QE and the Estimated Neutral Rate

TL;DR

Money for long-term borrowing moves freely across borders, so liquidity is a global phenomenon. QE bought bonds from asset holders and paid in cash. With this cash they bought other assets, everywhere and in every class. Asset prices rose worldwide, including in countries that never ran a QE programme of their own.

That was inflation, in a market the consumer price index does not cover. And bidding an asset's price up is bidding its yield down, so the same event was a global fall in borrowing costs.

Most econometric models that estimate the neutral rate are fitted to consumer prices, output and interest rates. Asset prices are not among the inputs. So those models interpreted the persistently lower borrowing costs as evidence that the neutral rate itself had fallen. Policy rules then took that estimate as an input, and naturally recommended something close to the policy already in place.

None of this began in 2009. Bernanke saw low rates in 2005 and identified a global savings glut as the cause, favouring a structural explanation over a liquidity one.

This one story does the work of several. It explains why asset prices boomed where no programme ran, why consumer prices stayed quiet and then surged in 2021 when the same mechanics reached households instead, and why every country's estimate fell together despite different demographics, deficits and growth.

What the models report is the rate neutral for consumer prices. The rate that would have kept borrowing serviceable sat far above it for a decade. That is not a measurement problem. It is a specification problem, and a specification problem returns a confident number to the wrong question.

US Bonds Crisis

Everyone is panicking about the US bond market. Here is thirty years of data on the thing they are panicking about.  

Weekly energy update

Crude

Cheap oil isn't coming back anytime soon.

Yes, I use AI

I use AI to write. I use it to research, to draft, to code, and to argue with. This essay included.

I expect that within a few years the disclosure will read oddly, the way it would read oddly if I told you I had used a pen. Or a spreadsheet. Or a search engine. Tools stop being remarkable once everyone has them, and the announcement stops being a confession and becomes a tic. We are not there yet, so here is the confession.

Privatisation of Government Businesses, Services and Financing

1. Scope and definitions

What the word covers

Privatisation, at its broadest, is the transfer of ownership, financing or delivery of a government function into private hands. Four distinct transactions travel under that one word.

• An asset sale transfers ownership of a government business.

• Outsourcing keeps public funding and public responsibility but contracts delivery to someone else.

• Contestability makes a government provider compete against private providers rather than necessarily replacing it. Think of it as optional outsourcing.

• Private finance brings private capital into public infrastructure while ownership of the service stays public. These are sometimes called public-private partnerships (PPPs).

Weekly Energy Update

Refined product

We are seeing the diesel (gasoil) price rise relative to petrol (gasoline). The refinery crack spreads for diesel and jet fuel are also increasing. These must ultimately flow through to Australian prices.

Weekly Energy Update.

Australian terminal gate prices