Fixed IncomeApr 8 2016

Search for good fiscal policy goes on

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Search for good fiscal policy goes on

Things which were unthinkable in terms of central bank policy a few years ago are starting to be openly talked about.

In an interview with Investment Adviser’s Julia Faurschou, Christine Johnson, head of fixed income at Old Mutual, said she hoped there would not be a trend to introduce negative interest rates.

She said: “We need to hope central banks are not going to find negative interest rates to be their new tool of choice. We’ve seen this from the European Central Bank (EBC) and in Scandinavian countries it has been popular.

“But in real life, it seems to be a harmful policy and it hurts savers more than it aids debtors. Its ability therefore to boost the economy into better growth is very inhibited.”

Additionally, although low interest rates are meant to be encouraging spending, Ms Johnson said: “Every bit of evidence we have seen is this is encouraging saving. If people do not think they are going to get a return on their money, and they are saving for a long-term goal such as retirement, the temptation is to save more to make sure you have enough when you get to that end goal.

“So I hope this does not become embedded into the central bank arsenal.”

Ms Johnson also said “everything is on the table at the moment”, including helicopter money.

This is taking away from a policy which focuses on the financial and focusing on the real economy.

“That seems like intuitively, this is where we need to go. We are talking about monetary financing of fiscal policy. Think of it in this way: if you were a government, what would you do if you never had to pay for it? That is what helicopter money means.

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“What about training, refurbishing every single hospital, universal high-speed broadband. What if we took back free education?

“In Europe, you could be talking about debt forgiveness, and find a mechanism - whether through the government or the banking channel - where people who have overborrowed in the past find they no longer owe that money.

“This frees them up for the future instead of always worrying about paying for their past excesses.”

Ms Johnson said other policies, such as targeted quantiative easing makes sense, as it enables governments to invest in broadband, technology and improving road networks.

It enables governments to take advantage of cheap money and get the economy back on the front foot, helping people to get their “animal spirits” back, she explained.

However, “government bonds do not represent good value”, she added, meaning investors have to look elsewhere for fixed income.

She likes credit, as the real return on each coupon is good value, and emerging markets, which she said “are looking cheap” with a good yield. “I am willing to tolerate a certain amount of volatility for a 14 per cent yield.”