Jun 17

In Furious Tirade, Citi Lashes Out At “Utterly Misguided” Central Bankers, Invokes Weimar Republic’s Von Havenstein:

In what may be merely a peculiar case of serendipity, just last night we mentioned the name of the infamous president of Weimar Republic’s Reichsbank, Rudolf von Havenstein, in the context of the BOJ’s proud announcement that it now held more than a third of all Japanese government bonds at the end of March (so even more currently).

Well, either Citi’s Gregory Marks was following our amused observation, or in an act of odd confluence of thought invoked the spirit of Rudy von Havenstein completely independently, when overnight he unleashed a furious tirade at both negative rates and “utterly misguided” central bank policies in general and negative rates in particular in “Let’s Take Stock: The Efficacy and Merit of Negative Rates.”

The full note, which is on par with Deutsche Bank’s just as angry recent rant against the ECB, is presented in its entirety below.

Let’s Take Stock: The Efficacy and Merit of Negative Rates

There once was a gentleman named Rudolf von Havenstein. You probably have never heard of him. His Wikipedia page is not even a full page long. He started his career in law, working in the Prussian Justice Service and then became a judge. From there he went to the Prussian Ministry of Finance. From 1900 to 1908 Havenstein was president of the Prussian State Bank. From 1908 to 1923 he was president of the Reichsbank.

I do not know him personally (he died in 1923). My assumption is he was a pretty well regarded person in the academic/finance/law/market community. After all, he was head of the central bank! His name was on the German Reichsbank notes (from 1908 to 1923)! How can he not have known what he was doing? Someone in that position has to know what they are doing. Right?

During Havenstein’s time at the Reichsbank, it was widely believed that the rate of inflation and the money supply had nothing to do with each other.

For some context, the gold standard was suspended during WWI and Keiser Wilhelm II did not enact an income tax (unlike France) to pay for the war, choosing to pay by borrowing. The war was lost and over with, but the debt remained. In order to ‘help’ the government and people, old Havenstein went on a printing spree. Good idea right? Remember, at that time it was believed that the rate of inflation and the money supply had nothing to do with each other. The end result was crippling hyperinflation, economic collapse and a negative shift in the political spectrum.

Havenstein’s name was invoked during the early QE days among those who argued QE would lead to hyperinflation. That is missing the point. We should not be using the ‘Havenstein experience’ to parallel QE with the money printing days of hyperinflation past.

Rather, we should be invoking Havenstein to identify the present flaw in institutional thinking around current monetary policy, specifically negative rates. In other words, the lesson here is that, unfortunately, people believed in the efficacy of a completely irrational policy because it was put in place by a qualified and experienced policymaker- this instead of questioning the common sense merit of its possible outcome.

Today, the idea that the money supply and inflation have nothing to do with each other is a foolish thought of the past. Today, we know better. And those persons at the top of their field in economics and monetary policy, they know better. Those persons in those positions know what they are doing today with negative rates. Right?

Today, the 30 year Swiss rate went negative. The 30 year JGB yield is not far behind. German 10s went negative earlier this week. US 30 year Treasury yields are not far off of modern day lows. Although US QE is over, the Federal Reserve continues to roll its Treasury holdings, keeping a large proportion of outstanding US debt with longer-dated maturities out of the market and on the Fed’s balance sheet, thus artificially suppressing market rates as they raise the Federal Funds rate. The ECB just started buying non-financial corporate bonds (when arguably it is the financials that are in need of attention). And the head of the Riksbank just said that ‘technically, we can cut rates more if needed.’

I took my first economics course as a sophomore in high school in the first semester. I took an economics class every semester from then until my university graduation when I received a degree in economics. Never once were negative rates discussed; never were they written about in a textbook; never were they rigorously tested- either quantitatively or qualitatively; never was there a discussion of incentives or disincentives with regard to negative rates; and never a discussion of the falling marginal benefit- and perhaps rising marginal detriment- to going further negative.

If ever there was a time to invoke the Havenstein experience, it is now. The fact that there are qualified, experienced people at the helm directing policy does not mean that they are exempt from occasionally being utterly misguided in their perceptions of positives versus negatives when it comes to economic theory and policy. This is especially true as the policy remains unconventional, experimental and theoretical.

There are laws that prevent the medical industry from adopting experimental procedures before they become, well, less experimental. To not have those laws in place would be dangerous. Experimental procedures can produce unintended consequences and their efficacy must be rigorously tested before wide release and adoption. So as a society, we do not let doctors perform experimental procedures on everyone who walks through the hospital doors.

Yet for some reason, there are a lot of PhD holders from a different industry who are doing just that to entire nations and economic zones. This isn’t a theoretical petri dish. It’s the global economy.

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