The ‘decisive’ action taken by central banks on Sunday lacked a critical component: yield curve control (YCC). Without YCC, central banks will not be able to anchor financial markets. Fiscal ‘stimulus’ may not work.
This is a critical lesson to be gleaned from Japan. The fiscal measures being adopted across the West will put debt to GDP ratios under extreme upward pressure. Simply relying on expanded asset purchases will fail. YCC in Japan helped to create record numbers of new jobs and kept core inflation in positive territory.
YCC is controversial, but the US already has experience of what happens when central banks do not take full control of markets. The Fed was very slow to embrace even the most rudimentary quantitative easing following the financial market crash of September 2008.
FOMC chair Jay Powell has said he is open to YCC. He may need to move swiftly.
Of course, YCC is not a panacea and nor is fiscal stimulus. The onus is on governments to ramp up testing quickly (especially for health care workers), tracking and isolation, protective equipment, along with the capacity for ICU.
As the Imperial College in London notes, suppression requires intensive controls that are simply lacking in the UK and US. That will have to change. The US has the technology companies to make it happen.
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