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Archive for 11. September 2019

High Debt Levels Are Weighing on Economies

Posted by hkarner - 11. September 2019

Date: 09-09-2019
Source: The Wall Street Journal
Borrowing helped pull countries out of recession but made it harder for policy makers to raise rates

’The world is in a delicate equilibrium,’ Mark Carney, governor of the Bank of England, said earlier this year.

Global interest rates are low and may head lower, driven by slowing economies and the U.S.-China trade war. A less appreciated reason for lower rates is a mountain of debt built up during the past decade.

Debt owed by governments, businesses and households around the globe is up nearly 50% since before the financial crisis to $246.6 trillion at the beginning of March, according to the Institute of International Finance, an association of global financial firms.

The borrowing helped pull economies out of the nasty recession, but left them with high debt burdens that make it harder for policy makers to raise rates. It also makes consumers and businesses more likely to pull back from spending money on new goods if economic conditions weaken.

“Globally, you are at worryingly high levels,” said Sonja Gibbs, managing director for global policy initiatives at the IIF. She said policy makers need to consider debt levels as they adjust interest rates. “There’s going to be an impact on the broader economy.”

In the U.K., Canada and Australia, central bankers have backtracked from rate increases in the past two years after consumers got bruised more than expected. U.S. consumers, who have borrowed to pay for college, cars and everyday spending, have been less affected because their debt burdens are much lower relative to their incomes.

“The world is in a delicate equilibrium,” said Mark Carney, governor of the Bank of England, in a February speech. “The sustainability of debt burdens depends on interest rates remaining low and global trade remaining open.”

Mr. Carney and other central bankers would have liked to raise rates further during the good years to give themselves room to cut when economies slowed. But the higher rates hit their economies harder than many expected.

“Tightening may have had more of a restraining effect than anticipated,” said Nathan Sheets, chief economist at PGIM Fixed Income and a former senior economist at the Federal Reserve. “It acts as a very powerful drag on spending.”

There is a direct connection between debt, interest rates and growth. Rising rates force consumers and businesses who take on adjustable-rate loans such as credit-card debt to pay more each month and reduce other spending. Even with fixed-rate loans, borrowers know they will have to pay higher rates to roll over the loans, so they start putting aside money that they would have otherwise spent.

It doesn’t take much for countries loaded down with debt to feel the strain. When the Bank of Canada raised interest rates in July 2017, the first increase in seven years, officials said higher rates signaled the economy was strong.

But the country’s households had been borrowing heavily, pushing their ratio of debt to after-tax pay to the highest level among the world’s most-advanced economies. After five increases drove the interest rate up to 1.75%, the resulting slowdown in growth was “sharper and more broad-based than we expected,” said former Bank of Canada deputy governor Lynn Patterson during a March speech. The bank stopped raising rates far short of the 4.25% level in place before the financial crisis.

U.S. consumers are better off because so much mortgage debt was wiped out in the financial crisis. The impact of higher rates was tempered by the popularity of fixed-rate mortgages.

But higher rates squeezed U.S. consumers with lots of credit-card debt and big auto loans, said Torsten Slok, chief economist at Deutsche Bank Securities. Average auto-loan interest rates jumped by almost 2 percentage points in 2018 to roughly 5% for 60-month loans, while delinquency rates jumped from roughly 4% to more than 4.5%.

When Bank of Canada began raising interest rates in 2017, the country’s households had been borrowing heavily. A for-sale sign at a Toronto house.

Higher rates slowed home and auto sales. Companies such as toolmaker Stanley Black & Decker Inc. blamed weaker sales on higher rates. Others, including Coca-Cola Co. , complained about the impact of higher interest costs on their expenses.

In January, the Fed signaled it was pausing its rate increases after worries grew about the economy, including the housing market, global growth and the impact of the trade war. “The fundamentals for consumers are more worrying than we think,” Mr. Slok said.

The Bank of England, facing the risks of Brexit on top of growth and trade worries, last raised interest rates more than a year ago. One reason is that households and businesses are struggling with debt. Through the first three months of this year, households spent more money than they made, marking an unprecedented run of 10 quarters of net borrowing, according to the country’s Office for National Statistics.

Business defaults, meanwhile, rose in England and Wales during the second quarter of this year to the highest level since the first quarter of 2014, according to the government’s Insolvency Service. Short-term rates in the U.K. are at 0.75%, down from 5.75% in July 2007.

In Australia, where consumers owe $2 for every dollar they earn, economists at the country’s central bank found that every 10% increase in debt shaves household expenditures by 0.3%.

Philip Lowe, Reserve Bank of Australia’s governor, acknowledged that the borrowing is leading to softer consumption when he announced in July that the bank would lower its benchmark rate to an all-time low of 1%.

It appears poised to fall again. The board kept rates unchanged on Tuesday but in its September statement said it “will ease monetary policy further if needed to support sustainable growth in the economy and the achievement of the inflation target over time.”

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What Economists Still Need to Learn

Posted by hkarner - 11. September 2019

Date: 09-09-2019
Source: by Mark Cliffe

Mark Cliffe is Chief Economist and Head of Global Research of the ING Group.

More than a decade after the global financial crisis, macroeconomists have failed to absorb three crucial sets of lessons. Their models are still struggling – and mostly failing – to cope with disruptive change, and with the fact that both balance sheets and inequality matter.

AMSTERDAM – Macroeconomics was one of the casualties of the 2008 global financial crisis. Conventional macroeconomic models failed to predict the calamity or to provide a coherent explanation for it, and thus were unable to offer guidance on how to repair the damage. Despite this, much of the profession remains in denial, hankering for a return to “normal” and in effect treating the crisis as just a rude interruption.

That needs to change. Although an economic recovery has taken root, its structural fragilities suggest that macroeconomics is still in pressing need of an overhaul. Three sets of lessons from the past decade stand out. Den Rest des Beitrags lesen »

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Big Short Investor: Blase bei Indexfonds könnte den nächsten Crash auslösen

Posted by hkarner - 11. September 2019

DWN, 9/9/2019

dwn 9_9

 

Dank an H.G.

 

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A Capital Market Union for Europe: Why It’s Needed and How to Get There

Posted by hkarner - 11. September 2019

September 10, 2019, IMF Blog

By Ashok Vir Bhatia, Srobona Mitra, and Anke Weber

When savers and firms invest and borrow beyond their national borders, they enjoy opportunities to diversify their portfolios and lower their funding costs, respectively. In Europe, this idea—of an integrated financial system that offers a richness of financing choice—remains an elusive goal: capital markets are far from integrated.

Our recent research finds that European finance is still sharply segmented along national lines, with savers and investors depending heavily on national banking systems. Although the landscape is dotted with many different types of investors and intermediaries, their focus is mostly domestic—“home bias” is pervasive.

An unlevel playing field

This is a problem because it results in an uneven playing field: the financing costs companies pay depend hugely on their country of incorporation, collateral-constrained startups find it hard to get any funding at all, and consumption is not shielded from local economic shocks.

Lowering barriers to a European Capital Markets Union offers the prospect of powerful macroeconomic benefits.

Firms in, say, Greece, pay a 2.5 percent higher rate of interest on their debt than similar firms in the same industry in France; Italian firms pay 0.8 percent higher interest on debt than comparable firms in Belgium. And Greek and Italian firms are not alone in fighting this uphill battle on funding costs—there is no level playing field.

In addition, firms with limited plants and machinery to offer as collateral—think of an IT start-up—face hurdles accessing bank loans. Such companies grow significantly faster in more developed capital markets, where venture capital funds with diversified portfolios thrive and are more willing to take the risk of providing unsecured financing to innovative players.

Finally, private cross-border risk sharing is severely limited, with local consumption being four times more sensitive to local shocks in the 28 EU countries than in the 50 US states. For every 1 percentage point drop in national GDP growth, consumption drops by 80 basis points, on average, if the country is in the EU, compared to only 18 basis points for the average US state.

Obstacles to capital market integration

Our study included a survey of national market regulators and some of the largest institutional investors in the EU, which identified important obstacles to greater capital market integration in Europe.

Responses flagged shortcomings in information on both listed and unlisted firms, in insolvency practices, and to a slightly lesser extent, in capital market regulation. Some countries were also seen to have weak audit quality, overly complex procedures for retrieving withholding taxes on investments in other countries, and unduly high tax rates. Den Rest des Beitrags lesen »

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Boris Johnson Vows Oct. 31 Brexit as Law Rules Out No Deal, Election Bid Fails

Posted by hkarner - 11. September 2019

Date: 10-09-2019
Source: The Wall Street Journal

British prime minister loses second bid to get Parliament to approve an October election

Parliament rejected Boris Johnson calls for fresh elections for a second time in a week.

British Prime Minister Boris Johnson stuck to his pledge that the U.K. would leave the European Union on Oct. 31—even as a law came into force preventing the country from leaving on that date without an agreement and Parliament again rejected his bid to call an election before then.

In his first meeting with his Irish counterpart, Leo Varadkar, since taking office in July, Mr. Johnson on Monday insisted he wanted to leave the EU with an agreement to smooth the U.K.’s departure from the bloc. Although he outlined some ideas, he didn’t give any detail about how he proposed to do it. Den Rest des Beitrags lesen »

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