22 January 2019
The low yield on US treasury bonds is indicating inflation and economic growth will be mild. Photo: internet
The low yield on US treasury bonds is indicating inflation and economic growth will be mild. Photo: internet

Monetary tools are outdated medicine for economy

It seems that central banks in key economies are lacking new measures to stimulate the global economy after they loosened their monetary policy over the last few years.

They may have wrongly diagnosed the symptoms.

The economic model will be different in the coming decade from the one in the past 50 years.

We should not expect the old economic model to continue.

In future, new production and consumption models will emerge.

With progress in technology, low- and mid-level jobs will be replaced.

The middle class will have a harder time, while some in the technology industry or those who hold financial assets will become wealthy.

The wealth gap in society is likely to widen.

The government usually makes policy decisions based on economic data.

However, it’s time to review whether data like non-agricultural employment or retail sales can fully reflect the big picture.

While global financial markets are highly concerned about the divergence of central banks’ monetary policies, other factors will also influence the markets.

US interest rates are an example. Although the yield of short-term US treasuries will change in line with the Federal Reserve’s policies, the long-term treasuries’ yields are not directly linked to monetary policy and are influenced by global capital flows and the markets’ outlook for the economy.

As early as 2013, the yield on 10-year US treasury bonds rose to 3 percent from 1.6 percent in half a year owing to expectations the Fed would start to normalize the interest rate.

Back then, the market expected the yield on the 10-year US treasury bond would continue climbing.

Now, when the Fed has really begun to raise interest rates, the yield on the 10-year US treasury bond has fallen back to nearly 1.6 percent.

That level has priced in the markets’ expectations for low economic growth and low inflation in the US.

Meanwhile, the yield on the German 10-year bund is about 0.2 percent, and the yield on Japanese government bonds actually dipped below zero.

In effect, the US dollar is still a “high yield” currency.

The government should not rely on “old wisdom” to solve present issues.

A high-inflation environment will no longer exist, neither will structural inflation.

So monetary policy will not be effective to stimulate the economy any longer.

Instead, the transformation of the real economy would be a more appropriate way.

Investors should accept an environment of low inflation and low economic growth and adopt new investment strategies.

This article appeared in the Hong Kong Economic Journal on Feb. 17.

Translation by Myssie You

[Chinese version中文版]

– Contact us at [email protected]


General Manager, Head of Investment, Investment Management, Bank of China (Hong Kong)

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