The Money’s More Than Free. Why Won’t Europeans Borrow?

Date: 22-07-2019
Source: The Wall Street Journal

Which explanation you prefer determines whether you think the European Central Bank is right to be considering another cut

It is plausible that negative rates have worked, as eurozone investment since rates went negative in June 2014 has been slightly ahead of the U.S.

When it comes to interest rates, the U.S. and Europe are upside down.

A big worry about the expected interest-rate cut in the U.S. is that it will encourage too much borrowing, inflating bubbles in debt and equity markets. A big worry about the expected interest-rate cut in Europe is that it will discourage borrowing, with many companies, households and governments paying down debt even with negative central-bank rates.

Many think the European Central Bank will cut rates soon

Date: 18-07-2019
Source: The Economist

But for a significant stimulus, the bank will need to break self-imposed rules

The european central bank’s firepower is sadly depleted. The interest rate on the reserves that banks hold with it is sub-zero; its quantitative-easing (qe) scheme has hoovered up assets worth €2.6trn ($2.9trn)—equivalent to over a fifth of the euro area’s gdp. Even so, in June Mario Draghi, the bank’s boss, promised further stimulus if the economy does not buck up. Statistics published since then suggest little recovery. Cue much speculation about another attempt to revive growth.

Many expect an announcement at the bank’s meeting in September, along with updated economic forecasts. But its next gathering on July 25th could still surprise, or at least lay the groundwork for stimulus. With individual instruments nearing limits, it is expected to deploy a combination.

Should egalitarians fear low interest rates?

Date: 10-07-2019
Source: The Economist: Free exchange

Monetary stimulus is said to have been a boon for the rich. It is not so simple

JOHN MAYNARD KEYNES once fantasised about a world of permanently low interest rates. In the final chapter of “The General Theory” he imagined an economy in which abundant available capital causes investors’ bargaining power, and hence rates, to collapse. In such a world markets would reward risk-taking and entrepreneurial talent, but not the mere accumulation of capital. The result would be the “euthanasia of the rentier”.

That low rates could feature in a leftish Utopian vision might come as a surprise today. It is commonly argued that a decade of monetary-policy stimulus has filled the pockets of the rich. Low rates and quantitative easing (QE) are said to have sent stock and bond markets soaring, thereby exacerbating wealth inequality. They have also boosted house prices, adding to intergenerational tension. A glance at financial markets suggests more of the same is coming: long-term rates have tumbled this year in anticipation of monetary easing, while stockmarkets have boomed.

ECB’s Draghi Grows Bolder as His Tenure Nears End

Date: 01-07-2019
Source: The Wall Street Journal

The president of the European Central Bank is doubling down on a tried-and-tested strategy in an attempt to guard the bloc against too-low inflation

Mario Draghi, who has three policy meetings left before his term ends, is shown speaking during a conference at the ECB headquarters in Frankfurt earlier in June.

FRANKFURT—Mario Draghi is teeing up some of the boldest policy moves of his eight-year term as European Central Bank president only four months before he steps down, potentially binding the hands of his successor for years.

The late burst of activism by the 71-year-old Italian is buoying European financial markets and catching the eye of President Donald Trump, even as it raises legal and practical questions about how much more the ECB can squeeze out of its existing toolbox.

The shift toward easier money, mirroring a move by the Federal Reserve, comes despite relative resilience in the eurozone economy, whose unemployment rate is at the lowest level in a decade.

Mr. Draghi’s final three policy meetings—in July, September and October—are suddenly in play for a policy decision. Analysts expect the ECB to cut interest rates, which are already negative, at or before its Sept. 12 meeting. Some also expect Mr. Draghi to announce the relaunch of the bank’s €2.6 trillion ($3 trillion) bond-buying program, known as quantitative easing or QE.

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