No need for bad hare day

Caroline Ritchie

THIS week the markets have been as draggy as a slow bartender, so I racked my trades, knocked off early and thought about Easter.

When I was little, Easter was in the Northern Hemisphere. All to do with spring, rejuvenation.

My mother told me about the hare. The female, when she has her leverets, does not place them all in one patch but dots them around the field. This way her skyborn nemesis, the buzzard, cannot eat all her offspring in one sitting. If he seizes one nest she can at least make a run for it to protect another.

A multi-strategy plan of the wild, if you like, based on 20,000 years of successful experience.

Central banks have been doing it rather differently. Nearly eight years after the global financial crisis, they are locked in step together and are now cantering around doing the same thing in ever-decreasing spirals - reducing nominal interest rates.

The idea has been that this will stimulate growth.

In the thick of things, when the monetary system was hours from collapse, central banks cut rates.

In the wake of things, from that time until now, they have continued to cut rates - like hacking a pine tree over with a chainsaw then whittling it down to a matchstick.

These emergency slash and burn policies, quite extreme when they were first brought in, have become normal. But they are not working. Growth has not burst forth out of the starting gates and this follow-the-leader game is getting stuck in its tracks.

Those in charge might be casting nervous glances at Japan, now two decades into their same experiment and also stuck, thinking, boy I hope we're getting this right.

Having plunked all their cards down one rabbit hole, central banks must be wondering what to do next.

After almost a decade of open market intervention, ZIRP (zero interest rates), NIRP, (negative interest rates), and QE, (quantitative easing), isn't it time we stopped staring at one's bare cupboard?

The old model, from Keynes, which states that low interest rates will jump-start inflation, the one which the central banks continue to use, is a bust in this environment.

Surprising then the vigour with which it is applied to our major money systems, given no real evidence that it is working.

All hail our interest rate in one basket idea! But that is group-think for you - clubbing together despite the irrational.

The good news is that a few chaps at the top are willing to raise their voices and say "Hey, you lot, what MIGHT happen if we keep interest rates at zombie levels is that we will damage inflation, not create it." They muse, bravely, "What if we're making it worse?".

James Bullard, of the St Louis Federal Reserve, is such a force despite his old school leanings - "Indeed, during the past six years I have warned along with many others that ZIRP has put the US economy at risk of future inflation. In fact, my monetarist background urges me to continue to make this warning right now!"

He pushes on towards the light though, outlining that we would be better off using the Fisher equation. Under this, Federal authorities cannot just dictate nominal rates, but must link them to a long running value of inflation.

There is science to back him up. I say fantastic, let's put this and any other options you guys have on the table. We need fresh independent thinking. Though optimistic to think that any one formula will solve what we have created, looking at other options, a bunny in each corner so to speak, seems an awfully good start.

Caroline Ritchie is a former AFA, sharebroker & portfolio manager. She runs Investment Stuff, a sharemarket based investment coaching service. Visit her at www.investmentstuff.co.nz This column is not personalised financial advice.