Productivity and Employment Guarantee Growth, Not Futile Moves by Central Banks

Central banks have lost control and leadership as financial markets have ceased to trust them. However, Steen Jakobsen, chief economist at Saxo Bank, believes that investors should never have relied on the decisions and communication messages of bureaucrats who talk to the academic community without ever having worked in the private sector.

The latest appearance of Janet Yellen, chair of the U.S. Fed, can be described as the ‘fall of the Berlin Wall’ in economic terms as it represents the end of central bank planning and dialogue with the market, Jakobsen asserts.

– The market must return to a normal business cycle. All moves by central banks today are aimed at creating liquidity, and 70 to 75 percent of that liquidity actually serves to finance existing debts. In recent years, central bank leaders, particularly Mario Draghi, have played leading roles and enjoyed their positions. However, such a role has been allowed by irresponsible politicians who also do not do their jobs properly. With the impotence of the central bank, Yellen’s last address to Congress revealed a devastating prevailing pattern of political behavior in the U.S., but also globally – Jakobsen notes, vividly describing that if it were a street fight, Yellen would be dead, meaning that politicians treated her as if she were a kindergarten child, not a senior representative of the official administration.

– This also shows the distrust of politicians in central banks, Jakobsen believes.

Central banks are increasingly retreating from the events, which can only be good for the economy, analysts at Saxo Bank believe. This will bring ‘main street’ to the forefront, meaning individual investors and the economy in general, rather than Wall Street with major financial institutions and large corporations.

– Central bank leaders will certainly not acknowledge all that we are saying, but I believe we are at the end of the spiral into negative interest rates with the idea that they will stimulate the economy. Such rates have a negative effect on banks because only by creating loans do we encourage positive movements. On the other hand, we already have too much debt, and how will new promises of debt help stimulate loan growth? We are facing a major transition process in which these former power brokers and ‘masters of the universe’ need to lose their roles, and when the crisis becomes large enough, it is the politicians who need to take control and introduce fiscal stimulus – says John J. Hardy, head of FX strategy at Saxo Bank.

When looking at large economies and which of them can lose the most in the crisis that the global market is experiencing, it all comes back to China and the U.S. They, as two major global drivers, are currently at two-thirds of their capacity, which slows overall growth in the world. At the same time, Saxo Bank claims, the cost of money is rising for end users, meaning small businesses in Europe and the U.S. are borrowing money at increasingly higher interest rates due to regulations faced by banks, the Fed’s moves to raise key interest rates, and so on.

– I do not want to be a prophet of bad news, but the correction we are experiencing is necessary and has not yet brought significant losses to the market, but the process is not over. Central banks will certainly continue to try to save Wall Street, but every such move will bring even more deflation and thus actually lower profits for banks. A change in thinking is necessary, as well as investment in people, productivity, and infrastructure because a normal business cycle in itself brings positive shifts, and I believe that the future will not be as negative as many think – Jakobsen is optimistic and describes that the situation in the U.S. will likely be tougher than in Europe, in terms of their ability to stimulate positive change, as the idea of ‘venture capital’ funds prevails where entrepreneurs want to get rich by buying and selling companies, and no one invests in real innovations, productivity, and employment growth.

The global focus should not be on China but on the U.S. because both China and the U.S. have the same debt-to-GDP ratio, and although the U.S. economy is more advanced, China, on the other hand, has about 50 percent of private savings in the economy. The bad news is that we have become an unproductive society, but this will surely change soon. In addition to infrastructural moves, there are also public-private partnerships, such as recently in Canada, and I have quite a bit of faith in the recovery of financial markets and the economy, concludes the chief economist at Saxo Bank.