Unconventional Thinking about Unconventional Monetary Policies

Jun 10, 2019 Barry Eichengreen, Project Syndicate

Barry Eichengreen is Professor of Economics at the University of California, Berkeley, and a former senior policy adviser at the International Monetary Fund. His latest book is The Populist Temptation: Economic Grievance and Political Reaction in the Modern Era.

Defenders of central-bank independence argue that quantitative easing should have been avoided last time and is best avoided in the future, because it opens the door to political interference with the conduct of monetary policy. But political interference is even likelier if central banks shun QE in the next recession.

KONSTANZ – The policy interest rates of advanced-country central banks are stuck at uncomfortably low levels. And not just for the moment: a growing body of evidence suggests that this awkward condition is likely to persist. Inflation in the United States, Europe, and Japan continues to undershoot official targets. Measures of the “natural” rate of interest consistent with normal economic conditions have been trending downward for years.

Weak Spots in Global Financial System Could Amplify Shocks

April 10, 2019, IMF Blog

By Tobias Adrian and Fabio Natalucci

In the United States, the ratio of corporate debt to GDP is at record-high levels. In several European countries, banks are overloaded with government bonds. In China, bank profitability is declining, and capital levels remain low at small and medium-size lenders.

Vulnerabilities like these are on the rise across advanced and emerging market economies, according to the IMF’s latest Global Financial Stability Report. They aren’t all setting off alarm bells just yet. But if they continue to build, especially with still-easy financial conditions, they could amplify shocks to the global economy, raising the odds of a severe economic downturn a few years down the road.

With the right mix of policies, countries can sustain growth while keeping vulnerabilities in check.

This poses a dilemma for policymakers seeking to counter a slowing global economy, as discussed in the World Economic Outlook. By taking a patient approach to monetary policy, central banks can accommodate growing downside risks to the economy. But if financial conditions remain easy for too long, vulnerabilities will continue to build, and the odds of a sharp drop in economic growth at some later point will be higher.

Capitalism Gone Wild

By John Mauldin

April 5, 2019

Unwise Investment
Zombie Companies
Gummed-Up Economy
Uncreative Destruction
The Drive for Scale
Helicopter Governments

Recession is coming. We can debate the timing, but the economy will turn decisively downward at some point. My own analysis, looking at the data available on April 4, says recession isn’t likely this year but unfortunately looks very probable in 2020.

In addition to when it will happen, there’s also the question of how deep the next recession will be. A shallow downturn wouldn’t be fun, but compared to the last one might feel relatively refreshing.

Alas, I don’t think we will be that lucky. I think the opposite: The next recession will be deeper, longer and far more painful to many more people than your average recession, and could persist as long as the last one. That is because the next recession in all likelihood will be truly global. If you sailed through 2007–2009 without your lifestyle changing, I wouldn’t assume it will happen that way again.

Ironically, but not surprisingly, it will be the response to the last recession that makes the next one so much worse. Part of the reason is that investors once again “learned” that if you simply stay the course, the market will get you back to where you were and more. The massive move into low-fee index investing instead of active management will make the next recession more painful.

What if Zero Interest Rates Are the New Normal?

Mar 29, 2019 Adair Turner, Project Syndicate

Adair Turner, a former chairman of the United Kingdom’s Financial Services Authority and former member of the UK’s Financial Policy Committee, is Chairman of the Institute for New Economic Thinking. His latest book is Between Debt and the Devil.

The valid insight behind „modern monetary theory“ – that governments and central banks together can always create nominal demand – was explained by Milton Friedman in 1948. But it is vital also to understand that excessive monetary finance is hugely harmful, and it is dangerous to view it as a costless way to solve long-term challenges.

TOKYO – Ever since major central banks cut short-term interest rates close to zero in autumn 2008, and subsequently purchased huge volumes of bonds as part of their quantitative easing operations, economists have debated about when and how fast the “exit” from these unorthodox monetary policies would be.

But, a decade later, developed-economy interest rates are stuck far below pre-crisis levels and likely to remain so. Germany’s ten-year bond yield of -0.02% (as of March 23) signals market expectations that the European Central Bank will maintain zero policy rates not just until 2020 (the official ECB forward guidance) but to 2030. Japanese bond yields imply zero or negative interest rates for even longer. And while ten-year yields in the United States and the United Kingdom are just above 1% and 2.4%, respectively, both of these suggest minimal or no increases in policy rates for another decade.

Can Economics Shake Its Shibboleths?

Date: 15-03-2019
Source: by Jim O’Neill

Jim O’Neill, a former chairman of Goldman Sachs Asset Management and a former UK Treasury Minister, is Chairman of Chatham House.

Since the 2008 financial crisis, economic orthodoxies have been collapsing left and right. Under conditions of low unemployment, elusive inflation, weak productivity growth, and high profitability, economists in advanced economies may need to go back to the drawing board.

LONDON – Though economics aspires to the rigor of the natural sciences, at the end of the day it is still a social science. At no point in the past 40 years has this been more evident than it is now.

For decades, conventional macroeconomic analysis has rested on the edifice of the Phillips curve, which asserts a clear tradeoff between unemployment and inflation: when the unemployment rate falls below a certain point, inflation must rise. But this assumption has not been borne out in the decade since the 2008 financial crisis. In both the United Kingdom and the United States, for example, the unemployment rate is historically low, yet inflation remains weak.

Or consider monetary policy. Even after years of quantitative easing (QE) and ultra-low interest rates, central bankers in the advanced economies – particularly the eurozone – have continued to undershoot their inflation targets. Economists have also had to question long-held assumptions about downward nominal wage rigidity, an artifact of the 1960-70s, when organized labor was much stronger. Clearly, the idea that employees will always resist cutting wages (or workers’ hours) no longer applies.

Werden Sparer wirklich enteignet? Vier Mythen über das billige Geld

András Szigetvari, 10. März 2019, 12:51 derstandard.at

Die Europäische Zentralbank will mit milliardenschweren Krediten an den Bankensektor die Wirtschaft beleben. Dafür erntet sie viel Kritik. Nicht alles ist fundiert

Der „Nullzins-Draghi“ hat wieder zugeschlagen, „heute ist ein schwarzer Tag für Sparer“. Im Vergleich zur Wortwahl manch anderer deutscher Politiker und Ökonomen, die Draghi schon als „Brandstifter“ bezeichnet hatten, urteilte die Bild-Zeitung diese Woche richtig mild über die Europäische Zentralbank (EZB). Die EZB unter ihrem Chef Mario Draghi hat sich am Donnerstag dazu entschlossen, die Geldschleusen etwas weiter zu öffnen. Die EZB wird europäischen Banken Milliardenkredite für zwei Jahren anbieten. Der Zinssatz dafür liegt vorerst bei null Prozent. Die Ankündigung und die Kritik am Nullzinskurs ist Anlass, um einige Mythen rund um die Geldpolitik zu beleuchten.

1. Die Sparer werden enteignet

Drei Lektionen aus der quantitativen Lockerung in Europa

Jan 31, 2019 Stefan Gerlach, Project Syndicate

Stefan Gerlach is Chief Economist at EFG Bank in Zurich and Former Deputy Governor of the Central Bank of Ireland. He has also served as Executive Director and Chief Economist of the Hong Kong Monetary Authority and as Secretary to the Committee on the Global Financial System at the BIS.

ZÜRICH – Da die Europäische Zentralbank die quantitative Lockerung (QE) kürzlich beendet hat, ist dies ein geeigneter Zeitpunkt, um über die Auswirkungen der Politik nachzudenken. Drei Schlussfolgerungen scheinen offensichtlich: Die Vermögenskäufe der EZB hatten erhebliche makroökonomische Vorteile; die politischen Kosten der QE waren viel höher als erwartet; und die ganze Episode war für die Bundesbank wirklich schlimm.

Durch die Senkung der Kosten von Bankkrediten durch die QE förderte die EZB die Kreditvergabe an kleine Unternehmen und Haushalte in der gesamten Eurozone. Dies gab dem Wirtschaftswachstum einen wichtigen Impuls, der zu einem deutlichen Rückgang der Arbeitslosigkeit und einem Aufwärtsdruck auf die Lohnkosten führte. Obwohl die Kerninflation gestiegen ist, bleibt die zugrunde liegende Inflation schwach, was bedeutet, dass die EZB eine expansive Geldpolitik beibehalten muss.

Staatsschulden auf Rekordniveau – alles kein Problem?

András Szigetvari19. Jänner 2019, 18:00 derstandard.at

Ein französischer Ökonom behauptet, dass sich führende Industrieländer weniger Sorgen wegen ihrer Schulden machen müssen als gedacht. Die provokante These erntet Beifall. Was bedeutet sie für Europa?

Es klingt wie eine utopische Geschichte aus einer fernen Zukunft. Ein Land lässt neue Schulen, Kindergärten und die besten Eisenbahnverbindungen bauen. Geld spielt dabei keine Rolle. Das Land verschuldet sich immer weiter. Doch das stört niemanden, weil der Schuldenberg unbegrenzt wachsen kann. Klingt unrealistisch? Mag sein. Doch einige der führenden Ökonomen diskutieren derzeit angeregt darüber, ob die eigene Zunft die Bedeutung staatlicher Schulden über die vergangenen Jahre und Jahrzehnte massiv überschätzt hat. Die Erkenntnis hätte politische Bedeutung. Schließlich ist in der Eurozone vorgeschrieben, dass sich alle Mitgliedsländer an Schuldenobergrenzen halten müssen, auch wenn derzeit die meisten Länder die Regeln brechen. Nulldefizite und Überschüsse gelten zudem in vielen Staaten als Errungenschaften. Aber was, wenn Schulden nichts Negatives sind?

Günstige Verzinsung

Der führende Kopf hinter der Debatte ist der ehemalige Chefökonom des Internationalen Währungsfonds (IWF), Olivier Blanchard. Der Franzose forscht am Peterson Institute for International Economics (PIIE), einem eher konservativen Thinktank in Washington. Blanchards These, die er anhand der USA durchargumentiert: Seit gut 40 Jahren sinkt das weltweite Zinsniveau.

News from Euroland – recession imminent

By Victor Hill 30 November 2018, masterinvestor

17 mins. to read

When the money tap went dry…

Across Europe, and particularly in the 18-member Eurozone, the economic news is sobering. It’s now clear that the credit crunch in emerging markets which has played out over most of this year, plus the slowdown in China, are having negative consequences in Europe. Yet, despite the ongoing trauma of Brexit, the UK is cruising along relatively smoothly – for now.

A number of critical events are about to coincide. Firstly, the ECB will cease printing money by means of quantitative easing (QE) in December. The principal measure of the money supply across Europe, M3, was growing by around 5 percent per year when the ECB was buying up to €80 billion of bonds a month in 2013. That rate slowed to 2.1 percent in Q3 this year and will prospectively fall to zero in Q1 2019.

QE was instigated by ECB President Mario Draghi who took over the reins on 1st November 2011. At the beginning of 2012, at the height of the European Sovereign Debt Crisis, he pledged that the ECB would do everything it takes to save the Euro. First came a programme of soft loans to Eurozone banks (the so-called LRTO); then came a massive programme of government and then corporate bond-buying following the example set by America’s Federal Reserve in the aftermath of the financial crisis of 2008.

Wirtschaftsweiser warnt: EZB könnte geldpolitische Wende zu spät einleiten

Der deutsche Wirtschaftsweise Volker Wieland hat die Europäische Zentralbank vor einem zu langsamen Kurswechsel ihrer lockeren Geldpolitik gewarnt.

11.11.2018 um 10:14

„Die EZB läuft Gefahr, die geldpolitische Wende zu spät einzuleiten“, schrieb der deutsche Wirtschaftsweise Volker Wieland in einem Gastbeitrag für die „Welt am Sonntag“.

„Das heißt, die Inflation könnte schneller steigen, es könnten noch mehr riskante Kredite vergeben, unproduktive Investitionen getätigt und Ressourcen falsch eingesetzt werden.“ Risiken für die Finanzstabilität würden damit weiter zunehmen. Wieland forderte die EZB zu einer Abkehr von ihrer aktuellen Politik auf. „Die EZB könnte die Zinsen früher anheben. Außerdem müsste sie dringend erklären, wann und wie schnell sie ihre Bilanz reduziert. Sie sollte nicht auf so viel Staatsanleihen sitzen bleiben, sondern Bestände abbauen.“