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How to Admit You're Wrong Like a Central Banker

Nov 30, 2016


First, it's worth noting just how badly some of the monetary policy decisions we've seen over the past year or so have gone.

Take negative interest rates. By now you're familiar with the story. The whole idea of negative rates is to make it more likely that people will spend their money. It's an incentive against saving.

That's because, if you squint your eyes and look at the world like a central banker, people saving money for the future is bad for the economy. What's good for the economy is people spending or investing. (Or even better - borrowing!)

So we get negative rates. Have they worked? Not if numbers from Europe's biggest debt collector, Intrum Justitia, are to be believed. Despite negative rates across the continent, it found that 69% of Europeans still put their savings in regular bank accounts.

Mikael Ericson, chief executive officer of the firm, gave his view on why that is: "After the financial crisis, people have felt a need - even if they have small means - to create some kind of security. It can't be that people save in a bank account because of the fantastic returns, so it must be about a sense of security, of having money in the bank."

I'd argue it's even more than that. Negative rates are a sign something is wrong in the system. That scares people. That fear leads them to becoming more conservative and actually saving more than they would otherwise.

It serves to underline a fundamental point: you can try to manipulate the markets, but you can't predict people's psychological and emotional responses to your actions. And really an economy is driven on by those responses - how people feel is as important as the measurable data. Animal spirits vs rational actors, etc.

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If you saw Eoin Treacy's note yesterday (read it here if not), you'll know that he believes negative rates have been bad for the financial system as a whole and now central bankers are looking for a way out.

Government spending - things like the Autumn Statement - is a chance to do that. So look out for an indication that the government is raising spending again. Particularly look out for any infrastructure finance initiative - any way in which central bank stimulus can be funnelled into government spending directly in the economy.

We may not quite get that. But that's what I'll be looking out for - any small move could be a signal of a much more significant move to come in the future (and across the Atlantic).

Please note: This article was first published in Capital and Conflict on November 23, 2016.

Nick O'Connor is a writer and editor at Moneyweek. He is also the publisher of Exponential Investor.

Disclaimer: The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.

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