Central Bank can do nothing – Steen’s interview

2016 has seen a popular reaction against zero-bound policies

  • Political elites are struggling to preserve an unfruitful status quo
  • ‘The world has become elitist in every way’: Jakobsen
  • Political middle has become crowded, stagnant; new spectrum of ideas needed
  • Investment in education and research needed; zero rates are a dead end
  • Saxo chief economist remains ‘very positive’ overall


In April 2015, Saxo Bank chief economist Steen Jakobsen said that zero rates, zero growth, zero productivity, and zero reforms have left a great many countries adrift in a “new nothingness”.

The products of this nothingness, said Jakobsen, include apathy, stagnation and “an economic outlook based more in peoples’ heads than in reality”. On the cultural level, he continued, the widespread lack of dynamism and new ideas has empowered a political class that is “mainly interested in maintaining the status quo”, even as that status quo provides sharply diminishing returns.
US GDP growth, for instance, is hugging the zero line:

US real GDP

Source: Federal Reserve Economic Data

A little more than one year on and we remain, in terms of economics and monetary policy at least, profoundly entranced by this combination of zero-bound policies and continual “emergency measures”.
Culturally and politically, however, the past 12 months have demonstrated time and time again that nature abhors a vacuum.
In Europe, for instance, we have the spectacle of the European Union’s second-largest economy voting on whether it wants to leave the union next month. In the United States, the candidacies of Democratic senator Bernie Sanders and Republican front-runner Donald Trump have benefitted enormously from widespread frustration with the current consensus, particularly in the realm of trade where both candidates – one hard left, one populist right – point to a declining US manufacturing sector and a recovery bereft of “breadwinner” jobs as signs that the country has been led astray.
The list doesn’t end there. From the European migrant crisis to the rise of far-right political parties such as Germany’s Alternative für Deutschland and France’s Front National; from the the apparent stalling of the Federal Reserve’s policy normalisation plans to the European Central Bank’s continued adventures in quasi-permanent stimulus, the past 12 months have demonstrated that “nothingness” breeds restlessness.
This restlessness, as we have seen, will find release on the cultural level despite the hesitancy of central bank policy mandarins and political elites.
With this in mind, we sat down with Jakobsen to discuss the new nothingness, the even newer reactions to such, and his outlook for the global economy.
TradingFloor.com: The “new nothingness” thesis was based on zero rates, zero growth, zero reforms. But you hinted that all of this nothingness has spilled over into culture and politics as well… do these macro facts hinder peoples’ imagination, or their ability to deal with the problem?
Steen Jakobsen: Yes, I think so. This year, we see a growing gap between the central banks’ narrative – which is that you have a trickle-down impact from lower rates – and [the situation on the ground].
People understand that zero interest rates are a reflection of zero growth, zero inflation, zero hope for changes, and zero reforms.
In my opinion as an economist and a market observer, people are smarter than central banks. And because they are smarter, they can live with policy mistakes for a while because the narrative is very strong and because people like (European Central Bank head Mario) Draghi and (Federal Reserve chief Janet) Yellen have these platforms from which they not only talk but occasionally shout, and they are deemed to be “credible”, scare quotes mine…
We see [this gap] in the Brexit debate as well, where the elite and the academics talk down to the average voter. By doing that, of course, they alienate the voters from their representatives.

Jean-Claude Juncker

says European Commission president Jean-Claude Juncker
That’s what we see globally, that’s why Brazil is going to change presidents, why Ireland could not get its government re-elected with 6% growth. It’s not about the top line, but about the average person seeing that we need real, fundamental change.
TF: Earlier this year, you said that the social contract – the agreement between rulers and the ruled – is broken. It made me think of this year’s Davos meeting, which showed a leadership class terrified of slowing jobs growth and enamoured with the idea that population movements might be used to address this. Given the current unpopularity of globalisation and its effects, would you say that there are some things it is impossible for 21st century leaders and the led to agree upon? Is a social contract impossible?
SJ: No, it could be re-established, but it needs to be established on terra firma. Right now, we have a panacea in the form of low rates and the idea that things will somehow improve in six months. This has led to buyback programmes, a lack of motivation [and all the rest].
We as a society have to recognise that productivity comes from raising the average education level. People forget that all the revolutionary trends, the changes we’ve seen in history, have come from basic research. I don’t mean research driven by profit, but by an individual’s particular interest in one very minute area of a specific topic. This is what creates new inventions.
The second thing we often forget is that the military has been behind a lot of the industrial revolution. Mobile telephony, for example, had nothing to do with private citizens or companies – instead, it had a lot to do with the US military.
The key thing here is that we need to be more productive. If everyone has a job, there is no need to renegotiate the social contract.
The world has become elitist in every way. Before, you could start a company and build a small franchise; now, you have to be global, you have to have a billion users (if you’re an IT company), and [the pursuit of this] does not necessarily provide the best technologies, but only the biggest ones, the ones backed by [the firms with] the deepest pockets and largest web of connections.
We need to democratise the ability to be educated because we don’t know what’s going to work and not going to work. What we do know is that the social contract needs to come from better education levels.
There exist a huge number of studies that show a correlation – in mathematical terms, an R squared value – of 80% between the average education of a country or company and the productivity of same.

US unemployment rates

Source: Federal Reserve Economic Data
TF:Last week, you retweeted an article claiming that $127 billion in labour and services could be replaced by drones. Is automation, and the consequent lack of working-class jobs, partly responsible for “the new nothingness”?
SJ: Like everything else, there is an equilibrium between supply and demand at work here. On the supply side, we must consider that, in Western Europe at least, the amount of people needing jobs will be smaller in 10 or 20 years […] we need automation to pay for the lack of people in the workforce.
This is probably the first period in the evolution of technology where tech is deducting rather than adding jobs. But I think it ultimately will add jobs again, because productivity will pick up.
The demographic component here is that we will have less supply in labour markets in the future, so we need a more efficient way of doing things, a cheaper way.
That’s the good news. The bad news is that the next decade will be very, very challenging, and you haven’t even spoken about immigration and refugees – [this phenomenon] is adding to the labour market’s net supply while the net demand from employers is very low because of indirect taxes, regulations and the like.
So again, we need to go back and address what is feasible, or possible. I very rarely agree with the International Monetary Fund, for example, but if Germany can borrow at negative interest rates and invest in infrastructure, why wouldn’t they do it?
Infrastructure is and always will be productive; productivity improvements don’t happen because of silly shenanigans concerning politics…
There are a lot of things that can be done in the short term, but underneath all of this is a long-term view that you need to make people smarter. If they’re smarter, they’ll be more productive, more self-reliant, they’ll have better lives.
Yes, the political system is doing us a disservice, but we as individuals have also become extremely lazy and we are not intellectually challenged.
TF: You mentioned supply and demand and demographic changes. Before German chancellor Angela Merkel launched the refugee programme that has seen over a million people arrive in Germany, there were several reports from EU banks and think tanks calling for an injection of new working-aged people into Europe. Why were they calling for that if growth and the jobs market are stuck at zero?
SJ: Again there are two sides. Looking at the Organisation for Economic Co-operation and Development’s report on immigration and migration, for example, it shows that in the history of European immigration, 75% of all immigrants have been put into some kind of work and become productive taxpayers within one year of their arrival.


A refugee family arrives in Greece: Despite concerns about jobs and culture, Europe has historically had a great deal of success economically integrating newcomers. Photo: iStock
If you can retain that 75% inclusion rate, immigration will provide a huge boost in terms of injecting workers into a faltering demographic context. These are young, aggressive, multicultural people who are going to add colour and flavour to a continent that has been too homogenous for too long.
TF: But isn’t this very difference what is currently unpopular, what is fueling the rise of right-wing nationalism and other such movements?
SJ: People are always afraid of change. We are programmed to want today to be very much like yesterday. We don’t have high aspirations.
[On the other hand], people thrive when they are challenged. While the political narrative on refugees might follow the script you just laid out, for an economist like me it’s very clear: immigration is positive.
Of course, you can get too much of a good thing in too short of a time. If we knew now that the maximum amount [of incoming migrants] would be, for argument’s sake, 3 million over the next 10 years, then Europe could easily adapt and put these people to work.
The problem is that we currently have an infinite number and it is seen as an issue in the political spectrum – it’s not an economic issue.
There is nothing empirically that says refugees are a negative. It can challenge the social fabric, it can challenge the political spectrum, but to me that’s a good thing – we need openness.
Are there problems with this? Yes, but there are also problems with being a startup, or with riding your bike for the first time. I don’t think there is anything in life that doesn’t come with some pain. I think you need to play through the pain to become better.
TF: We mentioned the expansion of the political spectrum, how we’re seeing more interest in the far left, but I think notably we’re seeing more interest in the far-right with FN, with AfD and with Donald Trump in the US. Now, a huge amount of his support comes from the perception that globalisation – NAFTA, the TPP, Chinese manufacturing – has harmed US workers, and his solution is protectionism. What would a world in which the US enacted protectionist policies look like?
SJ: The irony is that we already have protectionism. Trade volume and trade value has been collapsing for the past 24 months. If you look at the trade talks that happen under the umbrella of the World Trade Organization, they have achieved absolutely nothing since China’s inclusion.

Donald Trump

« Bad deals! » Photo: iStock
There are also signs, practically and economically, that you can have too much of a good thing in terms of the division of labour. You can actually come to a point where you end up with an endless deficit in one country and an endless surplus in another if the deficit country does not have the ability to respond to the deficit, whether through a weaker currency or by being more productive.
The US is the prime example of this phenomenon which is why Trump is having so much of a tailwind.
The US has basically been living off of cheaper imports for a very long time. There is a lot of pain in the US, but for the middle class the pain has been cushioned by the fact that Chinese imports, Vietnamese shoes and the like are just so much cheaper.
Trump is having a good time right now, but it is not because he is right about protectionism versus free trade. It’s because we are at the end of the cycle where the US benefitted massively from lower import prices on consumer goods, which make up 70% of US consumption.
If, like Trump wants, an iPhone were to be produced in the US, it would cost $2,000 or more. This is why Trump is wrong – if that were the case, we wouldn’t see the sales that we do, we wouldn’t see the share price that we do.
TF: Wouldn’t his argument, or the protectionist one, be that real wages are stagnant, and if working class or manufacturing jobs had remained in the US, then people might not be so dependent on low prices?
SJ: That’s a circular argument. The fact is that the US doesn’t have a competitive productive base anymore. In some industries they do, like in cars, but to a large extent the car industry is subsidised.
It’s not that the US worker can’t do the work, he’s just massively more expensive. The price difference between producing Nike shoes in the US versus Vietnam is, in my best estimation, one to 10 if not one to 20.
The amount of US workers at or below the minimum wage is decreasing:

US wage growth

Source: Federal Reserve Economic Data
If you want to pay $500 for trainers, you can have the Trump version. The reality, as with so many things in life, lies between Trump and globalisation.
Let’s look at a Danish example: I never understood, for example, why [pharmaceuticals giant] Novo Nordisk don’t use some of the money they put into funds and trusts and [architecture] for basic research, for something – like penicillin, for example – that might do some good in the world.
Of course, they don’t do it because there’s no profit in, but [they are overlooking the fact that] something could come out of that research, something that would give them a new product…
Everyone in the world is just looking out for number one. We’ve lost the coherent belief that underlies the social contract.
Historically speaking, the most successful examples of social contract formation occurred under benign kings, under regimes that tolerated a sophisticated bureaucratic class and a robust opposition.
You have the [Russian president Vladimir] Putins and [Turkish president Recep Tayyip] Erdogans and these people who can execute power… they destroy society. You need both sides, and that’s why I talk about the far left and the far right creating a new spectrum a new middle ground.
The problem now is that the middle has effectively disappeared. Everyone wants to be in the middle, and the result is that there are no new ideas.
The media are always considering demand independent of supply and vice versa – nobody is covering the balance.
TF: Finally, you have said that continual emergency measures are unhealthy, and that’s very much where we are with central banks – negative rates, zero rates. But following the one US rate hike that happened, we saw a huge retreat from the US normalisation narrative.
If continual emergency measures are unhealthy, but the world’s arguably strongest economy has stalled on the road to normalisation, what can central bankers do?
SJ: They can do nothing. They should do nothing. They should go away.
If you look at monetary history prior to the formation of the Bank of England – the world’s first central bank – you will find that economic cycles were more stable then. Since the founding of the BoE and the Fed 102 years ago, we’ve seen an increased amount of business cycle up and downs.

Bank of England

The Old Lady of Volatility Street? Photo: iStock
The problem is that the fractional monetary system is based on access to credit, and the only institutions that create credit in this system are the banks.
Central banks keep these institutions alive with one hand, but choke them with the other. [The result, as we see this year] is that they are underperforming relative to the broader indices, so their ability to go to the marketplace and get more money is diluted.
We have a very vicious negative cycle that is initiated by the central banks. They’re not exclusively guilty, of course, and central bankers would rebut this argument with one saying that monetary policy cannot work on its own, you also need fiscal stimulus… but that’s all nonsense.
The way societies survive is by creating frameworks in which people can be productive. This is based, again, on basic research, which is in turn based on general education levels.
Let me end this little talk by saying that I am very positive. I think [the reaction to the new nothingness] is the best news that has happened in the last 10 years, because now people are starting to ask about the social contract.
We are now questioning the central banks’ model.
I could be wrong with all my criticism, but I am not wrong in saying that if you give people incentives and if you educate people, you become more productive.
If I’m running a football team, I don’t try and improve my players’ performance by feeding them pizza every day, but this is what the central banks are doing. They’re feeding us burgers and pizza when we need food – training programmes, education, intellectual stimulation.

Fast food

The « Janet and Mario diet » is known to cause bloating, fatigue,
and a loss of motivation. Photo: iStock
That is inarguably the way to go. And it’s beautiful, it means our kids can be better-educated, can have more access to information, and hopefully down the line we see better practices in terms of politicians laying out both the supply and demand cases.
That, of course, is a big reach in any political sphere, but the ones who will survive will be the honest ones and the ones who take both sides into account before proceeding in a rational and disciplined manner.
By Michael McKenna, editor at TradingFloor
1 réponse
  1. Nostromo
    Nostromo dit :

    Very nice and positive conclusion I would like to believe in…but at the sole condition that the « ones who will survive will be the honest ones and the ones who take both sides into account before proceeding in a rational and disciplined manner. » because there are the other ones who will not allowed to loose their domination and those « ones » seems (see world news) to be ready to fight to the death….

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