problems are real enough, but they only tell half of the story. The other halt is one of monetary impotence to do even the limited work central banks are usually charged with: making sure that actual economic growth is in line with potential growth rates. Central banking can prove tricky enough in normal times. As Rudiger Dornbusch quipped in 1997, "None of the U.S. expansions of the past 40 years died in bed of old age; every-one was murdered by the Federal Reserve."' But at least, central banks have plenty of historic data to rely on. By contrast, economists looking at Japan since the early 1990s had to go back to the Great Depression to find anything remotely similar. Japan appeared stuck in a liquidity trap, the traditional bogeyman of central banking (see box). Much of the policy response in the rest of the world since 2009 can best be understood as an attempt to avoid such a fate. Central bank balance sheets as percentage of GDP have ballooned Throughout the developed world, °antral banks have taken ova more assets onto their balance sheets. Initially, this reflected such programs aS the Fed's %WI Asset- Backed Securities Loan FarAtity(TALF) in the United States. intended to boost consumer lending in the aftermath of the financial crisis. Similarly, the Eurozone debt crisis caused the ECU's balance sheet to expand, well before the formal adaption of OE. In recent years, balance sheet growth has been strongest in Japan, reflecting its increasingly aggressive use of of policies. Dornbusch, Rudiger. 1997. "How Real Is U.S. Prosperity?" Column reprinted in World Economic Laboratory Columns, Massachusetts Institute of Technology, December. Past performance is not indicative of future returns. No assurance can be given that any forecast, investment objectives and/or expected returns will be achieved. Allocations are subject to change without notice. Forecasts are based on assumptions, estimates, opinions and hypothetical models that may prove to be incorrect.The information herein reflect our current views only, are subject to change, and are not intended to be promissory or relied upon by the reader. There can be no certainty that events will turn out as we have opined herein. CONFIDENTIAL - PURSUANT TO FED. R. CRIM. P. 6(e) DB-SDNY-0092200 CONFIDENTIAL SDNY_GM_00238384 EFTA01388569