Spitfire List Web site and blog of anti-fascist researcher and radio personality Dave Emory.

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Krugmenistan vs the Permahawks

Lift Off! That was the announce­ment by the Fed­er­al Reserve this week when the world’s biggest and most influ­en­tial cen­tral bank start­ed the long await­ed rais­ing of its bench­mark short-term rate a quar­ter point from near-zero lev­els, mark­ing the first time the Fed has raised rates since 2006. Based on that alone it would seem like this was big news. But giv­en that this rate hike was telegraphed for quite a while now and vir­tu­al­ly every­one was expect­ing the Fed to do exact­ly what it did, it’s not quite as big a sto­ry as it could have been. For instance, if the Fed had decid­ed not to raise rates, despite all the telegraph­ing, that prob­a­bly would have been a big­ger sto­ry. But would it have been a bad sto­ry if the Fed decid­ed to keep rates at their cur­rent near-zero lev­els? Would that have been a sto­ry that dam­ages the cred­i­bil­i­ty of the Fed­er­al serve in the eyes of the mar­ket? There’s a big debate in the eco­nom­ic com­mu­ni­ty over that. And since the Fed has been pon­der­ing its his­toric “lift off” moment for years now, it’s a debate that’s been going on for years too and as we’re going to see in this post, it’s a debate that pits pru­dent econ­o­mists with excel­lent track-records like Paul Krug­man, some­one who opposed the Fed’s Decem­ber “lift off” deci­sion, against the broad array of “per­ma­hawks” who have a seem­ing­ly end­less list of often con­tra­dic­to­ry rea­sons to raise rates now, now, now.
But it’s not just the ques­tion with respect to Fed. The Euro­pean Cen­tral Bank made a pol­i­cy announce­ment this month too regard­ing its stim­u­lus mea­sure and it was indeed rather sur­pris­ing. And as we’re also going to see in this post, it was sur­pris­ing in the way that just might have done seri­ous dam­age to not just the cred­i­bil­i­ty of ECB Pres­i­dent Mario Draghi but the ECB itself. Or at least cred­i­bil­i­ty in the ECB’s com­mit­ment to its sin­gle man­date of keep­ing infla­tion hov­er­ing around 2 per­cent.

To pla­cate the per­ma­hawks (to main­tain cred­i­bil­i­ty) or not pla­cate the per­ma­hawks (to main­tain cred­i­bil­i­ty)? That is the ques­tion. Or at least one of the ques­tions cen­tral banks face. Unfor­tu­nate­ly.

********************

So the Fed final­ly did it: Fed rates rose for the first time in years from their near-zero lev­els. And while many in the finan­cial mar­kets cheered this his­toric day, it’s impor­tant to keep in mind that the under­ly­ing log­ic for rais­ing rates isn’t real­ly very strong based on the under­ly­ing macro­eco­nom­ic land­scape. In oth­er words, if this was­n’t the right move, which folks like Paul Krug­man think is the case, it was his­toric fol­ly too:

The New York Times
The Con­science of a Lib­er­al

Fed Fol­lies

Paul Krug­man
Dec 16 4:01 pm Dec 16 4:01 pm 30

No, I don’t mean the deci­sion to raise rates, although noth­ing I’ve seen changes my view that it’s a bad idea. I mean the des­per­ate efforts to say some­thing new about today’s move. I under­stand that there are strong jour­nal­is­tic incen­tives here, but it real­ly is try­ing to squeeze blood from a stone.

After all, this move was com­plete­ly telegraphed in advance; I guess there was some small chance that the Fed would wait, but real­ly very lit­tle. Longer-term bond rates bare­ly moved, show­ing that there was very lit­tle news.

And it will be quite some time before we have any evi­dence about whether the Fed’s judge­ment of the economy’s tra­jec­to­ry was right. (I think this was an ex ante mis­take even if it turns out OK ex post, but it’s still inter­est­ing to see how it goes.) We’re talk­ing months if not quar­ters, and it may take years.

I guess even the fact that the Fed suc­ceed­ed in com­mu­ni­cat­ing its inten­tions is a kind of news sto­ry. But it’s pret­ty thin gru­el.

“And it will be quite some time before we have any evi­dence about whether the Fed’s judge­ment of the economy’s tra­jec­to­ry was right. (I think this was an ex ante mis­take even if it turns out OK ex post, but it’s still inter­est­ing to see how it goes.) We’re talk­ing months if not quar­ters, and it may take years.”
Yep, the first Fed rate hike since 2006 was basi­cal­ly a big his­toric *yawn*. And per­haps a big his­toric mis­take too giv­en the del­i­cate nature of the US’s eco­nom­ic recov­ery and extreme­ly low lev­els of infla­tion.

But as Krug­man points out, it’s going to take a while before the wis­dom of this deci­sion becomes appar­ent. And as for­mer Trea­sury Sec­re­tary Lawrence Sum­mers points out below, whether or not it was the cor­rect move to do eco­nom­i­cal­ly speak­ing, because the Fed had been strong­ly telegraph­ing this rate hike in the months lead­ing up to this, it basi­cal­ly boxed itself in because when cen­tral banks strong­ly tele­graph some­thing, a sud­den “sur­prise!” might have the impact of under­min­ing the Fed’s cred­i­bil­i­ty. Unfor­tu­nate­ly, as Sum­mers also points out, start­ing the Fed’s rate nor­mal­iza­tion at this point was prob­a­bly also a mis­take which isn’t exact­ly cred­i­bil­i­ty-enhanc­ing:

LarrySummers.com
What Should the Fed Do and Have Done?

Lar­ry Sum­mers
12/15/2015

The Fed­er­al Reserve meets this week and has strong­ly sig­naled that it will raise rates. Giv­en the strength of the sig­nals that have been sent it would be cred­i­bil­i­ty destroy­ingnot to car­ry through with the rate increase so there is no inter­est­ing dis­cus­sion to be had about what should be done on Wednes­day.

There is an inter­est­ing coun­ter­fac­tu­al dis­cus­sion to be had. Should a rate increase have been so clear­ly sig­naled? If rates are in fact going to be increased the answer is almost cer­tain­ly yes. The Fed has done a good job of guid­ing expec­ta­tions towards a rate increase while gen­er­at­ing lit­tle trau­ma in mar­kets. Assum­ing that the lan­guage sur­round­ing the rate increase on Thurs­day is in line with what the mar­ket expects, I would be sur­prised if there are major mar­ket gyra­tions after the Fed state­ment.

But was it right to move at this junc­ture? This requires weigh­ing rel­a­tive risks. A deci­sion to keep rates at zero would have tak­en sev­er­al risks. First, since mon­e­tary pol­i­cy acts only with a lag fail­ure to raise rates would risk an over­heat­ing econ­o­my and an accel­er­a­tion of infla­tion pos­si­bly neces­si­tat­ing a sharp and desta­bi­liz­ing hike in rates lat­er. Sec­ond, keep­ing rates at zero would risk encour­ag­ing finan­cial insta­bil­i­ty par­tic­u­lar­ly if there became a per­cep­tion that the Fed would nev­er raise rates. Third, keep­ing rates at zero leaves the Fed with less room to low­er rates in response to prob­lems than it would have if it increased rates.

Final­ly, per­haps zero rates have adverse eco­nom­ic effects. Per­haps eco­nom­ic actors take the con­tin­u­a­tion of zero rates as evi­dence that the Fed is wor­ried and so they should be as well. Some believe that zero rates are a sign of pathol­o­gy and we no longer have a patho­log­i­cal econ­o­my and so no longer should have zero rates. Or per­haps there is a fear that when rates go up some­thing cat­a­stroph­ic will hap­pen and this source of uncer­tain­ty can only be removed by rais­ing rates.

These argu­ments do not seem huge­ly com­pelling to me. Infla­tion is run­ning well below 2 per­cent and there is not yet much evi­dence of accel­er­a­tion. Decades of expe­ri­ence teach­es that the Phillips curve can shift dra­mat­i­cal­ly so rea­son­ing from the unem­ploy­ment rate to infla­tion is prob­lem­at­ic. Declin­ing prices of oil and oth­er com­modi­ties sug­gest infla­tion expec­ta­tions may actu­al­ly decline. Fur­ther­more, if one believes that pro­duc­tiv­i­ty is under­stat­ed by offi­cial sta­tis­tics one has to as a mat­ter of log­ic believe that infla­tion is over­stat­ed. I have recent­ly argued that this is quite like­ly the case giv­en the ris­ing impor­tance of sec­tors like health care where qual­i­ty is dif­fi­cult to mea­sure.

Even if one assumes that infla­tion could reach 2.5 per­cent, this is not an immense prob­lem. There is no con­vinc­ing evi­dence that economies per­form worse with infla­tion mar­gin­al­ly above 2 per­cent than at 2 per­cent. Then there is the ques­tion of whether it is bet­ter to tar­get the annu­al rate of infla­tion or the price lev­el. On the lat­ter stan­dard it is rel­e­vant that infla­tion over any mul­ti­year inter­val would still have aver­aged less than 2 per­cent. And I am not sure why bring­ing down infla­tion would be so dif­fi­cult if that were desired espe­cial­ly giv­en that it would sure­ly take a long time for expec­ta­tions to become unan­chored towards the high side of 2 per­cent.

It seems to me look­ing at a year when the stock mar­ket has gone down a bit, cred­it spreads have widened sub­stan­tial­ly and the dol­lar has been very strong it is hard to say that now is the time to fire a shot across the bow of finan­cial eupho­ria. Look­ing espe­cial­ly at emerg­ing mar­kets I would judge that under-con­fi­dence and exces­sive risk aver­sion are a greater threat over the next sev­er­al years than some kind of finan­cial eupho­ria.

...

“It seems to me look­ing at a year when the stock mar­ket has gone down a bit, cred­it spreads have widened sub­stan­tial­ly and the dol­lar has been very strong it is hard to say that now is the time to fire a shot across the bow of finan­cial eupho­ria. Look­ing espe­cial­ly at emerg­ing mar­kets I would judge that under-con­fi­dence and exces­sive risk aver­sion are a greater threat over the next sev­er­al years than some kind of finan­cial eupho­ria.
So sim­i­lar to Paul Krug­man’s take on mat­ter, the way Lar­ry Sum­mers sees it, while the actu­al deci­sion to sig­nal this impend­ing rate hike (which was based on the Fed’s inter­nal deci­sions months ago) may not have been so great giv­en the rel­a­tive costs and ben­e­fits of a rate hike giv­en the state of both the US and glob­al econ­o­my, the Fed’s deci­sion to raise rates today was indeed the cor­rect one giv­en the fact that not doing so would destroy the Fed’s cred­i­bil­i­ty after all the Fed sig­nal­ing.

Although it’s although worth not­ing that when Sum­mer’s writes:

...
The Fed­er­al Reserve meets this week and has strong­ly sig­naled that it will raise rates. Giv­en the strength of the sig­nals that have been sent it would be cred­i­bil­i­ty destroy­ingnot to car­ry through with the rate increase so there is no inter­est­ing dis­cus­sion to be had about what should be done on Wednes­day.

...

the Sep­tem­ber 23, 2013, Wall Street Jour­nal arti­cle about “cred­bil­i­ty destroy­ing” cen­tral bank behav­ior Sum­mers links to actu­al­ly iron­i­cal­ly describes a sce­nario when the Fed did­n’t fol­low through on the expec­ta­tions to scale back its QE pro­gram, cit­ing lin­ger­ing con­cerns over the health of the US’s recov­ery. And was its cred­i­bil­i­ty dam­aged by that sur­prise? It’s hard to see any indi­ca­tion of that. Sure, most sur­veyed econ­o­mists were expect­ing the Fed to reduce its bond buy­ing at that point in 2013 based on the Fed’s guid­ance ear­li­er in the year that the Fed’s QE pro­grams might start get­ting scaled back in the Fall if the the recov­ery was deemed robust enough. And the Fed, now we know, did­n’t view the recov­ery as robust enough and left the QE pro­gram intact. And as the WSJ arti­cle Sum­mers linked to points out, con­ser­v­a­tive econ­o­mists like the Fed’s then-board mem­ber Richard Fish­er (a per­ma­hawk who want­ed to end QE and raise rates at that point) were warn­ing that such a “sur­prise” deci­sion not to cut back QE would threat­en the Fed’s cred­i­bil­i­ty. But the mar­ket’s response to the fol­low­ing two years of extend­ed QE did­n’t exact­ly reflect a loss of “cred­i­bil­i­ty” and giv­en the lack of infla­tion and still frag­ile eco­nom­ic recov­ery, it’s hard to argue that mild­ly ‘sur­pris­ing’ the mar­kets was­n’t the right thing to do. What’s more cred­i­bil­i­ty dam­ag­ing? Doing the right thing despite a mild ‘sur­prise’ fac­tor or doing what the mar­kets expect even when it’s the wrong move?

It’s a reminder that cen­tral bank cred­i­bil­i­ty with respect to mar­ket sur­pris­es is par­tial­ly depen­dent on how much the cen­tral bank’s pri­or sig­nal­ing clash­es with what it actu­al­ly decides to do, but it’s also large­ly depen­dent on the eco­nom­ic cred­i­bil­i­ty of the argu­ments for or against the bank’s deci­sion. And when you con­sid­er that the per­ma­hawks like Richard Fish­er have been con­sis­tent­ly wrong for years, it’s also a reminder that it’s prob­a­bly cred­i­bil­i­ty-enhanc­ing to sur­prise the seg­ments of the mar­ket that are con­sis­tent­ly wrong:

The Wall Street Jour­nal
Fed’s Fish­er: Taper­ing Delay Threat­ens Cred­i­bil­i­ty

By Ben Lefeb­vre
2:36 pm ET Sep 23, 2013

The Fed­er­al Reserve‘s fail­ure to make the expect­ed cut in its bond- buy­ing pro­grams calls the body’s cred­i­bil­i­ty into ques­tion, Dal­las Fed Pres­i­dent Richard Fish­er said in pre­pared remarks Mon­day.

The S&P 500 hit an all-time-high and 10-year Trea­sury note yields fell Wednes­day after the Fed decid­ed to post­pone a wide­ly expect­ed reduc­tion of its $85 bil­lion-a-month bond buy­ing. The taper­ing, as it is known in the mar­ket, was sup­posed to sig­nal that the econ­o­my had improved enough that the Fed felt con­fi­dent start cut its bond buy­ing by up to $10 bil­lion a month.

By back­ing off the expect­ed taper­ing, the Fed con­tra­dict­ed the mes­sage it had been send­ing to mar­kets for months and has made future pol­i­cy direc­tion murki­er, Mr. Fish­er said dur­ing a speech to bank­ing- indus­try rep­re­sen­ta­tives.

“Today, I will sim­ply say that I dis­agreed with the deci­sion of the com­mit­tee and argued against it,” said Mr. Fish­er in his speech. “Here is a direct quote from the sum­ma­tion of my inter­ven­tion at the table dur­ing the pol­i­cy ‘go round’ when Chair­man [Ben] Bernanke called on me to speak on whether or not to taper: ‘Doing noth­ing at this meet­ing would increase uncer­tain­ty about the future con­duct of pol­i­cy and call the cred­i­bil­i­ty of our com­mu­ni­ca­tions into ques­tion.’ I believe that is exact­ly what has occurred, though I take no plea­sure in say­ing so.”

The market’s reac­tion showed that the Fed’s need to reform its com­mu­ni­ca­tions pol­i­cy, pos­si­bly by hold­ing post-meet­ing press con­fer­ences more fre­quent­ly, Mr. Fish­er said.

“You should nev­er wink at a girl in the dark,” Mr. Fish­er said. “Our com­mu­ni­ca­tions pol­i­cy is a lit­tle off–we should work hard­er to refine it.”

The Fed would con­tin­ue dis­cussing taper­ing its bond buy­ing and pos­si­bly reduce pur­chas­es of both Trea­surys and mort­gage-backed secu­ri­ties, Mr. Fish­er said. The deci­sion against start­ing it soon­er came part­ly because of a per­ceived “ten­der­ness” in an oth­er­wise strong hous­ing recov­ery, Mr. Fish­er said.

Mr. Fish­er, a non-vot­ing mem­ber of the board, is opposed to con­tin­ued bond buy­ing by the Fed. He is also against the Fed’s con­tin­ued pol­i­cy of rock-bot­tom inter­est rates, some­thing favored by Janet Yellen, the favorite to replace out­go­ing Fed Chief Ben Bernanke.

“She’s wrong on pol­i­cy, but she’s a darn good, decent won­der­ful per­son,” Mr. Fish­er said.

Mr. Fish­er also took issue about how the White House float­ed the name of Lawrence Sum­mers as some­one to replace Mr. Bernanke because it threat­ened to draw the inde­pen­dent Fed­er­al Reserve Board into the realm of pol­i­tics. Mr. Sum­mers with­drew his name as a can­di­date after a back­lash from sen­a­tors.

“The White House has mis­han­dled this ter­ri­bly,” Mr. Fish­er said. “This should not be a pub­lic debate.”

The Fed remains wary that the U.S. econ­o­my, while show­ing steady improve­ment, is still not strong enough for the cen­tral bank to start scal­ing down its efforts to spur stronger growth, Fed­er­al Reserve Bank of New York Pres­i­dent William Dud­ley said ear­li­er in the day.

....

“The S&P 500 hit an all-time-high and 10-year Trea­sury note yields fell Wednes­day after the Fed decid­ed to post­pone a wide­ly expect­ed reduc­tion of its $85 bil­lion-a-month bond buy­ing. The taper­ing, as it is known in the mar­ket, was sup­posed to sig­nal that the econ­o­my had improved enough that the Fed felt con­fi­dent start cut its bond buy­ing by up to $10 bil­lion a month.”
Well, at least the mar­kets took the alleged­ly poten­tial­ly cred­i­bil­i­ty-dam­ag­ing surpise Fed deci­sion in stride. It’s a reminder that a surpise to the down side (i.e. keep­ing rates low­er than expect­ed) is inher­ent­ly expan­sion­ary because low­er rates are inher­ent­ly expan­sion­ary (and con­trac­tionary poli­cies are con­trac­tionary). That’s just how finances works.

So how about the warn­ing from now-retired Dal­las Fed chair­man Richard Fish­er, one of the Fed’s biggest infla­tion-hawks? Was there a col­lapse in Fed cred­i­bil­i­ty and a sub­se­quent spike in infla­tion that Fish­er so fears?

...
“Today, I will sim­ply say that I dis­agreed with the deci­sion of the com­mit­tee and argued against it...Here is a direct quote from the sum­ma­tion of my inter­ven­tion at the table dur­ing the pol­i­cy ‘go round’ when Chair­man [Ben] Bernanke called on me to speak on whether or not to taper: ‘Doing noth­ing at this meet­ing would increase uncer­tain­ty about the future con­duct of pol­i­cy and call the cred­i­bil­i­ty of our com­mu­ni­ca­tions into ques­tion.’ I believe that is exact­ly what has occurred, though I take no plea­sure in say­ing so.
...

That was the warn­ing, but it’s hard to see any evi­dence of that dam­age to the Fed’s cred­i­bil­i­ty giv­en the fact that mar­kets weren’t con­tin­u­al­ly pre­dict­ing a sur­prise rate hike fol­low­ing the Fed’s assur­ances that rates would stay low until the econ­o­my picked up and/or infla­tion spiked. It’s anoth­er reminder that cen­tral bank sur­pris­es are far more like­ly to be cred­i­bil­i­ty dam­ag­ing if they turn out to be eco­nom­i­cal­ly dam­ag­ing and ill advised too and if the peo­ple being ‘sur­prised’ have a decent pre­dic­tion track record.

Accu­rate fore­cast­ing is hard. Per­sis­tent­ly inac­cu­rate fore­cast­ing is a lot eas­i­er, although cre­ativ­i­ty will be required.
Inter­est­ing­ly, fol­low­ing this intra-Fed ker­fuf­fle, in April 2014, Richard Fish­er actu­al­ly came out against the whole con­cept of cen­tral banks pro­vid­ing for­ward guid­ance (i.e. pub­licly stat­ing the medi­um-term pol­i­cy bias­es like assur­ing mar­kets that rates would prob­a­bly stay low for the new few years until employ­ment and infla­tion objects are achieved). Instead, Fish­er argued that for­ward guid­ance was point­less because “those who think we can be more spe­cif­ic in stat­ing our inten­tions and broad­cast­ing our every next move with com­plete cer­tain­ty are, in my opin­ion, cling­ing to the myth that eco­nom­ics is a hard sci­ence and mon­e­tary pol­i­cy a pre­cise sci­en­tif­ic pro­ce­dure rather than the applied best judg­ment of cool-head­ed, unemo­tion­al deci­sion-mak­ers”:

The Wall Street Jour­nal

Fed’s Fish­er Says Lim­its to Fed For­ward Guid­ance

By Michael S. Der­by

6:37 am ET Apr 4, 2014

Fed­er­al Reserve Bank of Dal­las Pres­i­dent Richard Fish­er said Fri­day that what the cen­tral bank can say about the future of mon­e­tary pol­i­cy is more lim­it­ed than many rec­og­nize.

Those who think we can be more spe­cif­ic in stat­ing our inten­tions and broad­cast­ing our every next move with com­plete cer­tain­ty are, in my opin­ion, cling­ing to the myth that eco­nom­ics is a hard sci­ence and mon­e­tary pol­i­cy a pre­cise sci­en­tif­ic pro­ce­dure rather than the applied best judg­ment of cool-head­ed, unemo­tion­al deci­sion-mak­ers,” Mr. Fish­er said in the text of a speech to be deliv­ered in Hong Kong.

Mr. Fish­er was wad­ing into the ongo­ing debate about what cen­tral bankers refer to as “for­ward guid­ance.” Most offi­cials cur­rent­ly agree that pro­vid­ing guid­ance about the tim­ing of future inter­est-rate increas­es can pro­vide clear ben­e­fits to the econ­o­my now. By sig­nal­ing that short-term rates will stay very low for well into the future, Fed offi­cials believe short-term rates will stay low cur­rent­ly, pro­vid­ing addi­tion­al sup­port for the econ­o­my.

The pow­er of for­ward guid­ance has grown in impor­tance as the Fed has moved to wind down its asset-buy­ing pro­gram over the course of this year. As the asset buy­ing comes to an end, cen­tral bankers hope that their strong hints that inter­est rates will stay low will allow mon­e­tary pol­i­cy to remain very sup­port­ive of growth, boost­ing hir­ing and push­ing very low lev­els of infla­tion back up to the cen­tral bank’s tar­get rate.

The man­ner in which the Fed guides views about the out­look for rate increas­es under­went a sig­nif­i­cant shift last month. Then, the Fed stopped pro­vid­ing numer­i­cal thresh­olds for the job­less rate and infla­tion that had to be met in order for rate increas­es to be con­sid­ered. Now, Fed guid­ance is based on a broad­er array of fac­tors that are more impres­sion­is­tic in nature.

Mr. Fish­er said, in his speech, the guid­ance the cen­tral bank now pro­vides may need to be even sim­pler than it is cur­rent­ly stat­ed so as to best reflect what cen­tral bankers tru­ly know about the future path of pol­i­cy. Cur­rent­ly, most cen­tral bankers reck­on the Fed will first raise short-term rates some time in 2015 as long as the eco­nom­ic out­look plays out as expect­ed.

Fore­casts pro­vid­ed by the Fed are “large­ly guess­work, espe­cial­ly the fur­ther out in time they go,” Mr. Fish­er said. When it comes to mon­e­tary pol­i­cy, “com­mit­ments aren’t always cred­i­ble, espe­cial­ly if they pur­port to extend far into the future.”

The Fed should tell mar­kets what it knows, and lit­tle more. Mr. Fish­er said the Fed should state it will con­duct pol­i­cy to achieve a sus­tained recov­ery, con­tained infla­tion, and finan­cial sta­bil­i­ty. “Regard­less of the way we may final­ly agree at the [Fed­er­al Open Mar­ket Com­mit­tee] to write it out or have Chair [Janet] Yellen explain it at a press con­fer­ence, we real­ly can­not say more than that.”

Mr. Fish­er not­ed that, in his past career as an investor, he would pre­fer as much cer­tain­ty about the mon­e­tary pol­i­cy out­look as cen­tral bankers can pro­vide. But now that he is on the oth­er side of the fence, he is not so sure.

...

Keep in mind that much of the crit­i­cism from infla­tion-hawks like Fish­er towards the Fed’s low-rate poli­cies comes from the strong assump­tion that high infla­tion is just around the cor­ner unless rates are raised soon. So while Fish­er does make a some­what valid point when he states:

...
Fore­casts pro­vid­ed by the Fed are “large­ly guess­work, espe­cial­ly the fur­ther out in time they go,” Mr. Fish­er said. When it comes to mon­e­tary pol­i­cy, “com­mit­ments aren’t always cred­i­ble, espe­cial­ly if they pur­port to extend far into the future.”
...

it’s a some­what iron­ic point com­ing from a per­ma-infla­tion hawk. But an iron­i­cal­ly valid point can still be a valid point and Fish­er’s iron­i­cal­ly valid point high­lights a key aspect of cen­tral bank deci­sion-mak­ing that’s often for­got­ten in these debate: Since it’s very pos­si­ble that the eco­nom­ic fore­casts can go awry, one of the biggest ques­tions fac­ing pol­i­cy-mak­ers is “on what side should we err?” In oth­er words, since it’s very pos­si­ble that a cen­tral bank’s pre­dic­tions may not pan out, what are the rel­a­tive costs and ben­e­fits of being wrong for the dif­fer­ent pol­i­cy options? And in this case, with rates at lev­els where they can only go up or hold near zero, it’s a ques­tion of what are the like­ly cost/benefit to being wrong if a rate hike is pre­ma­ture vs being over­ly delayed?

And as we saw above, for per­ma-infla­tion hawks like Fish­er, that answer isn’t sim­ply the risk of infla­tion if rates aren’t raised soon, but also the risk of a loss of cred­i­bil­i­ty. And as Fish­er put it in March of this year when the tim­ing of the first rate rise was still under debate, the deci­sion isn’t sim­ply between “lat­er and steep” (i.e. delay­ing a rate rise, but then hav­ing to raise rates quick­ly, pre­sum­ably to ward off infla­tion) or “ear­li­er and grad­ual” (i.e. rais­ing rates right away under the assump­tion that doing so will spread out the inevitable rate rise over a longer peri­od of time). It’s very pos­si­ble, in Fish­er’s view, that if the Fed decides to delay the rate rise until lat­er in the year (which it did), the pub­lic might inter­pret that as indi­cat­ing that the Fed is gen­er­al­ly “dovish” and dis­in­clined to raise rates in gen­er­al. In oth­er words, a “lat­er and grad­ual” sce­nario. And accord­ing to Fish­er a “lat­er and grad­ual” Fed sen­ti­ment would be cred­i­bil­i­ty dam­ag­ing. Who knows why exact­ly that would be cred­i­bil­i­ty dam­ag­ing, but if you’re a per­ma-infla­tion hawk “lat­er and grad­ual” is for some rea­son cred­i­bil­i­ty destroy­ing:

Fast FT
Fed’s Fish­er: delay­ing rate rise risks cred­i­bil­i­ty

March 9, 2015

The US Fed­er­al Reserve risks los­ing its cred­i­bil­i­ty if it doesn’t soon embark on the first rise in offi­cial inter­est rates since the finan­cial cri­sis, a senior pol­i­cy­mak­er has warned.

Push­ing back a rise in its overnight lend­ing rate until much lat­er in the year or to ear­ly 2016 will lead investors to ques­tion whether there is any appetite at the Fed to tight­en pol­i­cy, accord­ing to Richard Fish­er, the retir­ing pres­i­dent of the Dal­las Fed­er­al Reserve.

The Fed is instead, Mr Fish­er argues, bet­ter off with an “ear­li­er and grad­ual” approach to rais­ing rates. In a speech in Hous­ton on Mon­day, the pol­i­cy­mak­er said:

The cred­i­bil­i­ty of a “lat­er and steep” pol­i­cy strat­e­gy is sus­pect, it seems to me. Isn’t it pos­si­ble— even likely—that the pub­lic will inter­pret a deci­sion to defer liftoff as a sig­nal that the com­mit­tee is gen­er­al­ly “dovish” and gen­er­al­ly dis­in­clined to raise rates?

In oth­er words, mightn’t the pub­lic see the choice as between “ear­li­er and grad­ual” and “lat­er and grad­ual” rather than between “ear­li­er and grad­ual” and “lat­er and steep”?

...

One of the most colour­ful speech­mak­ers at the Fed, Mr Fish­er has argued for more than a year that the dan­gers of delay­ing an increase out­weigh any risks attached to doing so.

Yep, if the mar­kets per­cieve a “lat­er and grad­ual” bias at the Fed, some­how that’s cred­i­bil­i­ty dam­ag­ing accord­ing to Mr. Fish­er because it might “lead investors to ques­tion whether there is any appetite at the Fed to tight­en pol­i­cy”. And notice that there isn’t even the typ­i­cal (and wrong) warn­ing of an infla­tion spike. It’s an asser­tion look­ing for a jus­ti­fi­ca­tion, and a great exam­ple of a phe­nom­e­na that Paul Krug­man often rails about when it comes to the infla­tion hawks: their end­less cre­ativ­i­ty in devel­op­ing ques­tion­able jus­ti­fi­ca­tions for a rate hike:

The New York Times
The Con­science of a Lib­er­al
The Cre­ativ­i­ty of the Per­ma­hawks

Paul Krug­man
Sep­tem­ber 19, 2015 9:46 am

Tim Tay­lor writes about low inter­est rates. As he notes, many econ­o­mists see low rates as a nat­ur­al (in both the col­lo­qui­al and Wick­sel­lian sense) response to a weak econ­o­my; but he respect­ful­ly cites the Bank for Inter­na­tion­al Set­tle­ments, which argues that low rates are a source of ter­ri­ble eco­nom­ic dis­tor­tions. But it seems to me that there’s some con­text miss­ing.

Tay­lor writes,

Notice that none of the BIS con­cerns are about the risk of a rise in inflation–which it does not think of as a sub­stan­tial risk.

Ah, but it used to think oth­er­wise. It has been call­ing for high­er inter­est rates for around 5 years, and at first it was indeed warn­ing about infla­tion. In its 2011 report, in fact, it declared that

High­ly accom­moda­tive mon­e­tary poli­cies are fast becom­ing a threat to price sta­bil­i­ty.

That was dead wrong, and the ECB — which believed in the infla­tion threat and raised rates — clear­ly made a big mis­take. So you might have expect­ed the BIS to ask why it was so wrong, and recon­sid­er its pol­i­cy rec­om­men­da­tions. Instead, how­ev­er, it con­tin­ued to demand the same poli­cies, while invent­ing new jus­ti­fi­ca­tions.

And I mean invent­ing. As I’ve writ­ten many times, the remark­able thing about pol­i­cy since 2010 is that out­siders, par­tic­u­lar­ly beard­ed aca­d­e­mics, have based their crit­i­cisms of pol­i­cy on main­stream, text­book eco­nom­ics; where­as seri­ous-sound­ing bankers in suits have been cre­at­ing whole new eco­nom­ic doc­trines on the fly to jus­ti­fy what they claim are sound poli­cies.

In this case, the BIS not only claims that low inter­est rates cause finan­cial insta­bil­i­ty, but goes on to expound a sort of widow’s cruse the­o­ry of inter­est rates, in which low rates today lead to even low­er rates tomor­row, because they pro­duce bub­bles that weak­en the econ­o­my fur­ther when they burst. That’s pret­ty wild stuff; you wouldn’t want to take it seri­ous­ly with­out a lot of evi­dence, which the BIS does not pro­vide.

Or put it this way: if, say, Jere­my Cor­byn or Bernie Sanders were to invent whole new, dubi­ous eco­nom­ic the­o­ries to jus­ti­fy the poli­cies they clear­ly want for oth­er rea­sons, every­one would be com­ing down on them hard for being flaky and irre­spon­si­ble. Yet when the BIS — which was, once again, dead wrong on infla­tion — does the same thing, it’s tak­en very seri­ous­ly.

...

Again, if some­one from the cen­ter-left were to pro­duce an eco­nom­ic analy­sis this ten­den­tious, this much at odds with decades of main­stream eco­nom­ics, it would be met with increduli­ty. It’s awe­some to see the ultra-respectable BIS go down this path, and be tak­en seri­ous­ly along the way.

Yes, after years of warn­ing that low inter­est rates would cause an infla­tion spike , the right-wing Bank of Inter­na­tion­al Set­tle­ments shift­ed gears this Sep­tem­ber and made the case that low inter­est rates would basi­cal­ly per­pet­u­ate them­selves by cause finan­cial bub­bles that neces­si­tate even low­er rates in the future after the bub­ble bursts:

...
In this case, the BIS not only claims that low inter­est rates cause finan­cial insta­bil­i­ty, but goes on to expound a sort of widow’s cruse the­o­ry of inter­est rates, in which low rates today lead to even low­er rates tomor­row, because they pro­duce bub­bles that weak­en the econ­o­my fur­ther when they burst. That’s pret­ty wild stuff; you wouldn’t want to take it seri­ous­ly with­out a lot of evi­dence, which the BIS does not pro­vide.

Or put it this way: if, say, Jere­my Cor­byn or Bernie Sanders were to invent whole new, dubi­ous eco­nom­ic the­o­ries to jus­ti­fy the poli­cies they clear­ly want for oth­er rea­sons, every­one would be com­ing down on them hard for being flaky and irre­spon­si­ble. Yet when the BIS — which was, once again, dead wrong on infla­tion — does the same thing, it’s tak­en very seri­ous­ly.
...

Is the the Bank of Inter­na­tion­al Set­tle­ments com­ing up with bogus the­o­ries to jus­ti­fy bad pol­i­cy that’s not in the pub­lic’s inter­est? Well, it cer­tain­ly would­n’t be the first time the insti­tu­tion act­ed against the pub­lic inter­est.

Short-term per­son­al finan­cial incen­tives and a desire for wage sup­pres­sion also assist in per­sis­tent inac­cu­rate eco­nom­ic fore­cast­ing
And if the BIS is indeed engag­ing in per­ma­hawk puffery, it’s also worth not­ing anoth­er key point Paul Krug­man made regard­ing the com­pul­sion to raise rates no mat­ter what the cir­cum­stances: while doing so may not be in the pub­lic inter­est, there are some extreme­ly influ­en­tial pri­vate inter­ests where high­er rates are great for the bot­tom line:

The New York Times
The Con­science of a Lib­er­al

Rate Rage

Paul Krug­man
Sep­tem­ber 19, 2015 1:51 pm

OK, I should have seen that one com­ing, but didn’t: the bank­ing indus­try has respond­ed to the Fed’s deci­sion not to hike rates with a pri­mal cry of rage. And that, I think, tells us what we need to know about the polit­i­cal econ­o­my of per­ma­hawk­ery.

The truth is, I’ve been get­ting this one wrong. I’ve tried to under­stand demands that rates go up despite the absence of infla­tion pres­sure in terms of broad class inter­ests. And the trou­ble is that it’s not at all clear where these inter­ests lie. The wealthy get a lot of inter­est income, which means that they are hurt by low rates; but they also own a lot of assets, whose prices go up when mon­e­tary pol­i­cy is easy. You can try to fig­ure out the net effect, but what mat­ters for the pol­i­tics is per­cep­tion, and that’s sure­ly murky.

But what we should be doing, I now real­ize, is focus­ing not on broad class­es but on very spe­cif­ic busi­ness inter­ests. In par­tic­u­lar, com­mer­cial bankers real­ly dis­like a very low inter­est rate envi­ron­ment, because it’s hard for them to make prof­its: there’s a low­er bound on the inter­est rates they can offer, and if lend­ing rates are low that com­press­es their spread. So bankers keep demand­ing high­er rates, and invent­ing sto­ries about why that would make sense despite low infla­tion.

...

So the demand for high­er rates is com­ing from a nar­row busi­ness inter­est group, not the one per­cent in gen­er­al. But it’s an inter­est group that has a lot of clout among cen­tral bankers, because these are peo­ple they see every day — and in many cas­es are peo­ple they will become once they go through the revolv­ing door. I doubt there’s much crude cor­rup­tion going on at this lev­el (or am I naive?), but offi­cials at pub­lic mon­e­tary insti­tu­tions — cer­tain­ly the BIS, but also the Fed — are con­stant­ly hold­ing meet­ings with, hav­ing lunch with, com­mer­cial bankers who have a per­son­al stake in see­ing rates go up no mat­ter what the macro sit­u­a­tion.

Like every­one, the bankers no doubt are able to per­suade them­selves that what’s good for them is good for Amer­i­ca and the world; more alarm­ing­ly, they may be able to per­suade offi­cials who should know bet­ter. Does this explain the puz­zling diver­gence between the views of Fed offi­cials and those of out­siders like Lar­ry Sum­mers (and yours tru­ly) who have a sim­i­lar mod­el of how the world works, but are hor­ri­fied by the eager­ness to raise rates while infla­tion is still below tar­get?

I don’t know about you, but I feel that I’m hav­ing an Aha! moment here. Oh, and rais­ing rates is still a ter­ri­ble idea.

“So the demand for high­er rates is com­ing from a nar­row busi­ness inter­est group, not the one per­cent in gen­er­al. But it’s an inter­est group that has a lot of clout among cen­tral bankers, because these are peo­ple they see every day — and in many cas­es are peo­ple they will become once they go through the revolv­ing door. I doubt there’s much crude cor­rup­tion going on at this lev­el (or am I naive?), but offi­cials at pub­lic mon­e­tary insti­tu­tions — cer­tain­ly the BIS, but also the Fed — are con­stant­ly hold­ing meet­ings with, hav­ing lunch with, com­mer­cial bankers who have a per­son­al stake in see­ing rates go up no mat­ter what the macro sit­u­a­tion.
Con­stant­ly hold­ing meet­ings with, hav­ing lunch with, com­mer­cial bankers who have a per­son­al stake in see­ing rates go up no mat­ter what the macro sit­u­a­tion prob­a­bly isn’t the best pol­i­cy-mak­ing envi­ron­ment. But if Krug­man’s analy­sis is cor­rect, one of the most pow­er­ful and influ­en­tial indus­tries on the plan­et, com­mer­cial bank­ing, has a strong finan­cial incen­tive to see a Fed that’s ready and will­ing to err on the side of not just “soon but grad­ual”, as Richard Fish­er might put it, but maybe even “soon and steep”. It’s a rather alarm­ing con­flict of inter­est.

And as Richard Fish­er informed us back in Sep­tem­ber of 2014, it may not just be com­mer­cial bankers that would want to see rates rise soon­er rather than lat­er. It might be any­one that’s
wor­ried about ris­ing wages:

FX Street
Fed’s Fish­er: Fed Must Weigh Wage Pres­sures

Mar­ket­Pulse
Mon, Sep 29 2014, 03:07 GMT
by Stu­art McPhee | Mar­ket­Pulse

The Fed­er­al Reserve mustn’t “fall behind the curve” as it weighs when to start rais­ing inter­est rates, Dal­las Fed Pres­i­dent Richard Fish­er said, cit­ing strength­en­ing U.S. growth and build­ing wage-price pres­sures.

Fish­er, a vocal advo­cate for tighter mon­e­tary pol­i­cy to pro­tect against infla­tion, also said today that two soon-to-be-released eco­nom­ic reports from his Fed dis­trict would “knock your socks off.”

“I don’t want to fall behind the curve here,” Fish­er said in a Fox News inter­view. “I think we could sud­den­ly get a patch of high growth, see some wage-price infla­tion, and that is when you start to wor­ry.”

“I think we could sud­den­ly get a patch of high growth, see some wage-price infla­tion, and that is when you start to wor­ry.”
Uh oh! If we don’t raise rates soon we might “sud­den­ly get a patch of high growth” and then *gasp* wages might rise. Nooooo!

ECB’s “Life Off!” of 2011. And sub­se­quent cra­ter­ing.
So, as we’ve seen, while the recent Fed rate hike may not have been the best deci­sion at the point giv­en the tepid nature of the eco­nom­ic recov­ery thus far, the deci­sion to raise rates could have been far worse in the sense that it could have come a lot soon­er. How much worse? Well, as Krug­man remind­ed us above:

...
Tay­lor writes,

Notice that none of the BIS con­cerns are about the risk of a rise in inflation–which it does not think of as a sub­stan­tial risk.

Ah, but it used to think oth­er­wise. It has been call­ing for high­er inter­est rates for around 5 years, and at first it was indeed warn­ing about infla­tion. In its 2011 report, in fact, it declared that

High­ly accom­moda­tive mon­e­tary poli­cies are fast becom­ing a threat to price sta­bil­i­ty.

That was dead wrong, and the ECB — which believed in the infla­tion threat and raised rates — clear­ly made a big mis­take. So you might have expect­ed the BIS to ask why it was so wrong, and recon­sid­er its pol­i­cy rec­om­men­da­tions. Instead, how­ev­er, it con­tin­ued to demand the same poli­cies, while invent­ing new jus­ti­fi­ca­tions.
...

Yep, back in 2011 the whole world received an infor­ma­tive les­son in what hap­pens when cen­tral banks pri­or­i­tize infla­tion fears over the macro­eco­nom­ic real­i­ties com­pli­ments of the Euro­pean Cen­tral Bank (ECB). In was March of 2011, when the euro­zone was still in the grips of a major sov­er­eign debt cri­sis and just bare­ly claw­ing its way out of one of the nas­ti­est reces­sions its in recent mem­o­ry, the ECB issued some for­ward guid­ance to the mar­kets: In order to ensure infla­tion does­n’t rise about 2 per­cent (it’s tar­get rate), and does­n’t result in ris­ing wages, the ECB was will­ing to raise rates. Repeat­ed­ly. And part of the ratio­nal was based on the ECB’s new­ly high­er pro­jec­tions of 2.3 per­cent for the year, up from an ear­li­er pre­dic­tion of 1.8 per­cent. And since the ECB has a sin­gle man­date of keep­ing infla­tion below 2 per­cent, that new pro­jec­tion of 2.3 per­cent infla­tion was appar­ent­ly enough of a jus­ti­fi­ca­tion to raise rates in the midst of major eco­nom­ic dis­tress. Need­less to say, the mar­kets were rather sur­prised (not in a good way):

Bloomerg Busi­ness
Trichet Says ECB May Raise Rates, Show ‘Strong Vig­i­lance’

By Chris­t­ian Vits and Jana Randow
March 3, 2011 — 11:23 AM CST

Euro­pean Cen­tral Bank Pres­i­dent Jean-Claude Trichet said the ECB may raise inter­est rates next month for the first time in almost three years to fight mount­ing infla­tion pres­sures.

An “increase of inter­est rates in the next meet­ing is pos­si­ble,” Trichet told reporters in Frank­furt today after the cen­tral bank set its bench­mark rate at a record low of 1 per­cent for a 23rd month. “Strong vig­i­lance is war­rant­ed,” he said, adding that any move would not nec­es­sar­i­ly be the start of a “series.”

The com­ments sur­prised econ­o­mists and investors, most of whom hadn’t expect­ed the ECB to raise rates before August. The euro jumped more than 0.9 per­cent to $1.3976, the high­est since Novem­ber. Ger­man gov­ern­ment bonds, a bench­mark for Europe, dropped, send­ing the yield on the two-year bund 18 basis points high­er to 1.713 per­cent.

Trichet is sig­nal­ing tighter pol­i­cy at a time when Ire­land and Greece are strug­gling to cope with the terms of last year’s Euro­pean Union bailouts and gov­ern­ments are ham­mer­ing out a plan to draw a line under the cri­sis. The dan­ger is that rais­ing rates to tack­le infla­tion will exac­er­bate the finan­cial ten­sions that still run through euro region bond mar­kets.

‘The ECB Will Hike’

“The ECB will hike rates by 25 basis points in April and I wouldn’t be sur­prised to see anoth­er increase in Sep­tem­ber or Octo­ber,” said Natascha Gewaltig, chief Euro­pean econ­o­mist at Action Eco­nom­ics in Lon­don, who fore­cast before today’s meet­ing that the ECB would tight­en pol­i­cy in the first half. “Infla­tion expec­ta­tions are pick­ing up, that’s a clear sig­nal for rate set­ters.”

The ECB is con­cerned about so-called sec­ond-round effects, when com­pa­nies raise prices and work­ers demand more pay to com­pen­sate for soar­ing ener­gy and food costs, entrench­ing faster infla­tion. Crude oil surged above $100 a bar­rel last week amid polit­i­cal ten­sions in the Mid­dle East and North Africa. Euro-area infla­tion accel­er­at­ed to 2.4 per­cent last month.

“There is a strong need to avoid sec­ond-round effects,” Trichet said, call­ing for mod­er­a­tion from wage and price set­ters. The ECB is “pre­pared to act in a firm and time­ly man­ner.”

He sig­naled any rate move would like­ly be a quar­ter-point step, say­ing a big­ger increase would not be appro­pri­ate in his view. A rate increase in April would put the ECB ahead of its U.S. and U.K. coun­ter­parts.

Fed­er­al Reserve

Fed­er­al Reserve Chair­man Ben S. Bernanke said on March 1 that the surge in oil and oth­er com­mod­i­ty prices prob­a­bly won’t cause a per­ma­nent increase in broad­er infla­tion and repeat­ed that U.S. bor­row­ing costs are like­ly to stay near zero.

The Bank of Eng­land may be mov­ing clos­er to rais­ing its key rate from 0.5 per­cent, with three of its nine pol­i­cy mak­ers vot­ing for an increase last month.

Chi­na on Feb. 8 raised rates for the third time since mid-Octo­ber to curb infla­tion and pre­vent its econ­o­my from over­heat­ing.

The ECB today raised its infla­tion and growth fore­casts.

Infla­tion will aver­age 2.3 per­cent this year, up from a Decem­ber fore­cast of 1.8 per­cent and in breach of the ECB’s 2 per­cent lim­it, before slow­ing to 1.7 per­cent in 2012, the pro­jec­tions show. The 17-nation euro-area econ­o­my will expand 1.7 per­cent this year and 1.8 per­cent next, up from pre­vi­ous fore­casts of 1.4 per­cent and 1.7 per­cent, accord­ing to the ECB.

Debt Cri­sis

At the same time, Europe’s debt cri­sis is far from over, with politi­cians yet to agree on new steps to bol­ster the region’s res­cue fund.

While gov­ern­ments are cut­ting spend­ing to rein in deficits, risk pre­mi­ums for Spain, Por­tu­gal and Italy have increased since a Feb. 4 EU sum­mit that failed to endorse an eco­nom­ic com­petive­ness plan pro­posed by Ger­many and France as a con­di­tion for aid.

“The ECB is prepar­ing to raise rates too ear­ly,” said Julian Cal­low, chief Euro­pean econ­o­mist at Bar­clays Cap­i­tal in Lon­don. “It should give the euro-area econ­o­my more chance to get on a sus­tain­able foot­ing, par­tic­u­lar­ly since it is still too ear­ly to tell how the intense fis­cal con­sol­i­da­tion in many coun­tries will affect demand this year and next.”

...

“The sov­er­eign debt cri­sis would have to inten­si­fy sig­nif­i­cant­ly for the ECB to delay the start of the rate hik­ing cycle,” he said. “The mes­sage from today’s meet­ing is clear: with infla­tion risks crys­tal­liz­ing, the ECB stands ready to act in April.”

“The ECB is con­cerned about so-called sec­ond-round effects, when com­pa­nies raise prices and work­ers demand more pay to com­pen­sate for soar­ing ener­gy and food costs, entrench­ing faster infla­tion. Crude oil surged above $100 a bar­rel last week amid polit­i­cal ten­sions in the Mid­dle East and North Africa. Euro-area infla­tion accel­er­at­ed to 2.4 per­cent last month.”
An infla­tion­ary spi­ral is just around the cor­ner if rates are raised soon! Watch out! At least that was the warn­ing from the ECB, along with this bit of for­ward guid­ance:

...
“The sov­er­eign debt cri­sis would have to inten­si­fy sig­nif­i­cant­ly for the ECB to delay the start of the rate hik­ing cycle,” he said. “The mes­sage from today’s meet­ing is clear: with infla­tion risks crys­tal­liz­ing, the ECB stands ready to act in April.”

And sure enough, fol­low­ing a rate hike in April and anoth­er in July, the sov­er­eign debt cri­sis inten­si­fied sig­nif­i­cant­ly and the ECB, while con­tin­u­ing to warn of future infla­tion, decid­ed to delay fur­ther rate hikes:

The Econ­o­mist

The ECB realis­es infla­tion may not be Europe’s biggest wor­ry just now

Aug 4th 2011, 14:06 by R.A. | WASHINGTON

IT REALLY is dif­fi­cult to over­state the extent of the Euro­pean Cen­tral Bank’s fail­ure in recent months. Ear­li­er this year, head­line infla­tion rose in Europe behind ris­ing com­mod­i­ty prices. The Bank of Eng­land and the Fed­er­al Reserve con­sid­ered the increase in infla­tion, looked at emerg­ing mar­ket efforts to tight­en pol­i­cy, tight­en­ing fis­cal con­di­tions in their economies, and gen­er­al eco­nom­ic weak­ness and con­clud­ed that the bump would be short-lived. It’s not going too far to say that it was obvi­ous it would be short-lived. But the ECB appar­ent­ly suf­fers from a severe case of cen­tral-bank myopia, and so it respond­ed to high­er head­line infla­tion with an April inter­est rate increase, despite the vul­ner­a­bil­i­ty of the euro-zone econ­o­my, and despite an extreme­ly seri­ous ongo­ing euro-zone debt cri­sis.

Since that time, com­mod­i­ty prices have dropped, just as every­one expect­ed they would. Infla­tion has eased; in the euro zone, pro­duc­er prices indi­cate that it’s come to a screech­ing halt. Mean­while, much of the euro zone is fac­ing a return to reces­sion. Indus­tri­al pro­duc­tion is con­tract­ing across south­ern Europe. And the euro zone is on the precipice of an exis­ten­tial cri­sis. Ital­ian stocks have fall­en near­ly 30%. Span­ish stocks are down 20%. Even Ger­man shares are off 13%. Oh, and did I men­tion that the ECB raised rates again just last month?

Hav­ing dri­ven the euro zone to the brink of col­lapse, the ECB is seem­ing­ly hap­py to let some­one else push the econ­o­my over the edge. In today’s mon­e­tary pol­i­cy announce­ment, the cen­tral bank con­tin­ued to warn about infla­tion but opt­ed not to raise inter­est rates yet again. The ECB may also resume pur­chas­es of bonds to try and main­tain func­tion in sov­er­eign-debt mar­kets and lim­it ris­es in bond yields. It hard­ly mat­ters at this point; the dam­age has been done. Euro­pean mar­kets con­tin­ue to drop, and bond yields con­tin­ue to edge upward. It will take mas­sive gov­ern­ment inter­ven­tion to stem the cri­sis, and even if euro-zone gov­ern­ments suc­ceed there is a risk the euro-zone econ­o­my will fol­low its periph­er­al mem­bers into reces­sion. If the euro zone does fall apart, a fit­ting epi­taph might read, “The ECB feared 3% infla­tion”.

What would indeed be a fit­ting epi­taph:

If the euro zone does fall apart, a fit­ting epi­taph might read, “The ECB feared 3% infla­tion”.

And yet, despite the ECB’s lin­ger­ing infla­tion-pho­bia, the eco­nom­ic real­i­ties forced it to “sur­prise” the mar­kets in Novem­ber of that year with a rate cut under the new lead­er­ship of today’s ECB pres­i­dent Mario Draghi. And was we now know, the sov­er­eign debt cri­sis con­tin­ue to get worse, lead­ing to the his­toric dec­la­ra­tion by Draghi in July of 2012 to “do what­ev­er it takes” to keep the euro­zone finan­cial mar­kets and sov­er­eign debt mar­kets held togeth­er, embark­ing the ECB on the path towards quan­ti­ta­tive eas­ing, near-zero inter­est rates, and the kinds of poli­cies that the infla­tion-hawks and Ordolib­er­als at the Bun­des­bank fear so much. To put it anoth­er way, by lis­ten­ing to the infla­tion hawks in 2011, the ECB bun­gled things up so bad­ly that, by the mid-2012, the ECB was forced to become the kind of cen­tral bank folks like Richard Fish­er hate. It was either that or let the euro­zone implode.

The ECB’s mini-coup sur­prise of 2015. It was­n’t exact­ly cred­i­bil­i­ty-enhanc­ing.
And that brings us to anoth­er episode in cred­i­bil­i­ty-dam­ag­ing cen­tral bank behav­ior: While the Fed’s his­toric rate hike was get­ting much of the atten­tion of late among cen­tral bank watch­er, the Fed was­n’t the only major cen­tral bank mak­ing deci­sions this month. Specif­i­cal­ly, the ECB’s recent deci­sions on how much to expand its QE stim­u­lus pro­grams end­ed up send­ing a very dis­turb­ing sig­nal to the mar­kets. But the cred­i­bil­i­ty dam­age, while sim­i­lar in ways to the warn­ings of from folks like Richard Fish­er that not meet­ing mar­ket expec­ta­tions based on for­ward guid­ance made months ago could dam­age a cen­tral bank’s cred­i­bil­i­ty, was actu­al­ly quite dif­fer­ent. As we saw with Richard Fish­er’s warn­ings in 2013, the dam­age to the Fed’s cred­i­bil­i­ty was sup­posed to arise from the fact that the for­ward guid­ance the Fed gave ear­li­er in the year sug­gest­ed that rate hikes could be com­ing lat­er in the year assum­ing the recov­ery stayed on track, and by not fol­low­ing through with pre­dict­ed rate hike, the mar­kets would be less like­ly to believe the Fed lat­er (despite that fact that hik­ing rates in the fal 2013 could have been a real­ly stu­pid thing to do).

But what hap­pened with the ECB this month was actu­al­ly quite dif­fer­ent. In this case, ECB Pres­i­dent Mario Draghi made a num­ber of com­ments to the mar­kets in the weeks and days before the ECB’s Decem­ber pol­i­cy-mak­ing deci­sions that fur­ther QE mea­sures were prob­a­bly forth com­ing, in keep­ing with his “do what­ev­er it takes” pledge from 2012 and the over­all weak­ness of the euro­zone recov­ery. And then cred­i­bil­i­ty prob­lem arose: Mario Draghi was over­ruled by the infla­tion hawks:

Reuters
ECB anti-cli­max takes shine off Draghi

FRANKFURT | By John O’Don­nell
Fri Dec 4, 2015 11:52pm IST

Mario Draghi’s knack of aim­ing high and then ful­fill­ing expec­ta­tions did not quite come off on Thurs­day, rais­ing a ques­tion mark over how much the Euro­pean Cen­tral Bank and its pres­i­dent can be expect­ed to act in future.

Although he is the head of the cen­tral bank, Draghi relies on con­sen­sus-build­ing among the 19 coun­tries in the euro zone, from con­ser­v­a­tive Ger­many to debt-strapped Italy, to mould pol­i­cy, a task he has pre­vi­ous­ly deft­ly man­aged.

This time, how­ev­er, his announce­ment of a range of mea­sures to enhance mon­ey-print­ing fell short of what investors had hoped for, prompt­ing some to ques­tion whether Draghi is los­ing his mag­ic touch.

“There was a build up of expec­ta­tions based on Draghi’s strong track record of over­com­ing polit­i­cal oppo­si­tion,” said Lena Komil­e­va of con­sul­tan­cy G+ Eco­nom­ics.

“By wrong-foot­ing the mar­kets, the ECB has lost some cred­i­bil­i­ty. It renews con­cerns about polit­i­cal divi­sions.”

Since the run-up to the launch of full-scale mon­ey-print­ing, Draghi has estab­lished a pat­tern of pub­licly talk­ing up prospects of action, back­ing skep­tics such as Ger­many into a cor­ner and win­ning the major­i­ty of ECB gov­er­nors for his plan.

His pow­ers of per­suad­ing mar­ket skep­tics were most famous­ly demon­strat­ed in 2012 when he promised to do “what­ev­er it takes” to shield the euro, instant­ly quelling spec­u­la­tion that a debt cri­sis could bring about the col­lapse of the cur­ren­cy.

Yet on Thurs­day, Draghi’s words were not, in the eyes of investors, matched with the action some felt he had promised.

As recent­ly as late Novem­ber, Draghi had under­lined the need for “the econ­o­my ... to move back to full capac­i­ty as quick­ly as pos­si­ble”, dis­cussing the need for a pos­si­ble recal­i­bra­tion of ECB sup­port and warn­ing of the bloc’s mod­est prospects.

Short­ly after­wards, a rare pub­lic split emerged on the six-per­son Exec­u­tive Board, when Sabine Laut­en­schlaeger from Ger­many said she opposed an exten­sion of mon­ey-print­ing.

While there have long been dif­fer­ing views on the bank’s 25-mem­ber Gov­ern­ing Coun­cil, which sets inter­est rates, it was unusu­al for divi­sions on the Exec­u­tive Board, which is at the core of ECB deci­sion-mak­ing, to spill into the open.

There is no pub­lic record of Ger­many’s stance at the meet­ing on Thurs­day, the recal­i­bra­tion, when it came, was indeed a small­er-than-expect­ed increase in the charge on banks for deposit­ing mon­ey with the ECB.

Its one-tril­lion-euro-plus mon­ey print­ing pro­gram was extend­ed by six months. That increas­es its size by rough­ly one third but there is no top-up to month­ly buys. Munic­i­pal or region­al debt will be includ­ed in the ECB’s bond-buy­ing shop­ping list although Draghi could not yet say how much this would mount to.

“My under­stand­ing is the mar­kets expect­ed some changes which were not forth­com­ing,” Fed­er­al Reserve Chair Janet Yellen told Unit­ed States’ law­mak­ers.

That was per­haps an under­state­ment giv­en the mar­ket reac­tion: Euro­pean shares suf­fered their biggest fall in three months while and the euro leapt more than 2 cents, its biggest surge since March.

“The mar­ket’s dis­ap­point­ment is impor­tant for the future,” said Toby Nan­gle of asset man­ag­er Colum­bia Thread­nee­dle. “It lim­its Pres­i­dent Draghi’s abil­i­ty to guide mar­kets who will nat­u­ral­ly become more sus­pi­cious of his pow­er to deliv­er.”

For once put on the defen­sive by jour­nal­ists press­ing him abut the dis­ap­point­ed mar­ket reac­tion, Draghi was at pains to point out that fur­ther action was pos­si­ble and that mar­kets would under­stand bet­ter the ECB moves on clos­er inspec­tion.

...

“The mar­ket’s dis­ap­point­ment is impor­tant for the future...It lim­its Pres­i­dent Draghi’s abil­i­ty to guide mar­kets who will nat­u­ral­ly become more sus­pi­cious of his pow­er to deliv­er.”
That’s a pret­ty good way to put it. When Draghi implied much more aggres­sive mea­sures than he actu­al­ly deliv­ered just days before the new poli­cies were announced, that cer­tain­ly did­n’t help his cred­i­bil­i­ty and there­fore the cred­i­bil­i­ty of the entire ECB. And the pub­lic spat with Ger­many’s mem­ber of the ECB’s exec­u­tive coun­cil did­n’t help either:

...

Since the run-up to the launch of full-scale mon­ey-print­ing, Draghi has estab­lished a pat­tern of pub­licly talk­ing up prospects of action, back­ing skep­tics such as Ger­many into a cor­ner and win­ning the major­i­ty of ECB gov­er­nors for his plan.

His pow­ers of per­suad­ing mar­ket skep­tics were most famous­ly demon­strat­ed in 2012 when he promised to do “what­ev­er it takes” to shield the euro, instant­ly quelling spec­u­la­tion that a debt cri­sis could bring about the col­lapse of the cur­ren­cy.

Yet on Thurs­day, Draghi’s words were not, in the eyes of investors, matched with the action some felt he had promised.

As recent­ly as late Novem­ber, Draghi had under­lined the need for “the econ­o­my ... to move back to full capac­i­ty as quick­ly as pos­si­ble”, dis­cussing the need for a pos­si­ble recal­i­bra­tion of ECB sup­port and warn­ing of the bloc’s mod­est prospects.

Short­ly after­wards, a rare pub­lic split emerged on the six-per­son Exec­u­tive Board, when Sabine Laut­en­schlaeger from Ger­many said she opposed an exten­sion of mon­ey-print­ing.

...

Yeah, pub­licly diss­ing Draghi and then, lo and behold, the new ECB poli­cies were basi­cal­ly a watered-down ver­sion of his planned stim­u­lus expan­sion. It was­n’t exact­ly the best cred­i­bil­i­ty builder for the ECB.

But it could be worse. And since this is the euro­zone we’re talk­ing about, it got worse. At least Mario Draghi’s cred­i­bil­i­ty got worse when, lat­er in the day, Bun­des­bank chief Jens Wei­d­mann
announced his oppo­si­tion to the watered-down stim­u­lus and announced that below-tar­get infla­tion is no rea­son for the cen­tral bank to do more:

Mar­ket­Watch

Bun­des­bank’s Wei­d­mann sets face against ECB moves

By Todd Buell

Pub­lished: Dec 4, 2015 2:16 a.m. ET

FRANKFURT–European Cen­tral Bank Gov­ern­ing Coun­cil mem­ber Jens Wei­d­mann quick­ly voiced his oppo­si­tion Thurs­day to new pol­i­cy eas­ing announced ear­li­er in the day by the ECB, under­scor­ing com­ments made ear­li­er in the day by the ECB pres­i­dent that the Gov­ern­ing Coun­cil was­n’t unit­ed in pump­ing more mon­ey into the euro­zone econ­o­my.

Accord­ing to pre­pared remarks to be deliv­ered in Frank­furt, Mr. Wei­d­mann said that even though one should­n’t casu­al­ly ignore below-tar­get infla­tion for the fore­see­able future, this isn’t a rea­son for the cen­tral bank to do more.

“Con­sid­er­ing the dom­i­nant role of the ener­gy-price decline for the price devel­op­ment in the euro­zone and ear­li­er com­pre­hen­sive mon­e­tary pol­i­cy mea­sures, that also can have risks and side effects, I did not believe a fur­ther loos­en­ing of pol­i­cy was nec­es­sary,” he said.

Mr. Wei­d­mann, who heads Ger­many’s Bun­des­bank, is con­sid­ered one of the most out­spo­ken hawks on the ECB’s 25-strong Gov­ern­ing Coun­cil. He opposed the cre­ation of the cur­rent quan­ti­ta­tive eas­ing pro­gram and dis­sent­ed against cre­at­ing the bond pro­gram for stressed coun­tries a lit­tle over three years ago.

Speak­ing last month, Mr. Wei­d­mann also sug­gest­ed that he opposed an expan­sion in the cur­rent bond-buy­ing pro­gram.

“Mr. Wei­d­mann said that even though one should­n’t casu­al­ly ignore below-tar­get infla­tion for the fore­see­able future, this isn’t a rea­son for the cen­tral bank to do more.”
So fol­low­ing what amount to a pub­lic mini-coup by the per­ma­hawks on the ECB, the chief per­ma­hawk, Jens Wei­d­mann, announced that he does­n’t see sub‑2 per­cent infla­tion as a rea­son for the ECB to do more. And keep in mind that, unlike the Fed­er­al Reserve which has a duel man­date of price sta­bil­i­ty (2 per­cent infla­tion) the ECB only has a sin­gle man­date: main­tain­ing infla­tion below, but not too far below, 2 per­cent. That’s it. Also note the US per­ma­hawks like Richard Fish­er think switch­ing the Fed to a sin­gle man­date like the ECB (and ignor­ing unem­ploy­ment com­plete­ly) is an idea worth con­sid­er­ing. But appar­ent­ly, accord­ing to Wei­d­mann, even that sin­gle man­date should be ignored by the ECB at this point. And, again, the Wei­d­mann wing just pulled off a pub­lic mini-coup at the ECB and then Wei­d­mann declared that the ‘sin­gle man­date’ is real­ly more of a ‘sin­gle sug­ges­tion’. What kind of dam­age will that do to the ECB’s cred­i­bil­i­ty?

And this pub­lic smal­ck down of the ECB pres­i­dent all hap­pened not long before the Fed made its his­toric deci­sion to start the glob­al “lift off” of near zero rates, which means that the per­ma­hawks at the ECB are going to prob­a­bly be even more empow­ered to raise rates in the euro­zone the high­er the Fed’s rates go.. So assum­ing the Fed fol­low­ing through with its rate hik­ing for­ward guid­ance in 2016, we could be enter­ing the kind of sce­nario next where where the ECB per­ma­hawks get an excluse to repeat their epic blun­der of 2011.

“To the stars!” *ouch* “See­ing stars!”
So how like­ly is such a “Lift Off”/“crash down” sce­nario? Well, as Richard Fish­er not­ed in 2014, macro­eco­nom­ic prog­nos­ti­ca­tions aren’t easy to do. Or at least do well. That said, based on a recent sur­vey of econ­o­mists, the Fed’s new “lift off” era might be cra­ter­ing soon­er than you think. Their evi­dence? All the oth­er cen­tral banks that have tired to raise rates in recent years that only end­ed up trash­ing their recov­er­ies and see­ing those rates go right back down:

The Wall Street Jour­nal
Fed Offi­cials Wor­ry Inter­est Rates Will Go Up, Only to Come Back Down
More than half of econ­o­mists polled pre­dict fed­er­al-funds rate back near zero with­in next five years

By Jon Hilsen­rath
Updat­ed Dec. 13, 2015 7:16 p.m. ET

Fed­er­al Reserve offi­cials are like­ly to raise their bench­mark short-term inter­est rate from near zero Wednes­day, expect­ing to slow­ly ratch­et it high­er to above 3% in three years.

But that’s if all goes as planned. Their big wor­ry is they’ll end up right back at zero.

Any num­ber of fac­tors could force the Fed to reverse course and cut rates all over again: a shock to the U.S. econ­o­my from abroad, per­sis­tent­ly low infla­tion, some new finan­cial bub­ble burst­ing and slam­ming the econ­o­my, or lost momen­tum in a busi­ness cycle which, at 78 months, is already longer than 29 of the 33 expan­sions the U.S. econ­o­my has expe­ri­enced since 1854.

Among 65 econ­o­mists sur­veyed by The Wall Street Jour­nal this month, not all of whom respond­ed, more than half said it was some­what or very like­ly the Fed’s bench­mark fed­er­al-funds rate would be back near zero with­in the next five years. Ten said the Fed might even push rates into neg­a­tive ter­ri­to­ry, as the Euro­pean Cen­tral Bank and oth­ers in Europe have done—meaning finan­cial insti­tu­tions have to pay to park their mon­ey with the cen­tral banks.

Traders in futures mar­kets see low­er inter­est rates in com­ing years than the Fed projects in part because they attach some prob­a­bil­i­ty to a return to zero. In Decem­ber 2016, for exam­ple, the Fed projects a 1.375% fed-funds rate. Futures mar­kets put it at 0.76%.

Among the wor­ries of pri­vate econ­o­mists is that no oth­er cen­tral bank in the advanced world that has raised rates since the 2007-09 cri­sis has been able to sus­tain them at a high­er lev­el. That includes cen­tral banks in the euro­zone, Swe­den, Israel, Cana­da, South Korea and Aus­tralia.

“They effec­tive­ly have had to undo what they have done,” said Susan Sterne, pres­i­dent of Eco­nom­ic Analy­sis Asso­ciates, an advi­so­ry firm spe­cial­iz­ing in track­ing con­sumer behav­ior.

The Fed has nev­er start­ed rais­ing rates so late in a busi­ness cycle. It has held the fed-funds rate near zero for sev­en years and hasn’t raised it in near­ly a decade. Its deci­sion to keep rates so low for so long was like­ly a fac­tor that helped the econ­o­my grow enough to bring the job­less rate down to 5% last month from a recent peak of 10% in 2009. At the same time, wait­ing so long might mean the Fed is start­ing to lift rates at a point when the expan­sion itself is near­er to an end.

Ms. Sterne said the U.S. expan­sion is now at an advanced stage and con­sumers have sat­is­fied pent-up demand for cars and oth­er durable goods. She’s wor­ried it doesn’t have engines for sus­tained growth. “I call it late-cycle,” she said.

Sev­er­al fac­tors have con­spired to keep rates low. Infla­tion has run below the Fed’s 2% tar­get for more than three years. In nor­mal times the Fed would push rates up as an expan­sion strength­ens to slow growth and tame upward pres­sures on con­sumer prices. With no signs of infla­tion, offi­cials haven’t felt a need to fol­low that old game plan.

More­over, offi­cials believe the econ­o­my, in the wake of a debil­i­tat­ing finan­cial cri­sis and restrained by an aging pop­u­la­tion and slow­ing work­er-pro­duc­tiv­i­ty growth, can’t bear rates as high as before. Its equi­lib­ri­um rate—a hypo­thet­i­cal rate at which unem­ploy­ment and infla­tion can be kept low and stable—has sunk below old norms, the think­ing goes.

That means rates will remain rel­a­tive­ly low even if all goes as planned. If a shock hits the econ­o­my and sends it back into reces­sion, the Fed won’t have much room to cut rates to cush­ion the blow.

...

Nor­mal­ly in a reces­sion the Fed cuts rates to stim­u­late spend­ing and invest­ment. Between Sep­tem­ber 2007 and Decem­ber 2008 it cut rates 5.25 per­cent­age points. Between Jan­u­ary 2001 and June 2003 the cut was 5.5 per­cent­age points, while from July 1990 to Sep­tem­ber 1992 it was 5 per­cent­age points.

If the Fed wants to reduce rates in response to the next shock, it will be back at zero very quick­ly and will have to turn to oth­er mea­sures to boost growth.

Fed offi­cials wor­ry a great deal about the risk. The small gap between zero and where offi­cials see rates going “might increase the fre­quen­cy of episodes in which pol­i­cy mak­ers would not be able to reduce the fed­er­al-funds rate enough to pro­mote a strong eco­nom­ic recovery…in the after­math of neg­a­tive shocks,” they con­clud­ed at their Octo­ber pol­i­cy meet­ing, accord­ing to min­utes of the meet­ing.

In short, the age of uncon­ven­tion­al mon­e­tary pol­i­cy begun by the 2007-09 finan­cial cri­sis might not be end­ing.

Note the crit­i­cal para­dox at work here: When­ev­er the Fed rais­es rates, it simul­ta­ne­ous­ly cre­ates a larg­er ‘cush­ion’ for future rate cuts that can be employed. But it also simul­ta­ne­ous­ly slows down the econ­o­my, mak­ing a future rate cut more like­ly.

This para­dox is part of why the larg­er glob­al eco­nom­ic envi­ron­ment is crit­i­cal in mak­ing his­toric deci­sions like rais­ing near-zero rates after the longest peri­od of no rate hikes in his­to­ry. And that’s why the ECB’s mini-coup this month is poten­tial­ly so sig­nif­i­cant to not just euro­zone but every­where else too: If the ECB repeats its blun­der of 2011, maybe not by actu­al­ly rais­ing rates but anal­o­gous­ly by scal­ing back its QE poli­cies reck­less­ly and gen­er­al­ly sig­nal­ing that the Wei­d­mann-wing is call­ing the shots, that’s prob­a­bly going to drag down the US and every­one else too and make the odds of see near-zero rates from the Fed a lot more like­ly.

So here we are, with the Fed quite pos­si­bly rais­ing rates pre­ma­ture­ly, and the ECB send­ing sig­nals to the mar­ket that the Wei­d­mann-wing of per­ma­hawks has the pow­er it needs to over­rule Mario “do what­ev­er it takes” Draghi. But hey, prog­nos­ti­cat­ing is hard and it’s cer­tain­ly pos­si­ble that the econ­o­my will indeed pick up as expect­ed in 2016 and maybe this rate hike was pru­dent and well-time. And few things would enhance the cred­i­bil­i­ty of the Fed or ECB bet­ter than a robust recov­ery in both the US and euro­zone in the face of this his­toric “lift off” and a scal­ing back of the ECB’s stim­u­lus pro­grams.

On the oth­er hand...

Discussion

15 comments for “Krugmenistan vs the Permahawks”

  1. Here’s a reminder that the Fed­er­al Reserve’s his­toric tight­en­ing cycle is start­ing right when it starts look­ing like wages might broad­ly start going up for US work­ers:

    Bloomberg Busi­ness
    U.S. Work­ers May Final­ly Catch a Break as Wages Look Set to Rise

    * Pres­sure to raise pay is increas­ing, Man­pow­er’s Pris­ing says
    * Fed’s Yellen sees ‘incip­i­ent signs’ of faster salary growth

    Rich Miller and Steve Matthews
    Decem­ber 20, 2015 — 11:01 PM CST

    America’s work­ers may be final­ly in line for a decent raise.

    After five years in which annu­al wage increas­es have aver­aged around 2 per­cent, salaries are set to pick up as a taut job mar­ket prompts more employ­ers to boost pay to retain or add the work­ers they need, econ­o­mists said.

    “This will be the first time in a long time — and I’m talk­ing a long time — that work­ers will see real wage infla­tion of some mag­ni­tude,” said Jonas Pris­ing, chief exec­u­tive offi­cer of Man­pow­er­Group Inc., the Mil­wau­kee-based staffing com­pa­ny with more than $20 bil­lion in rev­enue last year.

    That’s good news for Fed­er­al Reserve Chair Janet Yellen and her col­leagues, who are count­ing on a tight labor mar­ket to lift wages and below-tar­get infla­tion as they grad­u­al­ly raise inter­est rates. It’s less wel­come for com­pa­ny exec­u­tives and investors as high­er com­pen­sa­tion will eat into prof­its. Wages account for around two-thirds of com­pa­nies’ costs.

    “We may be see­ing some incip­i­ent signs of faster wage growth,” Yellen said at a press con­fer­ence on Dec. 16 after the Fed increased rates for the first time since 2006. There is “space for wage growth to be high­er than it’s been.”

    Behind the antic­i­pat­ed rise in pay: a steady fall in job­less­ness to a sev­en-year low of 5 per­cent from a 26-year high of 10 per­cent in 2009. As a result, there are now 1.5 unem­ployed job seek­ers for every post­ed open­ing. That’s down from a 2009 high of 6.8 and is below the lev­el that pre­vailed at the end of the last eco­nom­ic expan­sion.

    “There is a more com­pet­i­tive labor mar­ket out there,” said St. Louis Fed Pres­i­dent James Bullard, cit­ing anec­do­tal evi­dence from around his dis­trict and talks with com­pa­ny exec­u­tives on the bank’s board.

    Wages Stir

    Com­pa­ny lead­ers “tend­ed to think that 3 per­cent was a rea­son­able num­ber for expect­ed wage gains in 2016,” Bullard told reporters on Nov. 6. “There are a wide vari­ety of busi­ness­es rep­re­sent­ed there, but they all said the same thing.”

    Some work­ers, espe­cial­ly those will­ing to switch employ­ers, already are reap­ing the ben­e­fits of the tighter labor mar­ket. The quits rate, which shows the will­ing­ness of employ­ees to leave their jobs, was 1.9 per­cent in Octo­ber, up from 1.3 per­cent in 2009 and just mar­gin­al­ly below the 2 per­cent aver­age of the last expan­sion.

    Finan­cial advis­er Davi Kut­ner said he received a “sig­nif­i­cant increase” in pay with the oppor­tu­ni­ty for more when he left his employ­er of 10 years in July for a new posi­tion at an Atlanta-based account­ing firm.

    Net­work­ing Pay­off

    “I real­ly didn’t put myself out into the mar­ket,” said Kut­ner, 37, who is mar­ried and has three chil­dren. “I have net­worked with a few peo­ple and this oppor­tu­ni­ty came up.”

    Econ­o­mists gen­er­al­ly believe that wage pres­sures start to heat up when the econ­o­my achieves full employ­ment as the demand for work­ers begins to out­strip the avail­able sup­ply.

    Most Fed pol­i­cy mak­ers reck­on the U.S. is just about there, based on pro­jec­tions they released on Dec. 16. Their medi­an fore­cast of longer run job­less­ness is 4.9 per­cent, just below November’s 5 per­cent rate. Offi­cials last week fore­cast unem­ploy­ment would be at 4.7 per­cent at the end of each of the next three years, low­er than pre­vi­ous­ly esti­mat­ed, show­ing they intend to run the job mar­ket a lit­tle hot to spur wage gains.

    A broad­er mea­sure of the job mar­ket, which includes part-time employ­ees who want a full-time job and dis­cour­aged peo­ple who’ve stopped look­ing for work, also shows the sup­ply of labor is shrink­ing. It’s fall­en to 9.9 per­cent from 17.1 per­cent in 2009, the high­est in data going back to 1994.

    Full employ­ment on that mea­sure is about 9 per­cent and the U.S. should achieve that lev­el around the mid­dle of next year, accord­ing to Mark Zan­di, chief econ­o­mist at Moody’s Ana­lyt­ics Inc. in West Chester, Penn­syl­va­nia.

    To cope with the tight­en­ing labor mar­ket, employ­ers are draw­ing from “tal­ent pools that were pre­vi­ous­ly untapped” by hir­ing Amer­i­cans who have been out of work for a while, ManpowerGroup’s Pris­ing said.

    Some of the for­eign forces that have held down salaries in the U.S. also may be wan­ing as labor costs esca­late over­seas, espe­cial­ly in Chi­na, mak­ing it eas­i­er for Amer­i­can work­ers to seek high­er pay.

    ...

    Most econ­o­mists don’t expect wages to rise rapid­ly now that salaries are start­ing to stir. With eco­nom­ic growth mod­er­ate and work­er pro­duc­tiv­i­ty slug­gish, com­pa­nies will be reluc­tant to increase pay too much, until they’re forced to, they said.

    Eco­nom­ic devel­op­ments over­seas also offer a cau­tion­ary tale. A 20-year-low unem­ploy­ment rate of 3.1 per­cent in Japan so far has failed to lift work­er wages sig­nif­i­cant­ly.

    Still, some Amer­i­can com­pa­nies are becom­ing resigned to hav­ing to offer their employ­ees a bet­ter deal. In a sur­vey last month by the Nation­al Fed­er­a­tion of Inde­pen­dent Busi­ness, the net per­cent­age of small firms plan­ning com­pen­sa­tion increas­es reached a nine-year high.

    “Employ­ers are increas­ing­ly aware that the labor mar­ket is tight­en­ing,” Pris­ing said. “The pres­sure to raise pay is increas­ing.”

    Keep in mind that the pro­ject­ed rise in wages by the econ­o­mists sur­veyed in this arti­cle are just that: pro­jec­tions. As the arti­cle point­ed out, all you have to look at is Japan to see how low unem­ploy­ment does­n’t nec­es­sar­i­ly trans­late into high­er wages. Or just look at the decades of stag­nant US wages.

    But let’s assume that we real­ly do see the sig­nif­i­cant wage growth as pro­ject­ed. Great!

    At the same time, note how this is being described from the per­spec­tive of CEOs and investors: An econ­o­my that’s strong enough to war­rant high­er wages is unwel­come because it high­er wages eat into their prof­its:

    ...
    That’s good news for Fed­er­al Reserve Chair Janet Yellen and her col­leagues, who are count­ing on a tight labor mar­ket to lift wages and below-tar­get infla­tion as they grad­u­al­ly raise inter­est rates. It’s less wel­come for com­pa­ny exec­u­tives and investors as high­er com­pen­sa­tion will eat into prof­its. Wages account for around two-thirds of com­pa­nies’ costs.
    ...

    Most econ­o­mists don’t expect wages to rise rapid­ly now that salaries are start­ing to stir. With eco­nom­ic growth mod­er­ate and work­er pro­duc­tiv­i­ty slug­gish, com­pa­nies will be reluc­tant to increase pay too much, until they’re forced to, they said.

    ...

    It’s a reminder that the way the US (and basi­cal­ly the glob­al) econ­o­my is set up, the only real mech­a­nism for clos­ing the seem­ing­ly ever-grow­ing income inequal­i­ty gap is for the econ­o­my to be so hot that cor­po­ra­tions are basi­cal­ly forced to raise wages through a tight labor mar­ket and strong demand. And when you look back across the his­to­ry of mod­ern cap­i­tal­ism and fac­tor in that devel­oped economies sim­ply aren’t going to expe­ri­ence peri­ods of red hot growth very often, it becomes pret­ty clear that wait­ing for red hot economies to close the income gap is basi­cal­ly a recipe for a return to the 19th cen­tu­ry. Except with more tech­nol­o­gy.

    So while it’s cer­tain­ly a relief that the Fed­er­al Reserve sees “some incip­i­ent signs of faster wage growth,” and feels that there’s “space for wage growth to be high­er than it’s been,” keep in mind that the “space” for high­er wage growth is prob­a­bly going to shrink rather rapid­ly if over­all infla­tion lev­els rise much above 2 per­cent (the Fed’s tar­get infla­tion rate). Yes, Fed Chair­man Janet Yellen made clear back in Sep­tem­ber that she would pre­fer to see infla­tion run “too hot” (above 2 per­cent) rather than “too cold”, which is a good sig­nal to send at this point. But, of course, we also just got the Fed’s rate hike while infla­tion and wage growth is still quite low, cit­ing fears that high­er infla­tion could be just around the cor­ner, which is sort of the oppo­site sig­nal.

    Giv­en all that, and since the kind of gov­ern­ment pro­grams that could cre­ate like tight labor mar­ket, like a strong fis­cal stim­u­lus in the form of large over­due pub­lic invest­ments, are basi­cal­ly off the table as long as the GOP con­trols con­gress, it’s look­ing like we’re enter­ing a medi­um-term peri­od where, unless the Fed’s “Doves” are able to hold back the “Hawks” over the next cou­ple of years and allow the econ­o­my to hum along at a fast enough pace to induce a real sus­tained tight­en­ing to the labor mar­kets even if that involves infla­tion clos­er to +3 per­cent, it’s look­ing like the only real shot of see­ing a peri­od of sus­tained real wage growth is for CEOs and investors to vol­un­tary accept low­er prof­its and bonus­es in order to pay high­er wages as some sort of col­lec­tive invest­ment in social cohe­sion.

    Mer­ry Kram­pus every­one!

    Posted by Pterrafractyl | December 22, 2015, 1:48 pm
  2. William White, the chief eco­nom­ic advis­er for the BIS from 1995–2008 and a cur­rent mem­ber of the OECD Review Com­mit­tee, just issued his report on the state of the glob­al econ­o­my and rec­om­men­da­tions for cen­tral banks. Much like the 2015 report he issued a year ago, when Mr. White argue that the use of quan­ti­ta­tive eas­ing by the Fed, the ECB, and Bank of Japan are like­ly to end very bad­ly (with Japan poten­tial­ly expe­ri­enc­ing hyper­in­fla­tion), White again see great per­il in the glob­al econ­o­my which he appears to blame pri­ma­ry on cen­tral bank actions (yes, he’s a per­ma­hawk).

    But, inter­est­ing­ly, White has a cou­ple of sug­ges­tions for what to do now that’s rather unex­pect­ed from an econ­o­mist of his stripe: White sug­gests gov­ern­ments should stop rely­ing exclu­sive­ly on mon­e­tary stim­u­lus from cen­tral banks and start engag­ing in actu­al fis­cal stim­u­lus like a pub­lic invest­ment binge. Also, debt jubilees might be in order. Keep in mind that White isn’t just a long-time mem­ber of the BIS, an insti­tu­tion that’s per­pet­u­al­ly freaked out about pub­lic debt lev­els, but he also serves on the Iss­ing Com­mit­tee which advis­es Angela Merkel.

    So while Mr. White 2016 report is most­ly what we would have expect­ed, in a cou­ple of ways it was rather unex­pect­ed:

    The Tele­graph
    World faces wave of epic debt defaults, fears cen­tral bank vet­er­an
    Exclu­sive: Sit­u­a­tion worse than it was in 2007, says chair­man of the OECD’s review com­mit­tee

    By Ambrose Evans-Pritchard, in Davos

    9:00PM GMT 19 Jan 2016

    The glob­al finan­cial sys­tem has become dan­ger­ous­ly unsta­ble and faces an avalanche of bank­rupt­cies that will test social and polit­i­cal sta­bil­i­ty, a lead­ing mon­e­tary the­o­rist has warned.

    “The sit­u­a­tion is worse than it was in 2007. Our macro­eco­nom­ic ammu­ni­tion to fight down­turns is essen­tial­ly all used up,” said William White, the Swiss-based chair­man of the OECD’s review com­mit­tee and for­mer chief econ­o­mist of the Bank for Inter­na­tion­al Set­tle­ments (BIS).

    “Debts have con­tin­ued to build up over the last eight years and they have reached such lev­els in every part of the world that they have become a potent cause for mis­chief,” he said.

    “It will become obvi­ous in the next reces­sion that many of these debts will nev­er be ser­viced or repaid, and this will be uncom­fort­able for a lot of peo­ple who think they own assets that are worth some­thing,” he told The Tele­graph on the eve of the World Eco­nom­ic Forum in Davos.

    “The only ques­tion is whether we are able to look real­i­ty in the eye and face what is com­ing in an order­ly fash­ion, or whether it will be dis­or­der­ly. Debt jubilees have been going on for 5,000 years, as far back as the Sume­ri­ans.

    The next task await­ing the glob­al author­i­ties is how to man­age debt write-offs — and there­fore a mas­sive reorder­ing of win­ners and losers in soci­ety — with­out set­ting off a polit­i­cal storm.

    Mr White said Europe’s cred­i­tors are like­ly to face some of the biggest hair­cuts. Euro­pean banks have already admit­ted to $1 tril­lion of non-per­form­ing loans: they are heav­i­ly exposed to emerg­ing mar­kets and are almost cer­tain­ly rolling over fur­ther bad debts that have nev­er been dis­closed.

    The Euro­pean bank­ing sys­tem may have to be recap­i­tal­ized on a scale yet unimag­ined, and new “bail-in” rules mean that any deposit hold­er above the guar­an­tee of €100,000 will have to help pay for it.

    ...

    Mr White, who also chief author of G30’s recent report on the post-cri­sis future of cen­tral bank­ing, said it is impos­si­ble know what the trig­ger will be for the next cri­sis since the glob­al sys­tem has lost its anchor and is inher­ent­ly prone to break­down.

    A Chi­nese deval­u­a­tion clear­ly has the poten­tial to metas­ta­size. “Every major coun­try is engaged in cur­ren­cy wars even though they insist that QE has noth­ing to do with com­pet­i­tive depre­ci­a­tion. They have all been play­ing the game except for Chi­na — so far — and it is a zero-sum game. Chi­na could real­ly up the ante.”

    Mr White said QE and easy mon­ey poli­cies by the US Fed­er­al Reserve and its peers have had the effect of bring­ing spend­ing for­ward from the future in what is known as “inter-tem­po­ral smooth­ing”. It becomes a tox­ic addic­tion over time and ulti­mate­ly los­es trac­tion. In the end, the future catch­es up with you. “By def­i­n­i­tion, this means you can­not spend the mon­ey tomor­row,” he said.

    A reflex of “asym­me­try” began when the Fed inject­ed too much stim­u­lus to pre­vent a purge after the 1987 crash. The author­i­ties have since allowed each boom to run its course — think­ing they could safe­ly clean up lat­er — while respond­ing to each shock with alacrity. The BIS cri­tique is that this has led to a per­pet­u­al eas­ing bias, with inter­est rates falling ever fur­ther below their “Wick­sel­lian nat­ur­al rate” with each cred­it cycle.

    The error was com­pound­ed in the 1990s when Chi­na and east­ern Europe sud­den­ly joined the glob­al econ­o­my, flood­ing the world with cheap exports in a “pos­i­tive sup­ply shock”. Falling prices of man­u­fac­tured goods masked the ram­pant asset infla­tion that was build­ing up. “Pol­i­cy mak­ers were seduced into inac­tion by a set of com­fort­ing beliefs, all of which we now see were false. They believed that if infla­tion was under con­trol, all was well,” he said.

    In ret­ro­spect, cen­tral banks should have let the benign defla­tion of this (tem­po­rary) phase of glob­al­i­sa­tion run its course. By stok­ing debt bub­bles, they have instead incu­bat­ed what may prove to be a more malign vari­ant, a clas­sic 1930s-style “Fisherite” debt-defla­tion.

    Mr White said the Fed is now in a hor­ri­ble quandary as it tries to extract itself from QE and right the ship again. “It is a debt trap. Things are so bad that there is no right answer. If they raise rates it’ll be nasty. If they don’t raise rates, it just makes mat­ters worse,” he said.

    There is no easy way out of this tan­gle. But Mr White said it would be a good start for gov­ern­ments to stop depend­ing on cen­tral banks to do their dirty work. They should return to fis­cal pri­ma­cy — call it Key­ne­sian, if you wish — and launch an invest­ment blitz on infra­struc­ture that pays for itself through high­er growth.

    “It was always dan­ger­ous to rely on cen­tral banks to sort out a sol­ven­cy prob­lem when all they can do is tack­le liq­uid­i­ty prob­lems. It is a recipe for dis­or­der, and now we are hit­ting the lim­it,” he said.

    “There is no easy way out of this tan­gle. But Mr White said it would be a good start for gov­ern­ments to stop depend­ing on cen­tral banks to do their dirty work. They should return to fis­cal pri­ma­cy — call it Key­ne­sian, if you wish — and launch an invest­ment blitz on infra­struc­ture that pays for itself through high­er growth.
    Yes, we now have a for­mer BIS banker say­ing that gov­ern­ments should embrace their inner Key­ne­sians and go on an invest­ment blitz on infra­struc­ture. Now, keep in mind that Key­ne­sians have reg­u­lar­ly argued that rely­ing sole­ly on cen­tral bank tools like ultra-low rates and QE were a mis­take and that gov­ern­ment fis­cal stim­u­lus that increas­es demand is a desir­able pol­i­cy. Also keep in mind that those Key­ne­sian calls for greater stim­u­lus cen­tral bank were reg­u­lar­ly dis­missed by the per­ma­hawks like Mr. White as a risky pol­i­cy that could ignite infla­tion and add too much pub­lic debt (for instance, White came out against fis­cal stim­u­lus back in 2010). But hey, if a for­mer top BIS econ­o­mist and gen­er­al per­ma­hawk is com­ing around to the idea of fis­cal stim­u­lus through pub­lic invest­ments as a valid tool, well, it’s sort of progress. Plus, he even hint­ed at a debt jubilee:

    ...
    “It will become obvi­ous in the next reces­sion that many of these debts will nev­er be ser­viced or repaid, and this will be uncom­fort­able for a lot of peo­ple who think they own assets that are worth some­thing,” he told The Tele­graph on the eve of the World Eco­nom­ic Forum in Davos.

    “The only ques­tion is whether we are able to look real­i­ty in the eye and face what is com­ing in an order­ly fash­ion, or whether it will be dis­or­der­ly. Debt jubilees have been going on for 5,000 years, as far back as the Sume­ri­ans.
    ...

    Grant­ed, he made that jubilee sug­gest­ed in the con­text of a pre­dict­ed “dis­or­der­ly” peri­od of debt unwind­ing, but con­sid­er­ing that the guy advis­es Angela Merkel, any talk of a debt jubilee is progress.

    Still, it’s not progress enough. For instance, let’s take a look at Mr. White’s “Wick­sel­lian nature rate” analy­sis for why cen­tral banks have held rates too low for the last three decades:

    ...
    Mr White said QE and easy mon­ey poli­cies by the US Fed­er­al Reserve and its peers have had the effect of bring­ing spend­ing for­ward from the future in what is known as “inter-tem­po­ral smooth­ing”. It becomes a tox­ic addic­tion over time and ulti­mate­ly los­es trac­tion. In the end, the future catch­es up with you. “By def­i­n­i­tion, this means you can­not spend the mon­ey tomor­row,” he said.

    A reflex of “asym­me­try” began when the Fed inject­ed too much stim­u­lus to pre­vent a purge after the 1987 crash. The author­i­ties have since allowed each boom to run its course — think­ing they could safe­ly clean up lat­er — while respond­ing to each shock with alacrity. The BIS cri­tique is that this has led to a per­pet­u­al eas­ing bias, with inter­est rates falling ever fur­ther below their “Wick­sel­lian nat­ur­al rate” with each cred­it cycle.

    The error was com­pound­ed in the 1990s when Chi­na and east­ern Europe sud­den­ly joined the glob­al econ­o­my, flood­ing the world with cheap exports in a “pos­i­tive sup­ply shock”. Falling prices of man­u­fac­tured goods masked the ram­pant asset infla­tion that was build­ing up. “Pol­i­cy mak­ers were seduced into inac­tion by a set of com­fort­ing beliefs, all of which we now see were false. They believed that if infla­tion was under con­trol, all was well,” he said.

    In ret­ro­spect, cen­tral banks should have let the benign defla­tion of this (tem­po­rary) phase of glob­al­i­sa­tion run its course. By stok­ing debt bub­bles, they have instead incu­bat­ed what may prove to be a more malign vari­ant, a clas­sic 1930s-style “Fisherite” debt-defla­tion.
    ...

    So Mr. White is assert­ing that a cen­tral bank bias towards allow­ing asset bub­bles to emerge and then clean­ing them up lat­er, cou­pled with the defla­tion­ary effect on man­u­fac­tured goods cre­at­ed by increas­ing glob­al­iza­tion, led a sit­u­a­tion where cen­tral banks were allow­ing each inter­est rate cycle to fall ever fur­ther below their “Wick­sel­lian nat­ur­al rate” and that cen­tral banks should have just stick to high­er inter­est rates and allowed “the benign defla­tion of this (tem­po­rary) phase of glob­al­is­tion run its course”.

    That analy­sis might sound real­ly nice on first pass, but it has a cou­ple sig­nif­i­cant prob­lems. Prob­lems that econ­o­mists like Paul Krug­man have had to address before since White’s “Wick­sel­lian” analy­sis is some­thing the BIS has been push­ing for a while:

    The New York Times
    The Con­science of a Lib­er­al

    Not Knut

    Paul Krug­man
    July 7, 2014 10:13 am

    Gavyn Davies takes on the de fac­to debate between the hard-mon­ey men at the BIS and the mon­e­tary doves, and frames it as a con­flict between Keynes and Wick­sell. But I don’t think that’s right. The BIS posi­tion is in fact just as incon­sis­tent with Wick­sell as it is with Keynes. That doesn’t mean that the BIS is wrong (although I believe that it is); it does mean that its view is much stranger and hard­er to defend than Davies sug­gests.

    So, for those won­der­ing what this is all about: The Key­ne­sian view of mon­e­tary pol­i­cy is that the cen­tral bank should, if it can, set inter­est rates at a lev­el that pro­duces full employ­ment. Some­times it can’t: even at a zero rate the econ­o­my remains depressed, so you need fis­cal pol­i­cy. But in nor­mal times the Fed and its coun­ter­parts should be aim­ing at the full-employ­ment inter­est rate.

    Wick­sel­lian analy­sis is an old­er tra­di­tion; it argues that there is at any giv­en time a “nat­ur­al” rate of inter­est in the sense that keep­ing rates below that lev­el leads to infla­tion, keep­ing them above it leads to defla­tion.

    I have always con­sid­ered these approach­es essen­tial­ly equiv­a­lent: the Wick­sel­lian nat­ur­al rate is the rate that would lead to full employ­ment in a Key­ne­sian mod­el. I have, in fact, treat­ed them as equiv­a­lent on a num­ber of occa­sions, e.g. here.

    Now, what about the BIS? It is argu­ing that cen­tral banks have con­sis­tent­ly kept rates too low for the past cou­ple of decades. But this is not a state­ment about the Wick­sel­lian nat­ur­al rate. After all, infla­tion is low­er now than it was 20 years ago.

    No, what the BIS is argu­ing is that there is some oth­er appro­pri­ate rate, defined as a rate suf­fi­cient­ly high to dis­cour­age bub­bles, and that cen­tral banks should tar­get this rate even though it is above the Wick­sel­lian nat­ur­al rate – or, equiv­a­lent­ly, that the econ­o­my should be kept per­ma­nent­ly depressed in order to curb the irra­tional exu­ber­ance of investors.

    It’s true that they don’t put it that way – prob­a­bly because the pol­i­cy rec­om­men­da­tion sounds out­ra­geous when you do. We can’t reg­u­late finance effec­tive­ly, so we have to accept a per­ma­nent slump instead? Real­ly? But that’s what it amounts to.

    “No, what the BIS is argu­ing is that there is some oth­er appro­pri­ate rate, defined as a rate suf­fi­cient­ly high to dis­cour­age bub­bles, and that cen­tral banks should tar­get this rate even though it is above the Wick­sel­lian nat­ur­al rate – or, equiv­a­lent­ly, that the econ­o­my should be kept per­ma­nent­ly depressed in order to curb the irra­tional exu­ber­ance of investors.
    That’s basi­cal­ly the argu­ment made by not just White but the per­ma­hawks in general...especially the Ordolib­er­als at the Bun­des­bank: keep­ing economies depressed with high­er inter­est rates is a fine trade-off if it avoids the asset bub­bles low­er rates could cre­ate. Or, in oth­er words:

    ...
    We can’t reg­u­late finance effec­tive­ly, so we have to accept a per­ma­nent slump instead? Real­ly? But that’s what it amounts to.

    That’s the under­ly­ing log­ic behind White’s argu­ment: since cen­tral banks or finan­cial reg­u­la­tors just can’t find alter­na­tive means of pre­vent­ing or deal­ing with asset bub­bles, we should just per­ma­nent­ly depress economies even when low­er rates (and fis­cal stim­u­lus) are called for to increase demand.

    And it’s that spir­it of reg­u­la­to­ry defeatism that makes White’s calls for greater fis­cal stim­u­lus and debt jubilees so inter­est­ing: One of the key argu­ments of the per­ma­hawk over the years has been that there’s basi­cal­ly noth­ing either cen­tral banks or gov­ern­ments can or should do to deal with the after­math of a major cri­sis and result­ing reces­sion. Gov­ern­ment stim­u­lus, they argue, is going to lead to a desta­bi­liz­ing rise in pub­lic debt (recall the Rein­hart-Rogoff argu­ment against ris­ing pub­lic debt that was issued in 2009, just in time to be used as an argu­ment against pub­lic stim­u­lus, and turned out to be based on a mess of cod­ing errors and ques­tion­able assump­tions) and low­er­ing rates too much will just result in asset bub­bles that are even more dam­ag­ing that just let­ting the econ­o­my tank. Liq­ui­da­tion, in the view of the per­ma­hawks at the BIS, is the only remain­ing option.

    So is Mr. White reject­ing the liq­ui­da­tion­ist views of the BIS? Well, keep in mind that his calls for a debt jubilee are in keep­ing with an expect­ed peri­od of mass liq­ui­da­tion, so maybe not. But let’s hope so, since liq­ui­da­tion­ism is best left in the last cen­tu­ry:

    The New York Times
    The Con­science of a Lib­er­al
    Liq­ui­da­tion­ism in the 21st Cen­tu­ry

    Paul Krug­man
    Jul 12, 2014

    Brad DeLong pro­fess­es him­self con­fused:

    I con­fess that I do not under­stand the recent BIS Annu­al Report. I have tried–I have tried very hard–to wrap my mind around just what the BIS posi­tion is. But I have failed.

    Actu­al­ly, I don’t think it’s that hard. But you need to see this in terms of an atti­tude, not a coher­ent mod­el.

    At least since 2010 the BIS posi­tion has basi­cal­ly been the same as that of 1930s liq­ui­da­tion­ists like Schum­peter, who warned against any “arti­fi­cial stim­u­lus” that might leave the “work of depres­sions undone.” And in 2010–2011 it had an intel­lec­tu­al­ly coher­ent — fac­tu­al­ly wrong, but coher­ent — sto­ry under­ly­ing that posi­tion. The BIS basi­cal­ly claimed that mass unem­ploy­ment was the result of struc­tur­al mis­match — work­ers had the wrong skills, and/or were in the wrong sec­tors. And it there­fore claimed that easy mon­ey would lead to a rapid rise in infla­tion, despite the high lev­el of unem­ploy­ment.

    But it didn’t hap­pen. So you might have expect­ed the BIS to revise its pol­i­cy pre­scrip­tions. What it did, instead, how­ev­er, was to look for new jus­ti­fi­ca­tions for the same pre­scrip­tions. Part­ly this involved play­ing up the sup­posed dam­age low rates do to finan­cial sta­bil­i­ty. But the BIS has also gone in heav­i­ly for the notion that we’re suf­fer­ing from a bal­ance-sheet reces­sion, that is, that over-indebt­ed­ness on the part of part of the pri­vate sec­tor is exert­ing a per­sis­tent drag on the econ­o­my.

    That’s a rea­son­able sto­ry — it’s a mod­el I like myself. But the BIS either doesn’t under­stand that model’s impli­ca­tions, or doesn’t care.

    Through­out the annu­al report, bal­ance-sheet prob­lems are treat­ed as if they were equiv­a­lent to the kind of real struc­tur­al prob­lems the bank used to claim were at the root of our trou­bles. That is, they’re treat­ed as a good rea­son to accept a pro­tract­ed peri­od of high unem­ploy­ment as some­how nat­ur­al, and to reject arti­fi­cial stim­u­lus that might alle­vi­ate the pain.

    That, how­ev­er –as Irv­ing Fish­er could have told them! — is not at all the cor­rect impli­ca­tion to draw from a bal­ance-sheet view. On the con­trary, what bal­ance-sheet mod­els tell us is that left to itself, the process of delever­ag­ing pro­duces huge, unnec­es­sary costs: debtors are forced to cut back, but cred­i­tors have no com­pa­ra­ble incen­tive to spend more, so there is a per­sis­tent short­fall of demand that leads to great pain and waste. More­over, the depressed state of the econ­o­my can crip­ple the process of delever­ag­ing itself, both because debtors don’t have the income to pay down their debts and because falling infla­tion or defla­tion increas­es the real val­ue of debt rel­a­tive to expec­ta­tions.

    So the bal­ance-sheet view actu­al­ly makes a com­pelling case for activism — for fis­cal deficits to sup­port demand while the pri­vate sec­tor gets its bal­ance sheets in order, for mon­e­tary pol­i­cy to sup­port the fis­cal pol­i­cy, for a rise in infla­tion tar­gets both to encour­age who­ev­er isn’t debt-con­strained to spend more and to erode the real val­ue of the debt.

    The BIS, how­ev­er, wants gov­ern­ments as well as house­holds to retrench — I’m kind of sur­prised that it doesn’t also call for every­one to run a trade sur­plus; it wants inter­est rates raised right away; and — in a clear sign that it isn’t being coher­ent — it includes a box declar­ing that defla­tion isn’t so bad, after all. Irv­ing Fish­er wept.

    Oh, and about the BIS’s claim that its posi­tion is Wick­sel­lian: if you go back just a cou­ple of years, you have William White of the BIS claim­ing that inter­est rates were below their nat­ur­al rate in the ordi­nary sense that they were infla­tion­ary. When it turned out that they weren’t — well, you guessed it — the Bank rede­fined the nat­ur­al rate so that it could keep claim­ing that rates are too low.

    ...

    “At least since 2010 the BIS posi­tion has basi­cal­ly been the same as that of 1930s liq­ui­da­tion­ists like Schum­peter, who warned against any “arti­fi­cial stim­u­lus” that might leave the “work of depres­sions undone.””
    That’s a good way to sum­ma­rize the BIS’s approach to eco­nom­ics: An insti­tu­tion that was estab­lished in 1930, and pret­ty much stayed there. Specif­i­cal­ly in the year 1930. The eco­nom­ic lessons of the mid-to-late 1930’s appar­ent­ly nev­er stuck for the BIS.

    But at least now we have William White, a long-time BIS chief econ­o­mist who’s advis­ing Angela Merkel and work­ing at the OECD, sort of mod­er­at­ing his BIS-ish liq­ui­da­tion­ist posi­tions and giv­ing tac­it approval for both gov­ern­ment stim­u­lus and a debt jubilee. Although the debt jubilee is pre­sum­ably to be used with­in the con­text of an upcom­ing peri­od of mass liq­ui­da­tion. So it’s sort of progress, but sort of not. And these days, sort-of-but-not-actu­al­ly progress is still progress! Yay?

    Posted by Pterrafractyl | January 20, 2016, 9:00 pm
  3. Gold­man Sachs issued a report that raised ques­tions about the gen­er­al effi­ca­cy of cap­i­tal­ism should we see the cur­rent cor­po­rate prof­it mar­gins US cor­po­ra­tion, which are still high by his­tor­i­cal stan­dards despite a rel­a­tive weak econ­o­my, remain strong as the eco­nom­ic recov­ery slows. Yes, Gold­man Sach­s’s report sug­gest­ed that sus­tained high cor­po­rate prof­its going for­ward could be a sign that cap­i­tal­ism is bro­ken. As the arti­cle below puts it: it’s not every day you see a major invest­ment bank say it might have to start ask­ing broad­er ques­tions about cap­i­tal­ism itself:

    Bloomberg Busi­ness

    Gold­man Sachs Says It May Be Forced to Fun­da­men­tal­ly Ques­tion How Cap­i­tal­ism Is Work­ing
    The prof­it mar­gins debate could lead to an unset­tling con­clu­sion.

    Joe Weisen­thal

    Feb­ru­ary 3, 2016 — 2:12 AM CST

    One of the most heat­ed debates among investors is the ques­tion of whether cor­po­rate prof­it mar­gins can main­tain their ele­vat­ed lev­el, or whether they will inevitably revert to mean.

    Here’s a quick look at S&P 500-stock index prof­it mar­gins, for exam­ple, going back more than 25 years. They remain high by his­tor­i­cal stan­dards.

    ...

    A new note from Gold­man Sachs Group Inc. ana­lysts led by Sumana Manohar looks at the bull and bear argu­ments for the prof­it mar­gins debate.

    Manohar argued that prof­it mar­gins have expand­ed, thanks to four key trends: strong com­modi­ties prices, emerg­ing mar­ket cost arbi­trage (com­pa­nies mak­ing things more cheap­ly in emerg­ing mar­kets), demand growth from emerg­ing mar­kets, and improved cor­po­rate effi­cien­cy dri­ven by the use of new tech­nol­o­gy. Con­tin­u­ing one of its major ana­lyt­i­cal themes of recent months, Gold­man also not­ed that the mar­ket has reward­ed com­pa­nies that have under­tak­en merg­ers and share buy­backs, as opposed to com­pa­nies that have invest­ed inter­nal­ly, fur­ther bol­ster­ing mar­gins.

    So will prof­it mar­gins inevitably roll over?

    Gold­man went through both sides of the argu­ment. On the bull side, the bank said that ongo­ing con­sol­i­da­tion in indus­tries, cost defla­tion, and tighter purse strings help keep a floor under mar­gins. Ulti­mate­ly though, it found that the above trends, cou­pled with weak demand and gen­er­al indus­tri­al over­ca­pac­i­ty, mean that mar­gins are like­ly to come down.

    But what if mar­gins stay ele­vat­ed? That too is pos­si­ble, and its impli­ca­tions could be unset­tling.

    Gold­man wrote: “We are always wary of guid­ing for mean rever­sion. But, if we are wrong and high mar­gins man­age to endure for the next few years (par­tic­u­lar­ly when glob­al demand growth is below trend), there are broad­er ques­tions to be asked about the effi­ca­cy of cap­i­tal­ism.

    In oth­er words, prof­it mar­gins should nat­u­ral­ly mean-revert and oscil­late. The exis­tence of fat mar­gins should encour­age new com­peti­tors and pric­ing cycles that cause those mar­gins to erode; con­verse­ly, at the bot­tom of the cycle, low mar­gins should lead to weak­er play­ers exit­ing the busi­ness and giv­ing stronger com­pa­nies more breath­ing space. If that cycle does­n’t con­tin­ue, some­thing strange is tak­ing place.

    Need­less to say, it’s not every day you see a major invest­ment bank say it might have to start ask­ing broad­er ques­tions about cap­i­tal­ism itself.

    “We are always wary of guid­ing for mean rever­sion. But, if we are wrong and high mar­gins man­age to endure for the next few years (par­tic­u­lar­ly when glob­al demand growth is below trend), there are broad­er ques­tions to be asked about the effi­ca­cy of cap­i­tal­ism.
    Did Gold­man Sachs qui­et­ly hire Thomas Piket­ty to join their research depart­ment? Either way, it’s nice to see basic ques­tions like, “hey, is this cap­i­tal­ism thing actu­al­ly work­ing the way we think it’s sup­posed to work?” get asked not just by any old mega bank but by the Giant Vam­pire Squid itself. While the cri­sis of cap­i­tal­ism is most­ly bad news since we don’t real­ly want to be using a dys­func­tion­al eco­nom­ic sys­tem, it’s still good news to see the ques­tion actu­al­ly get asked.

    It’s also worth keep­ing in mind that one of the rea­sons Gold­man Sachs is choos­ing the next few years, and the cor­po­rate prof­its earned dur­ing those years, as a “test” for the effi­ca­cy of cap­i­tal­ism is because it’s look­ing like the glob­al econ­o­my is slow­ing which means cor­po­rate prof­its are expect­ed to fall too. So ques­tions that might be raised, should cor­po­rate prof­its fall, are nice ques­tions to hear, they’re also being asked in a less than nice macro­eco­nom­ic con­text:

    Bloomberg Busi­ness
    Fed Offi­cials Urge Patience to Gauge Tur­moil’s Impact on Econ­o­my

    Feb­ru­ary 3, 2016 — 3:22 PM CST
    Updat­ed on Feb­ru­ary 3, 2016 — 4:29 PM CST

    * Dud­ley tells MNI ‘things have hap­pened’ that may alter out­look
    * Brainard high­lights risks to eco­nom­ic out­look in WSJ com­ments

    Jana Randow

    Two top Fed­er­al Reserve offi­cials said pol­i­cy mak­ers need to take into account tighter finan­cial con­di­tions when they meet next month to decide whether to raise inter­est rates again.

    “Recent devel­op­ments rein­force the case for watch­ful wait­ing,” Fed Gov­er­nor Lael Brainard said in com­ments to the Wall Street Jour­nal in an arti­cle pub­lished Wednes­day. New York Fed Pres­i­dent William Dud­ley said in an inter­view with Mar­ket News Inter­na­tion­al that finan­cial con­di­tions are “con­sid­er­ably tighter” than in Decem­ber, and if they remained in place by March, “we would have to take that into con­sid­er­a­tion in terms of that mon­e­tary-pol­i­cy deci­sion.”

    After the Fed­er­al Open Mar­ket Com­mit­tee raised inter­est rates in Decem­ber for the first time since 2006 and sig­naled it was pre­pared to tight­en bor­row­ing costs by 1 per­cent­age point this year, pol­i­cy mak­ers last week raised the prospect for a change in their assess­ment. The FOMC left its tar­get for the bench­mark fed­er­al funds rate unchanged at 0.25 per­cent to 0.5 per­cent and said it was “close­ly mon­i­tor­ing” the impact of finan­cial-mar­ket tur­bu­lence and glob­al risks to growth.

    “I read that as say­ing we’re acknowl­edg­ing that things have hap­pened in finan­cial mar­kets and in the flow of the eco­nom­ic data that may be in the process of alter­ing the out­look for growth and the risk to the out­look for growth going for­ward,” Dud­ley told MNI. “But it’s a lit­tle soon to draw any firm con­clu­sions from what we’ve seen.”

    On Hold

    Investors have cut the prob­a­bil­i­ty they see of the Fed rais­ing rates at its next meet­ing in March to about 12 per­cent from 50 per­cent this time last month, accord­ing to pric­ing in fed-funds futures, which also sig­nal that investors don’t ful­ly expect a rate hike until next year.

    Econ­o­mists at Gold­man Sachs have pushed back their fore­cast for tighter bor­row­ing costs, cit­ing finan­cial con­di­tions that have tight­ened “mean­ing­ful­ly.” Jan Hatz­ius and Zach Pan­dl wrote in a note that they antic­i­pate the next rate increase in June instead of March, fol­lowed by two more steps this year.

    A gauge of finan­cial con­di­tions cal­cu­lat­ed by the Chica­go Fed had risen to ‑0.55 in the week end­ing Jan. 29, the lat­est for which data are avail­able, from ‑0.58 after the Decem­ber FOMC meet­ing. Neg­a­tive val­ues of the index indi­cate con­di­tions are loos­er than on aver­age, while pos­i­tive val­ues sig­nal a tighter stance.

    Brainard expressed con­cern that stress­es in emerg­ing mar­kets includ­ing Chi­na and slow growth in devel­oped economies could spill over to the U.S.

    “This trans­lates into weak­er exports, busi­ness invest­ment, and man­u­fac­tur­ing in the Unit­ed States, slow­er progress on hit­ting the infla­tion tar­get, and finan­cial tight­en­ing through the exchange rate and ris­ing risk spreads on finan­cial assets,” she said, accord­ing to the Jour­nal, which said she made the com­ments on Mon­day.

    The remarks by Brainard and Dud­ley fol­low a speech Mon­day by Fed Vice Chair­man Stan­ley Fis­ch­er in which he dis­cussed the impli­ca­tions for U.S. growth of tur­moil in finan­cial mar­kets and uncer­tain­ty over Chi­na.

    “If these devel­op­ments lead to a per­sis­tent tight­en­ing of finan­cial con­di­tions, they could sig­nal a slow­ing in the glob­al econ­o­my that could affect growth and infla­tion in the Unit­ed States,” Fis­ch­er said. “But we have seen sim­i­lar peri­ods of volatil­i­ty in recent years that have left lit­tle per­ma­nent imprint on the econ­o­my.”

    ...

    “Investors have cut the prob­a­bil­i­ty they see of the Fed rais­ing rates at its next meet­ing in March to about 12 per­cent from 50 per­cent this time last month, accord­ing to pric­ing in fed-funds futures, which also sig­nal that investors don’t ful­ly expect a rate hike until next year.”
    We’ll see if the Fed fol­lows through with its pre­dict­ed sequence of rate hikes through­out the year, but it does­n’t look like the mar­kets are expect­ing it. And nei­ther is the Fed itself strong­ly pre­dict­ing that full 1 per­cent rate hike over the course of 2016 giv­en the caveats two of its mem­bers just issued.

    But if the US or glob­al econ­o­my does slow down sig­nif­i­cant­ly with­out a sig­nif­i­cant drop in large cor­po­rate prof­its, don’t for­get to ask Gold­man Sach­s’s ques­tion. Of course, don’t for­get that even if we do see sus­tained cor­po­rate prof­its in the face of an eco­nom­ic slow­down, it’s just one of the many con­tem­po­rary phe­nom­e­na that should raise the same ques­tion.

    Posted by Pterrafractyl | February 3, 2016, 10:04 pm
  4. John Kasich, the gov­er­nor of Ohio and pas­sen­ger of the 2016 GOP Pres­i­den­tial Clown Car, has a rather strange prob­lem fac­ing his pres­i­den­tial ambi­tions accord­ing to the arti­cle below. It’s the kind of prob­lem that one would think would actu­al­ly be a solu­tion in a pres­i­den­tial race if the world was­n’t crazy: So it turns out that part of what’s hold­ing back GOP pri­ma­ry sup­port for John Kasich is that lib­er­als like him:

    The New York Times
    The Upshot
    Part of John Kasich’s Prob­lem: Lib­er­als Like Him

    Toni Monkovic
    FEB. 8, 2016

    Our read­ers seem to like John Kasich. Lib­er­al pun­dits and edi­to­r­i­al board writ­ers in New Hamp­shire tend to like him, too. Lib­er­als and mod­er­ates in New Hamp­shire, who are plen­ti­ful and who are allowed to vote in the pri­ma­ry of their choos­ing if they are not reg­is­tered with a par­ty, also seem to have a soft spot for him.

    All of this is not near­ly as help­ful as some peo­ple might think.

    Mr. Kasich, accord­ing to recent polling, has a chance to place well in the Repub­li­can race in New Hamp­shire on Tues­day. He’s com­ing off a sol­id debate per­for­mance Sat­ur­day night, one in which Mar­co Rubio stum­bled. If he fin­ish­es sec­ond to Don­ald Trump — which would mean a first-place fin­ish among estab­lish­ment rivals — he might even get a boom­let of atten­tion and a boost in the polls.

    But none of it is expect­ed to mat­ter. Why? Our read­ers offer a clue below. (And there’s plen­ty more of the love­fest here.)

    React­ing to an arti­cle by Nate Cohn last month on the pos­si­bil­i­ty of a Kasich surge, Bill Neild of Rochester wrote, “Can the Repub­li­cans final­ly be com­ing to their sens­es? Be still my heart.”

    ...

    Some read­ers from Ohio point­ed out that Mr. Kasich, the gov­er­nor of Ohio, is not as mod­er­ate as he is por­trayed. As Ezra Klein of Vox put it in a tweet: “Always amazed that John Kasich, the Paul Ryan of the 90s, is seen as a mod­er­ate squish now. He’s changed a bit, but his par­ty changed more.”

    But Mr. Kasich is wide­ly viewed as the most mod­er­ate and rea­son­able G.O.P. can­di­date by many edi­to­r­i­al boards that are per­ceived as lib­er­al, win­ning most of the news­pa­per endorse­ments in New Hamp­shire as well as those from The Boston Globe and The New York Times.

    In the 2012 cycle, Jon Hunts­man said he “trust­ed sci­en­tists on glob­al warm­ing”; he was also endorsed by The Globe; he won a solid­ly impres­sive 17 per­cent of the vote in the New Hamp­shire pri­ma­ry. And he went nowhere. Few pri­maries have as many mod­er­ate vot­ers as New Hampshire’s does.

    Mr. Kasich’s tim­ing is sim­i­lar­ly poor. Speak­ing sun­ni­ly of bipar­ti­san coop­er­a­tion, he seems lost in anoth­er era. Not only do con­ser­v­a­tives not trust lib­er­als in these polar­ized times, but they also bare­ly seem to trust fel­low con­ser­v­a­tives who want to work with lib­er­als. There’s a rea­son Ted Cruz men­tions Chuck Schumer every chance he can get when talk­ing about Mr. Rubio.

    An NBC/Wall Street Jour­nal sur­vey last month showed Mr. Kasich fin­ish­ing with the 10th-worst score out of 11 can­di­dates, ahead only of Rick San­to­rum, when Repub­li­can respon­dents were asked which can­di­dates they could not sup­port.

    An arti­cle in the con­ser­v­a­tive web­site Red­State called Mr. Kasich the “lib­er­al fla­vor of the day.” Anoth­er car­ried the head­line: “The Repub­li­can for Peo­ple Who Hate Repub­li­cans.”

    Being viewed as some­one who will con­sort with the ene­my — and Times read­ers may qual­i­fy as the ene­my — is a non­starter when many Repub­li­cans feel betrayed by their own lead­ers for mak­ing deals with Democ­rats, and for not “win­ning” any­more.

    A recent arti­cle on Boston.com point­ed to a 2013 study by the Dart­mouth pro­fes­sor Kyle Dropp and the M.I.T. pro­fes­sor Christo­pher War­shaw that said “vot­ers are more like­ly to sup­port a can­di­date that receives an endorse­ment from a like-mind­ed group, while polit­i­cal endorse­ments from groups indi­vid­u­als dis­like makes them less like­ly to sup­port a can­di­date.”

    So that endorse­ment from The Times?

    “If you want­ed to be help­ful, NYT Edit Board,” David Frum, a con­ser­v­a­tive colum­nist for The Atlantic, wrote in a Twit­ter mes­sage, “you’d denounce John Kasich as a threat to all you hold most dear.”

    “If you want­ed to be help­ful, NYT Edit Board...you’d denounce John Kasich as a threat to all you hold most dear.”
    That appears to be pret­ty cogent advise from David Frum, espe­cial­ly if “vot­ers are more like­ly to sup­port a can­di­date that receives an endorse­ment from a like-mind­ed group, while polit­i­cal endorse­ments from groups indi­vid­u­als dis­like makes them less like­ly to sup­port a can­di­date.”

    But beyond being help­ful to Kasich, trash­ing him as a right-wing lunatic that’s only bare­ly less insane than the rest of Clown Car peers is hon­est and accu­rate too. If the guy was­n’t in favor of the Oba­macare Med­ic­aid expan­sion (while still push­ing for the repeal of the rest of Oba­macare) it would be dif­fi­cult to make any dis­tinc­tions between Kasich and the rest of the pack at all.

    So, in the spir­it of being help­ful, here’s one more rea­son why Kasich is not even remote­ly a “mod­er­ate”: John Kasich is an eco­nom­ic lunatic. Tell every GOP pri­ma­ry vot­er. It’s help­ful:

    The New York Times
    The Con­science of Lib­er­al

    Hard Mon­ey Men

    Paul Krug­man

    Feb 8, 2016 4:28 pm

    So what will hap­pen in NH tomor­row? I have no idea. We must dis­pel with this notion that any­one has the slight­est idea what they are doing. How­ev­er, there seems to be a real pos­si­bil­i­ty for one thing that seemed unlike­ly before the RubiOS bug man­i­fest­ed itself: that John Kasich will come in sec­ond on the Repub­li­can side.

    If he does, there will be an out­pour­ing of praise from self-pro­claimed cen­trists, who will declare Kasich the sen­si­ble, respon­si­ble Repub­li­can of their dreams. So let me attempt what will sure­ly be a futile pre­emp­tive strike, and note that on eco­nom­ic pol­i­cy — which sort of mat­ters — Kasich is ter­ri­ble, arguably worse than the rest of the GOP field.

    It’s not just his bal­anced-bud­get fetishism, which would be dis­as­trous in an eco­nom­ic cri­sis. He’s also a hard-mon­ey man.

    Ted Cruz has got­ten some scruti­ny, although not enough, for his gold­bug­gism. But Kasich, when asked why wages have stag­nat­ed, gave as his num­ber one rea­son “because the Fed­er­al Reserve kept inter­est rates so low” — because this divert­ed invest­ment into stocks, or some­thing. No, it doesn’t make any sense — but it tells you that he is vis­cer­al­ly opposed to mon­e­tary as well as fis­cal stim­u­lus in the face of high unem­ploy­ment.

    So no, Kasich isn’t sen­si­ble. He’s just off the wall in ways that dif­fer in some ways from the GOP main­stream. If he’d been pres­i­dent in 2009-10, we’d have had a full replay of the Great Depres­sion.

    “But Kasich, when asked why wages have stag­nat­ed, gave as his num­ber one rea­son “because the Fed­er­al Reserve kept inter­est rates so low” — because this divert­ed invest­ment into stocks, or some­thing. No, it doesn’t make any sense — but it tells you that he is vis­cer­al­ly opposed to mon­e­tary as well as fis­cal stim­u­lus in the face of high unem­ploy­ment.”
    Yep, the decades of US wage stag­na­tion is due to the low Fed­er­al Reserve inter­est rates of recent years and the US should have appar­ent­ly done what the euro­zone did back in 2011, and turned a reces­sion into a depres­sion out of desire to avoid those nasty low rates. That seems like the kind of batsh#t insan­i­ty it would be real­ly help­ful for Kasich’s sup­port­ers to let GOP pri­ma­ry vot­ers know about.

    And if that does­n’t work, there’s plen­ty more help where that came from...

    Posted by Pterrafractyl | February 9, 2016, 8:56 am
  5. Paul Krug­man has a pair of recent posts that high­light one of the dynam­ics in the bond mar­kets that’s going to be increas­ing­ly inter­est­ing, and some­what omi­nous, dynam­ic to watch as glob­al eco­nom­ic con­di­tions con­tin­ue to tread water:
    First, if you look at what’s hap­pen­ing in the sov­er­eign bond mar­kets, which at the time of Krug­man’s post had the US, Ger­man, Japan­ese, and Swiss 10 year bonds yield­ing 1.74%, 0.20%, ‑0.04%, and ‑0.37%, respec­tive­ly, what you’re basi­cal­ly see­ing is signs of near-pan­ic. Near-pan­ic that indi­cates that “the mar­kets” “are expect­ing very weak economies and pos­si­bly defla­tion for years to come, if not full-blown cri­sis”:

    The New York Times
    The Con­science of a Lib­er­al

    Bonds on the Run

    Paul Krug­man
    Feb 9, 2016 12:32 pm

    While we obsess over domes­tic pol­i­tics — not that there’s any­thing wrong with that, since a lot depends on whether the next leader of the world’s most pow­er­ful nation is a racist xeno­phobe, a sin­is­ter theo­crat, an emp­ty suit, or all of the above — some­thing scary is going on in finan­cial mar­kets, where bond prices in par­tic­u­lar are indi­cat­ing near-pan­ic.

    I know, Paul Samuel­son famous­ly quipped that the stock mar­ket had pre­dict­ed nine of the last five reces­sions; the wis­dom of crowds is often over­rat­ed. Still, bond mar­kets are a bit less flighty than stocks, and also more close­ly tied to the eco­nom­ic out­look. (A weak econ­o­my has mixed effects on stocks — low prof­its but also low inter­est rates — while it has an unam­bigu­ous effect on bonds.) What plung­ing rates tell us is that mar­kets are expect­ing very weak economies and pos­si­bly defla­tion for years to come, if not full-blown cri­sis.

    Among oth­er things, such a world would be a very bad place into which to elect a mem­ber of a par­ty that has spent the past 7 years inveigh­ing against both fis­cal and mon­e­tary stim­u­lus, and has learned noth­ing from the utter fail­ure of its pre­dic­tions to come true.

    “Among oth­er things, such a world would be a very bad place into which to elect a mem­ber of a par­ty that has spent the past 7 years inveigh­ing against both fis­cal and mon­e­tary stim­u­lus, and has learned noth­ing from the utter fail­ure of its pre­dic­tions to come true.”
    That’s a pret­ty good rea­son to avoid a GOP pres­i­den­cy in 2016. But we can’t avoid GOP-ish eco­nom­ic think­ing glob­al­ly, as is evi­dence by the euro­zone’s con­tin­ued com­mit­ment to far-right aus­ter­i­ty doc­trines. And it’s that rel­a­tive diver­gence between the US’s eco­nom­ic per­for­mance (which is only par­tial­ly crip­pled by the influ­ence of the GOP) and the euro­zone’s per­for­mance (which is dom­i­nat­ed by the aus­ter­i­ty-focused far-right eco­nom­ic thought ema­nat­ing from Berlin) that cre­ates the kind of glob­al macro­eco­nom­ic sit­u­a­tion where “the mar­ket” can very rea­son­ably expect the US’s eco­nom­ic recov­ery to con­tin­ue to out­pace Europe’s for years to come.

    And as Krug­man points out below, that dif­fer­ence in mar­ket expec­ta­tions between the US and Euro­pean economies can result in a mon­e­tary tight­en­ing that’s anal­o­gous to a Fed rate hike sim­ply as a con­se­quence of “the mar­ket” expect­ing a lot more future rate hikes by the Fed vs the ECB. For instance, while the Fed has only raised rates once since Decem­ber, by some met­rics the finan­cial con­di­tions in the US had already tight­ened over the past year the equiv­a­lent of mul­ti­ple Fed 0/25% rate yikes before the Fed offi­cial­ly raised rates, sim­ply as a con­se­quence of the mar­ket expect­ing endur­ing dif­fer­ences in both the poli­cies and eco­nom­ic per­for­mances between US and Europe for years to come:

    The New York Times
    The Con­science of a Lib­er­al

    Strong Dol­lar Blues

    Feb 15, 2016 7:34 am
    Paul Krug­man

    Gavyn Davies joins the cho­rus of those wor­ried that the Fed is in denial about its inter­est-rate mis­step:

    It is human nature that they are reluc­tant to admit that their deci­sion to raise rates in Decem­ber was a mis­take.

    But he adds a pos­si­bly deep­er rea­son, fail­ure to think suf­fi­cient­ly about the inter­na­tion­al side:

    But I sus­pect that some­thing deep­er is going on. The FOMC may be under­es­ti­mat­ing the need to off­set the major dol­lar shock that is cur­rent­ly hit­ting the econ­o­my.


    Two thoughts. First, there’s a close although not per­fect match between what’s going on now and what I warned about a year ago:

    So, what’s actu­al­ly hap­pen­ing? The dol­lar is ris­ing a lot, which sug­gests that mar­kets regard the rel­a­tive rise in US demand as a fair­ly long-term phe­nom­e­non – which in turn should mean that a lot of the rise in US demand ends up ben­e­fit­ing oth­er coun­tries. In oth­er words, the strong dol­lar prob­a­bly is going to be a major drag on recov­ery.

    And there’s an even clos­er match to the wor­ries Lael Brainard expressed about glob­al impacts back in Octo­ber:

    Over the past year, a feed­back loop has trans­mit­ted mar­ket expec­ta­tions of pol­i­cy diver­gence between the Unit­ed States and our major trade part­ners into finan­cial tight­en­ing in the U.S. through exchange rate and finan­cial mar­ket chan­nels. Thus, even as liftoff is com­ing into clear­er view ahead, by some esti­mates, the sub­stan­tial finan­cial tight­en­ing that has already tak­en place has been com­pa­ra­ble in its effect to the equiv­a­lent of a cou­ple of rate increas­es.

    This not-quite-dis­sent sure sounds pret­ty pre­scient now, doesn’t it?

    “Over the past year, a feed­back loop has trans­mit­ted mar­ket expec­ta­tions of pol­i­cy diver­gence between the Unit­ed States and our major trade part­ners into finan­cial tight­en­ing in the U.S. through exchange rate and finan­cial mar­ket chan­nels. Thus, even as liftoff is com­ing into clear­er view ahead, by some esti­mates, the sub­stan­tial finan­cial tight­en­ing that has already tak­en place has been com­pa­ra­ble in its effect to the equiv­a­lent of a cou­ple of rate increas­es.”
    Keep in mind that the per­son Krug­man is quot­ing there, Lael Brainard, is a mem­ber of the Fed­er­al Reserve Board of Gov­er­nors and that quote was part of a Fed ‘not-quite-dis­sent’ spilling into pub­lic. And as Krug­man notes at the end, it’s cer­tain­ly look­ing like a pret­ty pre­scient not-quite-dis­sent at this point. Unfor­tu­nate­ly, it’s also look­ing like that pre­scient dis­sent is poised to get a lot more pre­scient:

    The Finan­cial Times
    Four signs anoth­er euro­zone finan­cial cri­sis is loom­ing

    The mar­kets are say­ing they are los­ing faith in Draghi’s pledge to do ‘what­ev­er it takes’

    Wolf­gang Mun­chau Wolf­gang Mün­chau
    Last updat­ed: Feb­ru­ary 15, 2016 9:57 am

    The rout in Euro­pean finan­cial mar­kets last week was a water­shed event. What we wit­nessed was not nec­es­sar­i­ly the begin­nings of a bear mar­ket in equi­ties or an uncer­tain har­bin­ger of a future reces­sion. What we saw — at least here in Europe — is the return of the finan­cial cri­sis.

    Ver­sion 2.0 of the euro­zone cri­sis may look less fright­en­ing than the orig­i­nal in some respects but it is worse in oth­ers. The bond yields are not quite as high as they were then. The euro­zone now has a res­cue umbrel­la in place. The banks have low­er lev­els of lever­age.

    ...

    The mar­kets are send­ing us four spe­cif­ic mes­sages. The first and most impor­tant is the return of the tox­ic twins: the inter­ac­tion between banks and their sov­er­eigns. Last week’s crash in bank share prices coin­cid­ed with an increase in bond yields in the eurozone’s periph­ery. The pat­tern is sim­i­lar to what hap­pened dur­ing 2010-12. The sov­er­eign bond yields have not quite reached the same dizzy heights, though Portugal’s 10-year yields are almost 4 per cent.

    The com­bi­na­tion of high bond yields, expan­sion­ary fis­cal poli­cies, per­sis­tent­ly high pub­lic and pri­vate sec­tor debt and low growth rates is clear­ly un­sustainable. Italy’s posi­tion may be bet­ter than Portugal’s but it is still not sus­tain­able. Ital­ian 10-year yields rose to more than 1.7 per cent; Ger­man yields are a lit­tle over 0.2 per cent. The gap, or the spread, is the met­ric of stress in the sys­tem, which is ris­ing again.

    The finan­cial mar­kets are telling us that they are los­ing faith in Mario Draghi’s pledge of 2012 when he promised to do “what­ev­er it takes” to defend the mem­ber states of the euro­zone against a spec­u­la­tive attack. With this promise the ECB pres­i­dent end­ed the first phase of the euro­zone cri­sis, but did so at a cost. The urgency to resolve the under­ly­ing struc­tur­al prob­lems sud­den­ly dis­ap­peared.

    The sec­ond mes­sage is that Europe’s bank­ing union has failed. The bank­ing union the EU end­ed up with was a foul com­pro­mise: joint bank super­vi­sion and a joint res­o­lu­tion regime, but no deposit insur­ance and no gov­ern­ment back­stop to bail out fail­ing lenders.

    It is no coin­ci­dence that bank share prices col­lapsed just as the Euro­pean Bank Recov­ery and Res­o­lu­tion Direc­tive entered into full force. The direc­tive sets out a com­mon bail-in mech­a­nism for a fail­ing bank. Italy applied this law last year in the bailout of four region­al banks, caus­ing loss­es to bond­hold­ers. Investors in oth­er banks fear that they, too, may be bailed in. One of the rea­sons why investors in Deutsche Bank began to pan­ic last week has been the large amount of con­tin­gent con­vert­ible bonds (cocos) issued by the bank. If the bank were to run into trou­ble these would con­vert into equi­ties, and be imme­di­ate­ly wiped out if a res­o­lu­tion pro­ce­dure were to kick in.

    The third mes­sage is the mar­ket ex­pectations of future infla­tion have suf­fered a per­ma­nent shift. The ECB is tak­ing mar­ket-based esti­mates of future infla­tion seri­ous­ly — per­haps too seri­ous­ly. Its favourite met­ric is an infla­tion rate for a hori­zon of five to 10 years away from today. That mea­sure last week fell to its all-time low of just over 1.4 per cent. It is telling us that the mar­kets no longer believe that the ECB will hit its infla­tion tar­get of less than 2 per cent even in the long run.

    The fourth mes­sage is that the mar­kets fear neg­a­tive inter­est rates. This is because the vast major­i­ty of Europe’s 6,000 banks are old-fash­ioned sav­ings and loans: they take in deposits and lend them out. The banks would nor­mal­ly adjust the rates they offer to their savers in line with the rates the ECB charges them, main­tain­ing a prof­it mar­gin between the two. But if the ECB impos­es a neg­a­tive rate on the banks, this no longer works. If the banks im­posed neg­a­tive rates on sav­ings accounts, small savers would take their mon­ey and run. The banks could, of course, reduce their reserves at the cen­tral bank and lend the mon­ey instead. Or they could invest in risky secu­ri­ties. But that prospect is not nec­es­sar­i­ly reas­sur­ing to bank share­hold­ers either, espe­cial­ly if they do not see good lend­ing and invest­ment oppor­tu­ni­ties.

    Look­ing back, the car­di­nal error com­mit­ted by the Euro­pean author­i­ties was the fail­ure in 2008 to clean up their bank­ing sys­tem after the col­lapse of Lehman Broth­ers. This was the orig­i­nal sin. Many oth­er mis­takes sub­se­quent­ly com­pound­ed the prob­lem: pro-cycli­cal fis­cal aus­ter­i­ty, the ECB’s mul­ti­ple pol­i­cy fail­ures and the fail­ure to cre­ate a prop­er bank­ing union. It is inter­est­ing that every sin­gle one of these deci­sions was ulti­mate­ly the result of pres­sure brought by Ger­man pol­i­cy­mak­ers.

    “Look­ing back, the car­di­nal error com­mit­ted by the Euro­pean author­i­ties was the fail­ure in 2008 to clean up their bank­ing sys­tem after the col­lapse of Lehman Broth­ers. This was the orig­i­nal sin. Many oth­er mis­takes sub­se­quent­ly com­pound­ed the prob­lem: pro-cycli­cal fis­cal aus­ter­i­ty, the ECB’s mul­ti­ple pol­i­cy fail­ures and the fail­ure to cre­ate a prop­er bank­ing union. It is inter­est­ing that every sin­gle one of these deci­sions was ulti­mate­ly the result of pres­sure brought by Ger­man pol­i­cy­mak­ers.
    Yep, and it’s also inter­est­ing to note that all of these dis­as­trous deci­sions were root­ed in a quest to lim­it cross-bor­der lia­bil­i­ties in the event of a cri­sis. Sure, such deci­sions made future crises more like­ly, but the lia­bil­i­ties for Europe’s pay­mas­ter are at least lim­it­ed so the pres­sure to resolve the cri­sis is sad­ly lim­it­ed too. And it’s that kind of warped intra-euro­zone dynam­ic that makes the broad­er glob­al mar­ket dynam­ic dis­cuss above, where expec­ta­tions of future diver­gences between the US and Europe trans­late into pre­emp­tive de fac­to mon­e­tary tight­en in the US, the kind of dynam­ic we should prob­a­bly expect going for­ward. And that, unfor­tu­nate­ly, might involve a lot of de fac­to tight­en­ing.

    Posted by Pterrafractyl | February 15, 2016, 11:17 pm
  6. Remem­ber how the ECB total­ly botched its cred­i­bil­i­ty back in Decem­ber when Mario Draghi first estab­lished high expec­ta­tions for a big stim­u­lus pack­age, only to have it pared back fol­low­ing a rare pub­lic spat with Ger­many? Well, they may have done it again. But sort of in the oppo­site way: the ECB just declared a rate cut and stim­u­lus pack­age that’s actu­al­ly big­ger than the mar­ket expected...but that was­n’t all it declared. Draghi also declared that this was is prob­a­bly the last of the rate cuts, unless the sit­u­a­tion dete­ri­o­rates sig­nif­i­cant­ly. So the over­all mes­sage to the mar­kets was some­thing along the lines of ‘we’ll do what­ev­er it takes to make things bet­ter, but only if things get sig­nif­i­cant­ly worse’.

    So the ECB pulled out the metaphor­i­cal cen­tral bank ‘bazooka’ today and shot itself in the foot:

    Reuters

    ECB’s Draghi sig­nals end to rate cuts, over­shad­ows stim­u­lus

    FRANKFURT | By Bal­azs Koranyi and Francesco Canepa
    Thu Mar 10, 2016 11:52pm IST

    Euro­pean Cen­tral Bank chief Mario Draghi unleashed a bold eas­ing pack­age on Thurs­day, cut­ting rates and expand­ing asset buys, but undid the very stim­u­lus he hoped to achieve by sug­gest­ing there would be no fur­ther cuts.

    That com­ment drove the euro to unwant­ed gains against the dol­lar and prompt­ed crit­i­cism from some that Draghi, who already in Decem­ber dis­ap­point­ed mar­kets by under-deliv­er­ing, had once again botched his com­mu­ni­ca­tion.

    Seek­ing to res­ur­rect cor­po­rate activ­i­ty and invest­ments, the ECB said it would start buy­ing cor­po­rate debt and even offered to pay banks for lend­ing to com­pa­nies in the ail­ing euro area in a bid to kick­start growth and stave off the threat of defla­tion.

    The Bank has sought for three years to push infla­tion up to its tar­get lev­el, spend­ing 700 bil­lion euros on asset buys in the past year alone. But it has been to no avail amid weak invest­ment, high unem­ploy­ment, high debt and pro­duc­tive slack in the econ­o­my.

    Draghi announced that ECB staff had slashed its infla­tion and growth expec­ta­tions, pre­dict­ing that even with fresh stim­u­lus, price growth will not reach its tar­get for years to come and growth will slow.

    Mar­kets ini­tial­ly cheered the pack­age but reversed course after Draghi hint­ed the ECB was done cut­ting rates and ruled out a tiered deposit rate struc­ture — a sys­tem of mul­ti­ple rates already used in Switzer­land and Japan to encour­age lend­ing to com­pa­nies while also pun­ish­ing banks that hold too much cash.

    “Rates will stay low, very low, for a long peri­od of time and well past the hori­zon of our pur­chas­es,” Draghi told his reg­u­lar post-Coun­cil news con­fer­ence.

    “From today’s per­spec­tive and tak­ing into account the sup­port of our mea­sures to growth and infla­tion, we don’t antic­i­pate that it will be nec­es­sary to reduce rates fur­ther.”

    The euro reversed course on Draghi’s com­ments and firmed close to 1.5 per­cent EUR. Euro zone stock fell by 1.5 per­cent and euro area bond yields soared — all effec­tive­ly tight­en­ing mon­e­tary con­di­tions and so going counter to Draghi’s aims.

    Deliv­er­ing above expec­ta­tions, the ECB raised month­ly asset buys to 80 bil­lion euros from 60 bil­lion euros and cut its main refi­nanc­ing rate to zero from 0.05 per­cent. It also cut its deposit rate by 10 basis points to ‑0.4 per­cent and shaved the mar­gin­al lend­ing rate — used by banks to bor­row from the ECB overnight — to 0.25 per­cent from 0.3 per­cent.

    “Where the ECB dis­ap­point­ed was on the for­ward-look­ing sig­nal on rates and on its infla­tion tar­get,” JPMor­gan ana­lyst Greg Fuze­si said, argu­ing that the ECB should have argued for tiered deposit rates as a way to pro­tect bank earn­ings while giv­ing the ECB room to cut fur­ther.

    “This is dis­ap­point­ing as the ECB could have added a dif­fer­ent spin, empha­siz­ing that a tiered deposit rate sys­tem lim­its the direct cost to banks and that the tar­get­ed long-term refi­nanc­ing oper­a­tions (TLTRO) help banks even fur­ther by pro­vid­ing very cheap fund­ing,” Fuze­si added.

    Nicholas Spiro of Lau­res­sa Advi­so­ry con­sul­tan­cy head­lined his com­men­tary “Draghi mis­fires his bazooka”.

    “For a cen­tral banker who prides him­self on his ver­bal inter­ven­tion skills, it beg­gars belief that Mr Draghi would com­mit the faux pas of rul­ing out fur­ther cuts in inter­est rates any time soon,” he said.

    The ultra cheap four-year TLTRO loans would be offered at an inter­est rate of zero but banks lend­ing out more than a pre­scribed amount will get a reduc­tion worth up to the deposit rate, cur­rent­ly at minus 0.4 per­cent.

    “A bank that is very active in grant­i­ng loans to the real econ­o­my can bor­row more than a bank that con­cen­trates on oth­er activ­i­ties,” Draghi not­ed.

    Skep­ti­cal Ger­mans, the biggest oppo­nents of ECB pol­i­cy eas­ing, quick­ly jumped on Draghi, argu­ing that the side effects of the stim­u­lus could spoil the gains.

    “The ECB’s deci­sions are a heavy bur­den for savers and insur­ers,” Markus Soed­er, the min­is­ter for finance in Bavaria, one of Ger­many’s biggest states.

    “They are a guide for finan­cial spec­u­la­tion. The aver­age wage earn­ers and savers will have to pay for the Euro­pean mon­e­tary pol­i­cy. Under Mario Draghi, the ECB is more Wall Street than Bun­des­bank,” he added.

    Draghi answered such crit­i­cisms part­ly in Ger­man, argu­ing: “Sup­pose we had embraced the ‘nein zu allem’ (‘no to every­thing’) pol­i­cy strat­e­gy? We deem that the coun­ter­fac­tu­al would have been a dis­as­trous defla­tion.”

    But he acknowl­edged the lim­i­ta­tions of neg­a­tive rates and said any future moves would like­ly have to focus on oth­er, non-con­ven­tion­al mea­sures.

    “Does it mean that we can go as neg­a­tive as we want with­out hav­ing any con­se­quences on the bank­ing sys­tem? The answer is no,” he said.

    ...

    “The euro reversed course on Draghi’s com­ments and firmed close to 1.5 per­cent EUR. Euro zone stock fell by 1.5 per­cent and euro area bond yields soared — all effec­tive­ly tight­en­ing mon­e­tary con­di­tions and so going counter to Draghi’s aims.
    Yep, the ECB pulled out the mon­e­tary-loos­en­ing bazooka and man­aged to tight­en the mon­e­tary con­di­tions. Oops.

    At the same time, keep in mind that Draghi did leave open the pos­si­bil­i­ty that for future rate cuts under wors­en­ing cir­cum­stance. What he most­ly did was push the focus of future actions onto dif­fer­ent types of cen­tral bank tools that don’t involve a rate cut, such as the mod­i­fied TLTRO super cheap loans that will pay inter­est to banks that lend more aggres­sive­ly:

    ...
    The ultra cheap four-year TLTRO loans would be offered at an inter­est rate of zero but banks lend­ing out more than a pre­scribed amount will get a reduc­tion worth up to the deposit rate, cur­rent­ly at minus 0.4 per­cent.
    ...

    And the ECB did announce high­er month­ly QE pur­chas­es and did cut rates fur­ther, so it’s not quite the case that the ECB has embraced the Bun­des­bank’s view and just decid­ed to aban­doned Draghi’s 2012 “do what­ev­er it takes” pledge. But that’s all part of what made the “prob­a­bly no more future cuts” talk so odd. By announc­ing a bias towards no more future rate, Draghi imme­di­ate­ly under­min­ing all those mon­e­tar­i­ly-loos­en­ing actions the ECB just announced! As one observ­er put it, “For a cen­tral banker who prides him­self on his ver­bal inter­ven­tion skills, it beg­gars belief that Mr Draghi would com­mit the faux pas of rul­ing out fur­ther cuts in inter­est rates any time soon.” Even when the ECB over­shoots expec­ta­tions, which it did with the stim­u­lus mea­sures just announced today, it simul­ta­ne­ous­ly promis­es to erode expec­ta­tions for the future. Which, at this point, we should have prob­a­bly expect­ed.

    Posted by Pterrafractyl | March 10, 2016, 3:26 pm
  7. ECB Pres­i­dent Mario Draghi had a lit­tle chitchat with Euro­pean lead­ers on Thurs­day, dur­ing which when he made one more hope­less­ly attempt to one of the best ways to allow the ECB to change its pol­i­cy of QE and ultra-low rates is for the euro­zone gov­ern­ments to raise demand. It was anoth­er seem­ing­ly hope­less plea that empha­sized the impor­tance of “struc­tur­al reform” as key to jump-start­ing the euro­zone econ­o­my and increas­ing that demand. And, of course, “struc­tur­al reforms” is always a code-word for more neolib­er­al poli­cies and aus­ter­i­ty.

    At the same time, the way Draghi put it, the struc­tur­al reforms should be “most­ly dri­ven to raise the lev­el of demand, pub­lic invest­ments and low­er tax­es”, and while you could prob­a­bly inter­pret that lan­guage as code for the “expan­sion­ary aus­ter­i­ty” the­o­ry of “struc­tur­al reforms” where aus­ter­i­ty some­how leads to increased demand, there’s no rea­son you could­n’t also inter­pret Draghi’s as a mut­ed call for an end to aus­ter­i­ty. Maybe Mario isn’t as crazy as his pol­i­cy-straight­jack­et sug­gests. That prob­a­bly was­n’t the case but you got to dream. Espe­cial­ly in the midst of an intractable pol­i­cy night­mare:

    Reuters

    Draghi tells EU lead­ers he can’t fix the econ­o­my on his own

    BRUSSELS | By Gabriela Baczyn­s­ka and Francesco Guaras­cio

    Fri Mar 18, 2016 12:26pm EDT

    Euro­pean Cen­tral Bank Pres­i­dent Mario Draghi warned Euro­pean lead­ers on Thurs­day that mon­e­tary pol­i­cy alone would not be enough to jump-start the econ­o­my and that gov­ern­ments need­ed to do their job by push­ing through struc­tur­al reforms.

    “I made clear that even though mon­e­tary pol­i­cy has been real­ly the only pol­i­cy dri­ving the recov­ery in the last few years, it can­not address some basic struc­tur­al weak­ness­es of the euro zone econ­o­my,” Draghi told reporters.

    “For that you need struc­tur­al reforms, most­ly dri­ven to raise the lev­el of demand, pub­lic invest­ments and low­er tax­es. Even more impor­tant­ly, one needs clar­i­ty on the future of our ... mon­e­tary union,” he said after speak­ing to EU lead­ers.

    Euro­pean lead­ers will dis­cuss fur­ther inte­gra­tion of the economies and pol­i­cy-mak­ing of the 19 coun­tries shar­ing the euro at a sum­mit in June.

    Ideas for fur­ther inte­gra­tion, put for­ward by the Euro­pean Com­mis­sion, France and Italy, include a joint deposit-guar­an­tee scheme, a euro zone finance min­is­ter and a joint trea­sury.

    Among the most con­tro­ver­sial ideas is the joint issuance of debt, for instance to help finance reforms or to counter the effects of troughs in the busi­ness cycle. Ger­many strong­ly oppos­es the joint deposit-guar­an­tee plan as well as any joint debt issuance.

    ...

    “The econ­o­my is recov­er­ing, albeit with a low­er momen­tum. We see signs of improve­ments in var­i­ous parts of the econ­o­my — part­ly in the labor mar­ket, part­ly in the cred­it mar­ket,” Draghi said.

    “But the risks remain on the down­side and some of these risks have been inten­si­fy­ing, start­ing with ear­ly Decem­ber last year,” he said.

    Draghi said he expect­ed ECB inter­est rates to stay low, or to be even low­er than now, for a con­sid­er­able peri­od.

    “The Gov­ern­ing Coun­cil expects the inter­est rates to remain at present, or at low­er lev­els ... for an extend­ed peri­od of time and well beyond the end of our asset pur­chase pro­gram,” he told reporters, repeat­ing his remarks from last week.

    In Decem­ber, the ECB extend­ed the dura­tion of its asset pur­chase pro­gram, under which the bank buys euro zone gov­ern­ment bonds to inject more cash into the slow-grow­ing econ­o­my, by six months until March 2017 — “or beyond” as Draghi said.

    “The Gov­ern­ing Coun­cil expects the inter­est rates to remain at present, or at low­er lev­els ... for an extend­ed peri­od of time and well beyond the end of our asset pur­chase pro­gram”
    Yes, more rate cuts just might be need­ed. It’s good the ECB’s pres­i­dent cleared that up. And let’s hope he clears up his state­ments about demand-dri­ving struc­tur­al reforms in the future by point­ing out that across the board fis­cal stim­u­lus and an end to aus­ter­i­ty is required for Europe:

    ...
    “For that you need struc­tur­al reforms, most­ly dri­ven to raise the lev­el of demand, pub­lic invest­ments and low­er tax­es. Even more impor­tant­ly, one needs clar­i­ty on the future of our ... mon­e­tary union,” he said after speak­ing to EU lead­ers.
    ...

    Rais­ing demand and low­er­ing tax­es. The either calls for a con­tin­u­a­tion of the cur­rent neolib­er­al Art Laf­fer-style sup­ply-side garbage aus­ter­i­ty pol­i­cy response of cut­ting tax­es and reg­u­la­tions and hop­ing that some­how fix­es things despiteor it’s a call for an actu­al fis­cal stim­u­lus via “pub­lic invest­ments” and who knows what else. “Pub­lic invest­ments” can be quite loose­ly inter­pret­ed if you dream, although that might require some­thing like the joint issuance of debt and, as we saw, debt-pool­ing isn’t like­ly to hap­pen:

    ...
    Ideas for fur­ther inte­gra­tion, put for­ward by the Euro­pean Com­mis­sion, France and Italy, include a joint deposit-guar­an­tee scheme, a euro zone finance min­is­ter and a joint trea­sury.

    Among the most con­tro­ver­sial ideas is the joint issuance of debt, for instance to help finance reforms or to counter the effects of troughs in the busi­ness cycle. Ger­many strong­ly oppos­es the joint deposit-guar­an­tee plan as well as any joint debt issuance.
    ...

    Yeah, debt-pool­ing does­n’t look par­tic­u­lar­ly like­ly despite the fact that it’s prob­a­bly nec­es­sary for the euro­zone to allow for reg­u­lar fis­cal trans­fers from rich to poor states (via poor­er gov­ern­ment issu­ing debt from the col­lec­tive debt pool) and actu­al­ly func­tion.

    So it’s not real­ly clear what the ECB or euro­zone can do to turn things around since the rules allow for no devi­a­tion from the cur­rent slow death-spi­ral that is basi­cal­ly only being fought by the ECB. Hope­ful­ly those rules allow for “heli­copter drop”-style direct cash dis­tri­b­u­tions. You got to dream:

    Reuters

    ECB could cut rates again if econ­o­my fails to pick up — Praet

    Busi­ness | Fri Mar 18, 2016 8:18am GMT
    FRANKFURT

    The Euro­pean Cen­tral Bank can cut inter­est rates again if the euro zone’s econ­o­my fails to pick up and, under extreme cir­cum­stances, it might even con­sid­er print­ing mon­ey and giv­ing it out direct­ly to peo­ple, its chief econ­o­mist said in a news­pa­per inter­view pub­lished on Fri­day.

    The ECB upset investors last week when its pres­i­dent, Mario Draghi, said he did not expect fur­ther rate cuts, rais­ing ques­tions about his pledge in 2012 to do “what­ev­er it takes” to save the euro.

    Mar­kets have since sta­bilised and Draghi said on Thurs­day ECB rates would stay at cur­rent or low­er lev­els for a long time.

    The ECB’s chief econ­o­mist, Peter Praet, said rates have not reached their low­er lim­it, even if the ECB is aware of the neg­a­tive impact that its neg­a­tive deposit facil­i­ty, effec­tive­ly a charge on banks’ deposits with the ECB, has on lenders’ mar­gins.

    ...

    Praet added that if “neg­a­tive shocks should wors­en the out­look or if financ­ing con­di­tions should not adjust in the direc­tion and to the extent that is nec­es­sary to boost the econ­o­my and infla­tion, a rate reduc­tion remains in our armoury”.

    Asked whether the ECB could sim­ply print mon­ey and dis­trib­ute it to euro zone cit­i­zens, an extreme form of pol­i­cy eas­ing first envis­aged by U.S. econ­o­mist Mil­ton Fried­man using the metaphor of a fly­ing heli­copter drop­ping mon­ey, Praet said this was a pos­si­bil­i­ty, at least in the­o­ry.

    “Yes, all cen­tral banks can do it,” Praet said. “You can issue cur­ren­cy and you dis­trib­ute it to peo­ple. That’s heli­copter mon­ey.”

    He cau­tioned, how­ev­er: “The ques­tion is, if and when is it oppor­tune to have recourse to that sort of instru­ment, which is real­ly an extreme sort of instru­ment.”

    The ECB cut all three of its main inter­est rates last week and announced it would buy cor­po­rate bonds issued by euro zone com­pa­nies that have an invest­ment grade rat­ing and are not banks.

    Asked whether eli­gi­ble issuers might include Ger­man car mak­er Volk­swa­gen (VOWG_p.DE) while it strug­gles with the diesel emis­sion scan­dal, Praet said: “Yes, as long as they have invest­ment grade. You have cor­po­rate bonds in oth­er sec­tors too, such as util­i­ties, insur­ance, telecom­mu­ni­ca­tions, ener­gy.”

    He added: “We could buy some­thing that is close to the index, but exclud­ing banks, so that we avoid price dis­tor­tions in the cor­po­rate bond mar­ket.”

    “Yes, all cen­tral banks can do it. You can issue cur­ren­cy and you dis­trib­ute it to peo­ple. That’s heli­copter mon­ey.”
    Well that’s good to know that the ECB’s chief Econ­o­mist knows that all cen­tral banks can issue mon­ey if they want to. Or have to. Because while the ECB might not want to engage in such unortho­dox mea­sures, it might have to. So it’s good to know that the ECB knows that it can do what it prob­a­bly has to do. Peter Praet’s admis­sion cer­tain­ly indi­cate that a heli­copter drop is soon, but have the ECB’s chief econ­o­mist pub­licly acknowl­edge that the “ques­tion is, if and when is it oppor­tune to have recourse to that sort of instru­ment, which is real­ly an extreme sort of instru­ment,” is like a giant break­through. Because the euro­zone is weird.

    So let’s hope for heli­copter drops! In the mean time, it sounds like Volk­swa­gen has a heli­copter hov­er­ing over it :

    ...

    The ECB cut all three of its main inter­est rates last week and announced it would buy cor­po­rate bonds issued by euro zone com­pa­nies that have an invest­ment grade rat­ing and are not banks.

    Asked whether eli­gi­ble issuers might include Ger­man car mak­er Volk­swa­gen (VOWG_p.DE) while it strug­gles with the diesel emis­sion scan­dal, Praet said: “Yes, as long as they have invest­ment grade. You have cor­po­rate bonds in oth­er sec­tors too, such as util­i­ties, insur­ance, telecom­mu­ni­ca­tions, ener­gy.”

    ...

    That’s good ECB news for the Peo­ple’s Auto­mo­bile. Crime does­n’t always pay, so it helps to pay for that crime dur­ing a peri­od when your cen­tral bank is offer­ing to buy your cor­po­rate debt. And that’s exact­ly what the ECB should be doing, for VW and all sort oth­er cor­po­ra­tions poten­tial­ly. At least the ECB should do that if that’s what’s required. But if it’s required, it’s only because the ECB’s fis­cal pol­i­cy is an aus­ter­ian night­mare. It did­n’t have to be this bad. But it is. So let’s hope the ECB is busy work­ing on the Peo­ple’s Heli­copter.

    Posted by Pterrafractyl | March 19, 2016, 1:16 am
  8. This is rather excit­ing. Now that the ECB’s chief econ­o­mist, Peter Praet, floaght­ed the idea that the ECB could engage in ‘heli­copter drops’ of direct cash injec­tions into the euro­zone econ­o­my, Bun­des­bank chief Jens Wei­d­mann felt the need to shoot the idea down. That Wei­d­mann would that went such an idea is brought up isn’t at all sur­pris­ing. But the fact that he actu­al­ly had to shoot it down at all was­n’t some­thing one would expect giv­en the his­to­ry of the euro­zone thus far. So at least in terms of the ideas Jens Wei­d­mann feels the need to shoot down, we’re mak­ing progress:

    Reuters

    UPDATE 1-‘Helicopter mon­ey’ is not man­na from heav­en, Bun­des­bank chief says

    (Adds details)

    Davos | Sat Mar 19, 2016 6:03am EDT

    “Heli­copter mon­ey”, or free cash dished out to cit­i­zens in a bid to stim­u­late spend­ing and infla­tion, would end up cost­ing euro zone states and there­fore tax­pay­ers, the head of Ger­many’s cen­tral bank said in an inter­view with Ger­man news­pa­pers.

    After years of increas­ing­ly des­per­ate attempts to kick-start growth, some bankers and finance offi­cials fear pol­i­cy­mak­ers are run­ning out of effec­tive ammu­ni­tion and future stim­u­lus efforts could even be harm­ful. Econ­o­mists say “heli­copter mon­ey” would be a last resort.

    “Heli­copter mon­ey is not man­na that falls from heav­en — it would actu­al­ly rip huge holes in cen­tral bank bal­ance sheets,” Bun­des­bank Pres­i­dent Jens Wei­d­mann told Ger­man media group Funke’s region­al news­pa­pers.

    “Ulti­mate­ly euro zone states and there­fore tax­pay­ers would end up hav­ing to bear the costs because there would­n’t be cen­tral bank prof­its for a long time,” said Wei­d­mann, who is also on the Euro­pean Cen­tral Bank’s (ECB) deci­sion-mak­ing Gov­ern­ing Coun­cil.

    The cen­tral bank’s chief econ­o­mist Peter Praet had said in a news­pa­per inter­view pub­lished on Fri­day that, under extreme cir­cum­stances, such a pol­i­cy could be con­sid­ered by the euro zone cen­tral bank.

    Wei­d­mann, who has long been crit­i­cal of some of the ECB’s extra­or­di­nary pol­i­cy moves, said a deci­sion on giv­ing mon­ey to cit­i­zens was high­ly politi­cized and should be han­dled by gov­ern­ments and par­lia­ments.

    “That would be noth­ing oth­er than com­plete­ly mix­ing mon­e­tary pol­i­cy and fis­cal pol­i­cy and would not be com­pat­i­ble with cen­tral bank inde­pen­dence,” he said.

    Mon­e­tary pol­i­cy is not a panacea or a sub­sti­tute for nec­es­sary reforms in indi­vid­ual coun­tries and does not solve Europe’s growth prob­lems, Wei­d­mann added.

    On the ECB’s deci­sion last week to cut its main inter­est rate to zero, Wei­d­mann said: “I have repeat­ed­ly point­ed out that the effect of ultra-loose mon­e­tary pol­i­cy gets weak­er the longer it lasts. At the same time it’s true that the more you accel­er­ate, the big­ger the risks and side effects become.”

    ...

    Asked about the option of a joint Euro­pean deposit guar­an­tee scheme, Wei­d­mann said it would like­ly only gloss over eco­nom­ic prob­lems in the euro zone rather than solve them.

    Wei­d­mann said the risks on bank bal­ance sheets would first need to be reduced. Lenders should also no longer load up on bonds from their home coun­tries so much because the link between banks and states had act­ed like a “fire accel­er­ant” dur­ing the bloc’s cri­sis.

    Asked whether Ger­many was doing enough to main­tain its strong eco­nom­ic posi­tion, Wei­d­mann said an age­ing and declin­ing pop­u­la­tion meant more women and old­er peo­ple should work, while there should be invest­ment in edu­ca­tion and infra­struc­ture — but not at the expense of sol­id pub­lic finances.

    “In gen­er­al, the growth trend in Ger­many is low and will decrease fur­ther. This is where smart eco­nom­ic pol­i­cy is called for,” he said.

    “Heli­copter mon­ey is not man­na that falls from heav­en — it would actu­al­ly rip huge holes in cen­tral bank bal­ance sheets,”
    Unless, of course, it worked in stim­u­lat­ing the econ­o­my. In that case the ECB’s bal­ance sheet should be large­ly fine. And, real­ly, who cares. It’s a cen­tral bank of a large chunk of one of the wealth­i­est con­ti­nents on the plan­et. If the ECB has a bal­ance sheet prob­lem, it’s psy­cho­log­i­cal.

    But Wei­d­mann is unfor­tu­nate­ly cor­rect in his assess­ment fo the futil­i­ty of “heli­copter drops” under cur­rent con­di­tions, because if euro­zone gov­ern­ments remain on a path of aus­ter­i­ty and a neolib­er­al race to the bot­tom as the only “struc­tur­al reform” pos­si­ble, the heli­copter cash is only going to be used to help stop the Titan­ic from sink­ing in the hopes of buy­ing time for the euro­zone to divorce itself from junk eco­nom­ic the­o­ries. After all, when a fis­cal stim­u­lus has a mul­ti­pli­er greater than one (per­haps around 1.5), it’s not quite man­na from heav­en, but it’s close.

    So let’s hope the euro­zone comes to the real­iza­tion that not only can it chan­nel eco­nom­ic “man­na from heav­en”, but that it prob­a­bly has to do so to hold itself togeth­er. Soon. Or, you know, it could go down Wei­d­man­n’s pre­scribed pol­i­cy path:

    ...
    Asked whether Ger­many was doing enough to main­tain its strong eco­nom­ic posi­tion, Wei­d­mann said an age­ing and declin­ing pop­u­la­tion meant more women and old­er peo­ple should work, while there should be invest­ment in edu­ca­tion and infra­struc­ture — but not at the expense of sol­id pub­lic finances.

    ...

    Gut retire­ment and edu­ca­tion and infra­struc­ture. As long as it helps keep finances sol­id. Just keep the heli­copters and man­na at bay.

    Posted by Pterrafractyl | March 19, 2016, 7:37 pm
  9. The increas­ing talk of “heli­copter cash” as a pos­si­ble ECB pol­i­cy should all else fail to raise infla­tion from defla­tion­ary lev­els is indeed a pos­i­tive pol­i­cy devel­op­ment for the euro­zone; pos­i­tive both in terms of the pos­si­bil­i­ty that the pol­i­cy will actu­al­ly be put in place as well and as a sign of a will­ing­ness to tru­ly do “what­ev­er it takes” to ful­fill the ECB’s price sta­bil­i­ty man­date. It might be an inad­e­quate man­date, but it’s bet­ter than noth­ing. So if the ECB is will­ing to at least pub­lic spec­u­late about “heli­copter mon­ey” as a last resort and the idea is at least some­what seri­ous­ly dis­cussed in pol­i­cy-mak­ing cir­cles, things could be worse for the euro­zone. It’s a low bar.

    At the same time, it’s worth keep­ing in mind that one of the unfor­tu­nate aspects of of the “heli­copter mon­ey” debate is that the idea of using cen­tral banks or trea­suries to *poof* cre­ate mon­ey is still talked about as a last resort and not, say, a sec­ond resort after tax­es if there’s some use­ful pub­lic spend­ing that needs to be done. In oth­er words, if the use­ful eco­nom­ic activ­i­ty, whether pub­licly or pri­vate­ly financed, was seen as the true health of an econ­o­my, as opposed to deficits or sur­plus­es, it’s entire­ly pos­si­ble that heli­copter cash to indi­vid­u­als or the gov­ern­ment itself should be a reg­u­lar aspect of mod­ern economies. If the down sides of heli­copter cash are out­weighed by the upsides, and such poli­cies don’t actu­al­ly auto­mat­i­cal­ly result in Weimar-style hyper­in­fla­tion but can instead be intel­li­gent­ly man­aged, then it’s prob­a­bly worth pon­der­ing the pos­si­bil­i­ty that eco­nom­ic myths are ruin­ing every­one’s econ­o­my:

    The Inde­pen­dent

    ‘Hand­bag eco­nom­ics’ and the oth­er myths that dri­ve aus­ter­i­ty
    Neolib­er­al politi­cians believe that that mon­ey can only be bor­rowed into exis­tence, but that’s not the case — and this fic­tion is forc­ing gov­ern­ments to resort to dras­tic mea­sures

    Mary Mel­lor
    27 March 2016, 11:54 Lon­don

    The basic jus­ti­fi­ca­tion for aus­ter­i­ty is that the pub­lic sec­tor must “live with­in its means”. There is a plau­si­bil­i­ty in the claim that the state is like a house­hold that should not spend more than it earns, but this kind of ‘hand­bag eco­nom­ics’ draws its anal­o­gy from an entire­ly myth­i­cal fam­i­ly bud­get. We already know that real house­holds do not live with­in their means; if they did, the econ­o­my would grind to a halt. Mod­ern pros­per­i­ty is built upon debt, and the main aim of eco­nom­ic recov­ery is to get the banks lend­ing again to both house­holds and busi­ness­es.

    It is a myth, and it is prop­ping up aus­ter­i­ty pol­i­tics. Anoth­er myth is that there is a short­age of mon­ey. This implies that there is a fixed pool of mon­ey, or some oth­er exter­nal fac­tor lim­it­ing sup­ply. That might be true if mon­ey was made of a scarce resource, such as pre­cious met­al, but mod­ern mon­ey is main­ly held as bank records: only 3 per cent of mod­ern mon­ey cir­cu­lates as cash. The amount of mon­ey in exis­tence depends on com­mer­cial, polit­i­cal and per­son­al choic­es.

    ...

    If you ask the ques­tion, ‘who can cre­ate our cur­ren­cy’, most peo­ple would answer that the state cre­ates mon­ey and that the com­mer­cial sec­tor cir­cu­lates it. Yet that gen­er­al under­stand­ing con­tra­dicts the polit­i­cal notion that our econ­o­my func­tions well because the pri­vate sec­tor “makes mon­ey”, while the pub­lic sec­tor must on no account be seen to “print mon­ey”. So, where does mon­ey come from?

    It is now broad­ly acknowl­edged that banks cre­ate mon­ey by mak­ing loans. The myth that they only act as a link between savers and bor­row­ers has been exposed for what it is. The fail­ure to recog­nise the dan­gers of banks’ capac­i­ty to cre­ate new mon­ey through lend­ing lay behind the 2008/09 finan­cial cri­sis and its last­ing lega­cy. Debt piled upon debt, until the whole sys­tem gave way.

    What res­cued the finan­cial sec­tor was a com­bi­na­tion of states spend­ing mon­ey and cen­tral banks issu­ing new mon­ey through loans and pol­i­cy mea­sures such as quan­ti­ta­tive eas­ing (using new mon­ey to buy finan­cial assets from the finan­cial sec­tor). The aus­ter­i­ty myth that dam­aged the pub­lic sec­tor most sig­nif­i­cant­ly was the claim that states could not cre­ate mon­ey, they could only bor­row from the bank­ing sec­tor.

    There is no rea­son a pub­lic mon­e­tary author­i­ty should treat the pub­lic sec­tor as if it were a pri­vate bor­row­er. The ide­ol­o­gy of neolib­er­al ‘hand­bag eco­nom­ics’ ensures that the pub­lic capac­i­ty to cre­ate mon­ey must only be exer­cised through the finan­cial sec­tor; that is, mon­ey can only be bor­rowed into exis­tence. This leads to aus­ter­i­ty, for two rea­sons.

    The col­lapse in debt issue dur­ing a cri­sis leads to a short­age of mon­ey which shrinks the com­mer­cial sec­tor and thus the tax take, while at the same time increas­ing pres­sure on pub­lic wel­fare. The assump­tion that the sur­plus pub­lic expen­di­ture need­ed to res­cue both peo­ple and banks is being “bor­rowed” in some way dri­ves up over­all pub­lic debt. Even where mon­ey was clear­ly cre­at­ed to buy back pub­lic debt through quan­ti­ta­tive eas­ing, the debt was not can­celled. It still sits on the gov­ern­ment books, jus­ti­fy­ing ever increas­ing aus­ter­i­ty poli­cies.

    Aus­ter­i­ty will not dri­ve out deficit spend­ing, despite all the pain, and the threat of defla­tion is lead­ing to rad­i­cal mea­sures. Years of vir­tu­al­ly free mon­ey, and even neg­a­tive inter­est rates, are not reviv­ing flag­ging economies. Mea­sures such as ‘heli­copter mon­ey’ — cre­at­ing new mon­ey and giv­ing it direct­ly to the peo­ple or the gov­ern­ment to spend — are being con­sid­ered just to put mon­ey back into people’s pock­ets. Ideas such as the uni­ver­sal basic income are being test­ed through pilot projects, for exam­ple in Utrecht. What is impor­tant is that this should be new mon­ey, not based on tax or pub­lic bor­row­ing.

    We are repeat­ed­ly told that states need to “bal­ance the books”, in the sense that they must lim­it expen­di­ture to the tax take. The pub­lic capac­i­ty to cre­ate mon­ey shows that this is not the case. And as gov­ern­ment expen­di­ture occurs along­side tax pay­ments, there is always uncer­tain­ty about the final bal­ance. Rather than tax take deter­min­ing pub­lic income, the lev­el of avail­able tax mon­ey can be seen as deter­mined by the lev­el of pub­lic spend­ing. Rather than aus­ter­i­ty, the bal­ance between expen­di­ture and tax can be high, cre­at­ing pub­lic wealth in terms of goods and ser­vices as well as com­mer­cial pros­per­i­ty.

    Aus­ter­i­ty reflects an ide­ol­o­gy that sees the pub­lic sec­tor as a drain upon the activ­i­ties of the pri­vate sec­tor. And that is the biggest myth of all. It is the pub­lic capac­i­ty to cre­ate and cir­cu­late pub­lic wealth, and guar­an­tee a pub­lic cur­ren­cy, that sus­tains com­merce. We need an eco­nom­ic pol­i­cy that under­stands that.

    “We are repeat­ed­ly told that states need to “bal­ance the books”, in the sense that they must lim­it expen­di­ture to the tax take. The pub­lic capac­i­ty to cre­ate mon­ey shows that this is not the case. And as gov­ern­ment expen­di­ture occurs along­side tax pay­ments, there is always uncer­tain­ty about the final bal­ance. Rather than tax take deter­min­ing pub­lic income, the lev­el of avail­able tax mon­ey can be seen as deter­mined by the lev­el of pub­lic spend­ing. Rather than aus­ter­i­ty, the bal­ance between expen­di­ture and tax can be high, cre­at­ing pub­lic wealth in terms of goods and ser­vices as well as com­mer­cial pros­per­i­ty.”
    Remem­ber when the GOP was threat­en­ing to default on the nation­al debt by not rais­ing the debt-ceil­ing back in Jan­u­ary 2013? Hav­ing the US Trea­sury mint the “Tril­lion dol­lar coin” was one of the real pos­si­ble fall­back plans Paul Krug­man was advo­cat­ing to avoid that default. Gov­ern­ments real­ly can just print cash. And what if it’s pos­si­ble that it’s often the least harmful/most help­ful thing to do, but we don’t do it because of var­i­ous mon­ey myths? Should­n’t we feel very sil­ly at that point?

    So let’s hope not just the ECB but the rest of the world’s cen­tral banks start ask­ing more meta ques­tions about the nature of mon­ey and the pos­si­ble role pub­lic mon­ey cre­ation can play in rou­tine pub­lic pol­i­cy, espe­cial­ly dur­ing times of defla­tion. The big risk is clear­ly stu­pid pub­lic pol­i­cy that wastes resources. But if the big fear is over uti­liz­ing the pub­lic capac­i­ty to cre­ate cash for pub­lic spend­ing is that the pub­lic will just go on an out of con­trol worth­less spend­ing spree that real­ly does lead to hyper­in­fla­tion, which can’t be ruled out, would­n’t that indi­cate that the biggest “struc­tur­al reform” required for that hypo­thet­i­cal soci­ety is more time for the pub­lic to study the issues and greater demo­c­ra­t­ic over­sight of pub­lic spend­ing so it does­n’t go on a spend­ing spree and can arrive at a sane pub­lic con­sen­sus instead? In oth­er words, if we replaced the aus­ter­i­ty with more, high­er qual­i­ty democ­ra­cy, and per­haps some heli­copter ash when need­ed, we real­ly might have a ‘free lunch’ just sit­ting there wait­ing to be eat­en. Bet­ter pol­i­cy real­ly can pay for itself if it’s actu­al­ly bet­ter.

    Or we could just stick with the same ol’ menu.

    Posted by Pterrafractyl | March 27, 2016, 9:56 pm
  10. When Ger­many’s finance min­is­ter Wolf­gang Schaeu­ble voiced his oppo­si­tion to any sort of coor­di­nat­ed stim­u­lus by the G20 nations it was both unsur­pris­ing and sur­pris­ing. It was unsur­pris­ing giv­en Schaeuble’s his­to­ry of call­ing for coor­di­nat­ed G20 aus­ter­i­ty in recent years. But still a bit sur­pris­ing giv­en the fact that many of those G20 economies could real­ly use some fis­cal stim­u­lus at the moment and also hap­pen to be major Ger­man export mar­kets:

    The New York Times

    Ger­man Econ­o­my, Once Europe’s Leader, Now Looks Like Lag­gard

    By JACK EWING
    APRIL 5, 2016

    FRANKFURT — Chi­na is cut­ting back on min­ing machin­ery as its econ­o­my slips. The Unit­ed Arab Emi­rates and oth­er Mid­dle East­ern coun­tries are no longer awash in oil mon­ey, putting lux­u­ry car brands at risk. Rus­sia, still fac­ing West­ern sanc­tions, can­not buy as much high-tech ener­gy equip­ment.

    The down­shift in the emerg­ing mar­kets is leav­ing Ger­many vul­ner­a­ble — and, by exten­sion, Europe.

    As many busi­ness­es in the region strug­gled just to tread water in recent years, Ger­man com­pa­nies pros­pered by sell­ing the goods and tech­nol­o­gy that emerg­ing coun­tries need­ed to become more mod­ern economies. As they did, Germany’s strength served as a coun­ter­weight to the eco­nom­ic malaise, finan­cial tur­moil and Greek debt dra­ma that dragged down many Euro­pean coun­tries.

    Now, Ger­many, which accounts for the largest share of the Euro­pean econ­o­my, is look­ing like the lag­gard. Com­pared with the economies of oth­er coun­tries in the region, Germany’s has been more deeply teth­ered to emerg­ing mar­kets. And the polit­i­cal cli­mate is only adding to the uncer­tain­ty, as Ger­many deals with a wave of migrants and a poten­tial exit of Britain from the Euro­pean Union.

    Against that back­drop, the country’s export engine is sput­ter­ing, while busi­ness con­fi­dence is erod­ing.

    Dur­ing the good times, the Ger­man man­u­fac­tur­er Eick­hoff Berg­bautech­nik sold 20 machines a year as Chi­na dug ever more coal mines to feed its ener­gy-hun­gry fac­to­ries. The machines, shear­er load­ers that use giant spin­ning claws to scrape coal or potash from under­ground seams, sell for up to 4 mil­lion euros, or about $4.6 mil­lion apiece.

    Last year, the com­pa­ny sold just eight. With prof­it drop­ping, Eick­hoff laid off about 10 per­cent of its local work force of 300.

    “We are going from an unbe­liev­able boom to a down phase,” said Karl-Heinz Rieser, the man­ag­ing direc­tor of Eick­hoff.

    Less tor­rid sales at Eick­hoff and hun­dreds of oth­er mid­size Ger­man exporters trans­late into slow­er over­all eco­nom­ic growth. Sup­pli­ers of min­ing equip­ment gen­er­at­ed exports of €6.2 bil­lion in 2012, accord­ing to the Ger­man Engi­neer­ing Fed­er­a­tion, an indus­try group. Last year, those exports fell to €3.5 bil­lion, a trend that has played out in a num­ber of indus­tries.

    As exports have slipped, the mood in Ger­many has turned glum.

    Pes­simists out­num­bered opti­mists in Feb­ru­ary for the first time since late 2014, accord­ing to the sur­vey of busi­ness man­agers by the Ifo Insti­tute in Munich, which is con­sid­ered a reli­able pre­dic­tor of the growth. Although there was a small uptick in March, man­u­fac­tur­ers remain wary. If con­fi­dence remains weak, they are like­ly to cut back plans to invest in new equip­ment or hire peo­ple, prompt­ing growth to slow.

    A weak­er Ger­man econ­o­my would have polit­i­cal con­se­quences for Europe.

    As much as oth­er Euro­peans like to bash the Ger­mans, it is doubt­ful that the euro­zone could have sur­vived its recent debt cri­sis with­out Germany’s check­book. Ger­many con­tributes more than a quar­ter of the financ­ing for the Euro­pean Sta­bil­i­ty Mech­a­nism, the new bailout fund used to pre­vent the total col­lapse of coun­tries like Greece.

    For pro­duc­ers around the euro­zone, Ger­man shop­pers also filled the void left by strug­gling Spaniards, Ital­ians and Por­tuguese. When auto sales entered a deep slump begin­ning in 2009, Ger­mans bought not only Volk­swa­gens and Mer­cedeses but also Ital­ian Fiats and French Renaults.

    “It’s the biggest mar­ket in Europe,” Thier­ry Koskas, the exec­u­tive vice pres­i­dent of sales at Renault, said in an inter­view. “Due to the weight of this mar­ket, it’s big vol­ume for us and it’s impor­tant.”

    The chang­ing eco­nom­ic pic­ture also threat­ens to under­cut the influ­ence of Chan­cel­lor Angela Merkel of Ger­many.

    The country’s finan­cial strength has made it the dom­i­nant polit­i­cal pow­er. Though pro­test­ers in Greece were known to burn effi­gies of Ms. Merkel over her harsh aus­ter­i­ty poli­cies, she helped impose a mea­sure of dis­ci­pline among bick­er­ing euro­zone lead­ers.

    But there has been a tonal shift in recent months.

    Aus­tria and oth­er coun­tries have defied Ms. Merkel’s wish­es on how to han­dle the influx of refugees from Syr­ia. While she want­ed to pre­serve Europe’s open­ness, her coun­ter­parts insti­tut­ed bor­der con­trols.

    “Germany’s polit­i­cal stand­ing in Europe has declined in the last num­ber of quar­ters from a posi­tion of undis­put­ed hege­mo­ny just to one where they are the most impor­tant coun­try,” said Jacob Funk Kirkegaard, a senior fel­low at the Peter­son Insti­tute for Inter­na­tion­al Eco­nom­ics in Wash­ing­ton. “It has been more dif­fi­cult for Berlin to herd the cats.”

    Dur­ing the last decade, Ger­many has been some­thing of a shop­ping mall for devel­op­ing coun­tries. If a coun­try was mech­a­niz­ing its farms, Ger­man com­pa­nies like Claas made the trac­tors and grain har­vesters. If a coun­try need­ed a fac­to­ry to pro­duce liq­uid oxy­gen or one to bot­tle beer, Ger­man com­pa­nies like Linde or Kro­nes could design, equip and build the whole plant.

    Soar­ing demand from Chi­na, as well as places like Rus­sia, Brazil and Kaza­khstan, made Ger­many near­ly imper­vi­ous to the woes of its neigh­bors. While more than one-fifth of the work force in Spain is job­less, Ger­man unem­ploy­ment has fall­en to only 4.3 per­cent, low­er than that of the Unit­ed States. When Eick­hoff, the min­ing com­pa­ny, had to lay off work­ers, many of them found jobs at sis­ter com­pa­nies.

    Chi­na has been par­tic­u­lar­ly good to Ger­man automak­ers, and there­fore to the whole coun­try. Autos are Germany’s biggest export and one of the most impor­tant sources of jobs. Chi­na last year became the biggest mar­ket for the Ger­man sports car mak­er Porsche, sur­pass­ing the Unit­ed States for the first time.

    But there are signs of trou­ble. Growth in the Chi­nese auto mar­ket is expect­ed to be around 4 per­cent this year, half what it was last year. “We will con­tin­ue to grow,” Detlev von Plat­en, the head of sales for Porsche, said in an inter­view. “But not as quick­ly as before.”

    The Mid­dle East is anoth­er boom mar­ket turned trou­bled. Civ­il war in Syr­ia and plung­ing oil prices have hurt the con­fi­dence and buy­ing pow­er of coun­tries like Kuwait.

    Ger­man exports to oil-pro­duc­ing coun­tries fell 7 per­cent last year. The decline hurt sales of com­pa­nies like Voith, based in Hei­den­heim in south­ern Ger­many, which pro­duces motors used to pump large quan­ti­ties of oil in refiner­ies or drilling sites. “Cus­tomers in these indus­tries are post­pon­ing or stop­ping invest­ments,” said Dirk Böck­en­hoff, a spokesman for Voith.

    No mat­ter where Ger­man exec­u­tives look, they strug­gle to iden­ti­fy any region that is boom­ing the way that Chi­na did until recent­ly.

    Growth in the Unit­ed States is look­ing mixed. Brazil is in the midst of a severe reces­sion. And Rus­sia has suf­fered from low com­mod­i­ty prices and polit­i­cal ten­sion with the West.

    Iran pos­es an oppor­tu­ni­ty, since sanc­tions have been lift­ed and the coun­try has been open­ing up. Ger­man com­pa­nies are rush­ing to exploit the new mar­ket. The engi­neer­ing and elec­tron­ics giant Siemens last month signed an agree­ment to deliv­er elec­tric­i­ty-gen­er­at­ing equip­ment to Map­na, an Iran­ian pow­er and trans­porta­tion con­glom­er­ate.

    But Iran, with an econ­o­my small­er than Turkey’s, is not big enough to sup­port Ger­man growth. And Ger­man com­pa­nies will prob­a­bly have to adapt to a growth rate that is clos­er to the mediocre euro­zone aver­age of about 1 per­cent — mak­ing it a mem­ber of the pack rather than the leader.

    ...

    “No mat­ter where Ger­man exec­u­tives look, they strug­gle to iden­ti­fy any region that is boom­ing the way that Chi­na did until recent­ly.”
    A coor­di­nat­ed G20 stim­u­lus pro­gram, where all of the world’s biggest economies are stim­u­lat­ing togeth­er so as to min­i­mize ‘beg­gar thy neigh­bor’s appetite for imports’ dynam­ics and max­i­mize the poten­tial syn­er­gy, sure would be use­ful for an econ­o­my focused on exports. Or, bar­ring some­thing that big, a EU or euro­zone-wide fis­cal stim­u­lus pro­gram could prob­a­bly do the trick. But that would anger the Ordolib­er­al­ism gods. Oh well. On to the next dis­as­ter it seems:

    The Week

    Why the euro­zone is still head­ed for total dis­as­ter

    Ryan Coop­er

    April 8, 2016

    For a few months in 2015, U.S. writ­ers paid rapt atten­tion to euro­zone pol­i­tics.

    It seemed like tiny Greece was going to force Euro­pean elites to final­ly fix some of the crip­pling defects with the cur­ren­cy area. Left-wing Syriza, led by Prime Min­is­ter Alex­is Tsipras and Finance Min­is­ter Yanis Varo­ufakis, lev­eled a chal­lenge to the Ger­man-dom­i­nat­ed euro­zone grandees. With the eco­nom­ic sit­u­a­tion in Greece worse than the Great Depres­sion — very obvi­ous­ly the result of elite-imposed aus­ter­i­ty — and much of the rest of the cur­ren­cy area doing only some­what bet­ter, they demand­ed an end to aus­ter­i­ty and a return to growth and shared pros­per­i­ty.

    Alas, the hopes of inter­na­tion­al­ist left­ists world­wide were crushed.

    Elites, main­ly through the Euro­pean Cen­tral Bank hold­ing a gun to the head of the Greek bank­ing sys­tem, forced Syriza to capit­u­late and give up their reform pro­gram even after they won a pop­u­lar ref­er­en­dum. Varo­ufakis resigned, Tsipras seemed con­tent serv­ing as a local admin­is­tra­tor for an eco­nom­ic empire run by euro­zone tech­nocrats, and pol­i­tics set­tled down.

    How­ev­er, the lull is only tem­po­rary. The polit­i­cal force of anti-aus­ter­i­ty is still there, just wait­ing to be picked up by a suf­fi­cient­ly bold polit­i­cal move­ment. If the tech­nocrats are lucky, it will be a bet­ter-pre­pared left-wing move­ment. If they aren’t, it will be fas­cists.

    Varo­ufakis is out with a new book try­ing to pave a way out of the con­tin­u­ing cri­sis, and by his account the var­i­ous euro­zone grandees were total­ly unin­ter­est­ed in any sub­stan­tive argu­ment. Instead near­ly all “dis­cus­sion” was cen­tered around how to coerce Greece into accept­ing tech­no­crat dom­i­na­tion:

    Pre­arranged com­mu­niques, pre­fab­ri­cat­ed votes, a sol­id coali­tion of finance min­is­ters around [Ger­man Finance Min­is­ter Wolf­gang] Schäu­ble that was impen­e­tra­ble to ratio­nal debate; this was the order to the day and, more often, of the long, long night. Not once did I get the feel­ing that my inter­locu­tors were at all inter­est­ed in Greece’s eco­nom­ic recov­ery while we were dis­cussing the eco­nom­ic poli­cies that should be imple­ment­ed in my coun­try. [The Guardian]

    It’s a some­what self-serv­ing nar­ra­tive, but it rings true. Basi­cal­ly every major eco­nom­ic pol­i­cy deci­sion made in the euro­zone since 2010 has been utter­ly deranged by aca­d­e­m­ic stan­dards, and the ensu­ing dis­as­ters have arrived exact­ly as pre­dict­ed. If some­one want­ed an exam­ple of man­age­ment by a bunch of irra­tional incom­pe­tents immune to ratio­nal argu­ment, the euro­crats could scarce­ly have done a bet­ter job if they tried.

    What’s more, the euro­zone has only bare­ly improved since Syriza was cud­geled into sub­mis­sion in 2015. Euro­zone GDP growth briefly nudged a piti­ful 0.6 per­cent in ear­ly 2015, and has since fall­en back down to 0.3 per­cent. Unem­ploy­ment in Greece is still over 24 per­cent. In Spain it is near­ly 21 per­cent. In Por­tu­gal it is over 12 per­cent. In Italy it is near­ly 12 per­cent.

    ...

    Even the core of the euro­zone econ­o­my, Ger­many, is now look­ing dis­tinct­ly wind­ed. The devel­op­ing world has been going through an eco­nom­ic rough patch, and so they’re buy­ing a lot less high-qual­i­ty Ger­man exports — a sit­u­a­tion that could con­tin­ue indef­i­nite­ly, as places like Chi­na trans­form from a man­u­fac­tur­ing export-led growth mod­el to a con­sumer-led one. Inci­den­tal­ly, that’s some­thing Ger­many itself could stand to try — its work­ers are among the low­est-paid in Europe, and some domes­tic growth and spend­ing might help quell the elec­toral gains by the Ger­man far right, which has been ener­gized by the over one mil­lion refugees enter­ing the coun­try over the past year. (Will they do this? Haha! Of course not.)

    At any rate, all this is to say that any polit­i­cal-eco­nom­ic struc­ture which can­not mend extreme depres­sion con­di­tions will either reform or col­lapse even­tu­al­ly. The fail­ure of Varo­ufakis’ attempt to con­vince the euro­crats has sim­ply fore­closed one poten­tial route. At this point I would typ­i­cal­ly urge the euro­crats to see sense, but frankly there is no rea­son to expect this. Some future move­ment, per­haps in Spain or Greece, or per­haps even in Ger­many or France, will even­tu­al­ly break the aus­ter­i­ty strait­jack­et, and over­throw euro­crat con­trol. It’s only a mat­ter of time and will.

    “What’s more, the euro­zone has only bare­ly improved since Syriza was cud­geled into sub­mis­sion in 2015. Euro­zone GDP growth briefly nudged a piti­ful 0.6 per­cent in ear­ly 2015, and has since fall­en back down to 0.3 per­cent. Unem­ploy­ment in Greece is still over 24 per­cent. In Spain it is near­ly 21 per­cent. In Por­tu­gal it is over 12 per­cent. In Italy it is near­ly 12 per­cent.
    Yep, despite the tepid growth of recent years, Europe’s Sec­ond Great Depres­sion is still basi­cal­ly in effect. It’s kind of depress­ing.

    At the same time, with the Ger­man econ­o­my now find­ing itself with few­er and few­er sources for export growth, we can’t rule out the pos­si­bil­i­ty that even Berlin will decide to aban­don Europe’s hor­ri­ble fail­ures in aus­ter­i­ty eco­nom­ics. Except, of course, we prob­a­bly can rule that pos­si­bil­i­ty out since the same peo­ple who have demand­ed such mad­ness all along are still in pow­er and are push­ing exact­ly the same aus­ter­ian solu­tions that fueled the cri­sis in the first place. Aus­ter­i­ty may make for hor­ri­ble eco­nom­ic pol­i­cy, but it’s great pol­i­tics for the cred­i­tor-nations in the euro­zone, where the com­part­men­tal­iza­tion of aus­ter­i­ty to the ‘periph­ery’ is now an estab­lished part of the euro­zone social con­tract. The euro might be a shared cur­ren­cy, but it’s one designed to com­part­men­tal­ize the con­se­quences of that shar­ing and it’s not sur­pris­ing that such a ‘fea­ture’ would be high­ly val­ued by the pop­u­la­tions of the nations that most ben­e­fit from that com­part­men­tal­iza­tion. Short­sight­ed and dan­ger­ous, but not sur­pris­ing.

    And until pro-aus­ter­i­ty/pro-defla­tion poli­cies because bad pol­i­tics in Berlin, it’s hard to see what’s going to change that cost/benefit polit­i­cal cal­cu­lus, even with a slow­ing Ger­man econ­o­my. Espe­cial­ly, as the arti­cle below points out, with the rise of far-right AfD par­ty call­ing for an imme­di­ate rise in inter­est rates (osten­si­bly to help Ger­man savers who don’t care if it tanks the over­all econ­o­my) and the Ger­man finan­cial sec­tor strong­ly agree­ing with its new AfD allies:

    Der Spiegel

    Mario Both­ers: Ger­many Takes Aim at the Euro­pean Cen­tral Bank

    Busi­ness and polit­i­cal lead­ers in Ger­many are increas­ing­ly frus­trat­ed with the mon­e­tary poli­cies of Euro­pean Cen­tral Bank head Mario Draghi. Recent­ly, the con­fronta­tion has threat­ened to become dam­ag­ing to the euro zone.

    By Mar­tin Hesse, Ralf Neukirch, René Pfis­ter, Chris­t­ian Reier­mann and Michael Sauga

    April 08, 2016 – 07:04 PM

    There was a time when the Ger­man chan­cel­lor and the head of the Euro­pean Cen­tral Bank had nice things to say about each oth­er. Mario Draghi spoke of a “good work­ing rela­tion­ship,” while Angela Merkel not­ed “broad agree­ment.” Draghi, said Merkel, is extreme­ly sup­port­ive “when it comes to Euro­pean com­pet­i­tive­ness.”

    These days, though, meet­ings between the two most pow­er­ful politi­cians in the euro zone are often no dif­fer­ent than their face-to-face at the most recent sum­mit in Brus­sels. She observed that his forced pol­i­cy of cheap mon­ey is endan­ger­ing the busi­ness mod­el of Ger­many’s Sparkassen sav­ings banks and retire­ment insur­ance com­pa­nies. He snarled back that the sec­tors would sim­ply have to adapt, just as the Amer­i­can finan­cial sec­tor has.

    The alien­ation between Ger­many and the ECB has reached a new lev­el. Back in deutsche mark times, Euro­peans often joked that the Ger­mans “may not believe in God, but they believe in the Bun­des­bank,” as Ger­many’s cen­tral bank is called. Today, though, when it comes to rela­tions between the ECB and the Ger­man pop­u­la­tion, peo­ple are more like­ly to speak of “par­al­lel uni­vers­es.”

    ECB head Draghi does­n’t under­stand why he is get­ting so much resis­tance from the coun­try that has prof­it­ed from the euro more than any oth­er. Yet Ger­mans blame Draghi for minis­cule yields on sav­ings accounts and life/retirement insur­ance poli­cies. Frus­tra­tion is grow­ing.

    Draghih has pushed the prime rate down to zero and now even charges com­mer­cial banks a fee for park­ing their mon­ey at the ECB. He has also bought almost €2 tril­lion worth of bonds from euro-zone mem­ber states, mak­ing the ECB one of the largest state cred­i­tors of all time.

    Dur­ing his most recent appear­ance before the Frank­furt reporter pool, he went even fur­ther. The idea of pump­ing mon­ey direct­ly into the econ­o­my, he said, was a “very inter­est­ing con­cept,” with a heli­copter to dis­trib­ute the mon­ey across the coun­try if nec­es­sary, as econ­o­mists have half-jok­ing­ly rec­om­mend­ed. Doing so is seen as a way of boost­ing the econ­o­my. Ger­man mon­ey being thrown out of a heli­copter: It would be dif­fi­cult to find a more fit­ting image to show peo­ple that the mon­ey they have set aside for retire­ment may soon be worth very lit­tle.

    Pub­lic Rumi­na­tions

    The crit­i­cism of Draghi had already been sig­nif­i­cant, but his pub­lic rumi­na­tions about so-called “heli­copter mon­ey” have mag­ni­fied it to extreme lev­els. Even econ­o­mists that tend to back the ECB, such as Peter Bofin­ger, who is one of Merkel’s eco­nom­ic advi­sors, are now accus­ing Draghi of con­stant­ly “pulling new rab­bits out of the hat.” Lead­ing rep­re­sen­ta­tives of the bank­ing and insur­ance sec­tors are open­ly speak­ing of legal vio­la­tions. And strate­gists with­in Merkel’s gov­ern­ing coali­tion, which pairs her con­ser­v­a­tives with the cen­ter-left Social Democ­rats (SPD), are con­cerned that Draghi is hand­ing the right-wing pop­ulist Alter­na­tive for Ger­many (AfD) yet anoth­er issue where they can score points with the vot­ers. There is hard­ly any oth­er issue that enrages Ger­mans at town meet­ings and polit­i­cal par­ty con­ven­tions as much as the dis­ap­pear­ance of their sav­ings due to the “uncon­ven­tion­al mea­sures” adopt­ed by the ECB in Frank­furt.

    By now, the grow­ing dis­may has been reg­is­tered in the Chan­cellery. Merkel is also crit­i­cal of Draghi’s zero per­cent inter­est pol­i­cy, but she is afraid of mak­ing pub­lic demands that she may not be able to push through. Still, she is con­vinced that Draghi must give greater weight to Ger­man con­cerns, so she has resort­ed to tele­phone con­ver­sa­tions and closed-door meet­ings to make her case.

    Eco­nom­ics Min­is­ter Sig­mar Gabriel, who is also head of the SPD and vice chan­cel­lor, has like­wise refrained from pub­licly crit­i­ciz­ing Draghi. Instead, he says it was the “inac­tion of Euro­pean heads of gov­ern­ment” that has trans­formed the ECB into “a kind of faux eco­nom­ic gov­ern­ment.” But Draghi’s most recent deci­sion to make mon­ey in the euro zone even cheap­er has been heav­i­ly crit­i­cized with­in Gabriel’s Eco­nom­ics Min­istry. “It jeop­ar­dizes the trust of all those who work hard to estab­lish a small degree of pros­per­i­ty or a nest-egg for retire­ment,” says one min­istry offi­cial. “Plus, the cheap mon­ey has­n’t helped get the econ­o­my back on track.”

    Most dan­ger­ous for Draghi, how­ev­er, is the dis­plea­sure from the Ger­man Finance Min­istry. A few weeks ago, Finance Min­is­ter Wolf­gang Schäu­ble warned the ECB head that his ultra-loose mon­e­tary poli­cies could “ulti­mate­ly end in dis­as­ter.” The fact that Schäu­ble said any­thing at all is rather sur­pris­ing, as were the words he chose. Out of respect for the ECB’s inde­pen­dence, finance min­is­ters tend not to com­ment on deci­sions made by the cen­tral bank.

    The Legal Bound­ary

    But Schäu­ble believes Draghi’s course is calami­tous. He is con­cerned that the unchecked cre­ation of mon­ey could lead to new bub­bles on the finan­cial mar­kets. Fur­ther­more, neg­a­tive inter­est rates have a neg­a­tive impact on the prof­it mar­gins of com­mer­cial banks — and part of the ECB’s mis­sion is ensur­ing the sta­bil­i­ty of such banks. Schäu­ble believes that Draghi’s poli­cies cre­ate mis­guid­ed incen­tives for the gov­ern­ments of euro-zone mem­ber states.

    ...

    The Con­cerns of Savers

    Fol­low­ing the dis­as­trous results of the three recent state elec­tions in Ger­many — elec­tions which saw the AfD suc­ceed at the expense of Merkel’s Chris­t­ian Demo­c­ra­t­ic Union (CDU) and Gabriel’s SPD — the gov­ern­ment in Berlin has dif­fer­ent pri­or­i­ties. Par­tic­u­lar­ly among Ger­man con­ser­v­a­tives — a des­ig­na­tion that includes the CDU as well as its Bavar­i­an sis­ter par­ty, the Chris­t­ian Social Union (CSU) — wor­ries are grow­ing that, with the refugee cri­sis abat­ing, the AfD could turn its fury on the ECB. Such a shift could cost con­ser­v­a­tives addi­tion­al vot­ers, par­tic­u­lar­ly since the con­cerns of savers have long been a cen­tral issue for the CDU.

    Con­ser­v­a­tive floor leader Volk­er Kaud­er, a close ally of Merkel’s, has warned against heap­ing too much pres­sure on the ECB. “It was the CDU and the CSU that insist­ed on cen­tral bank inde­pen­dence,” he says. “We should behave accord­ing­ly.”

    But the mood in the par­ty has clear­ly shift­ed. Dur­ing a recent vis­it to his con­stituen­cy, Kaud­er’s deputy, eco­nom­ics expert Michael Fuchs, expe­ri­enced first-hand just how con­cerned vot­ers are about the inter­est-rate issue. One enraged man screamed at him dur­ing an event that Merkel is to blame for the low inter­est rates. Such anger is fer­tile soil for the AfD. “On this issue, it isn’t easy to counter the AfD,” Fuchs says. “The crit­i­cism of the ECB is jus­ti­fied.” Merkel’s coali­tion, he says, “must clear­ly say that it finds Mr. Draghi’s inter­est rate pol­i­cy to be incor­rect. We haven’t been loud enough.”

    That may soon change. The num­ber of par­ty allies join­ing in Fuchs’ cri­tique has been grow­ing in recent weeks. Fol­low­ing a joint meet­ing in Dres­den, con­ser­v­a­tive finance experts from Ger­man state par­lia­ments issued a state­ment say­ing that Draghi’s poli­cies are under­min­ing trust in the com­mon cur­ren­cy. Ralph Brinkhaus, deputy head of the con­ser­v­a­tive par­ty group in Ger­man par­lia­ment, says: “We have to pres­sure the ECB to jus­ti­fy its poli­cies. Oth­er­wise, noth­ing will change.”

    The most point­ed attacks have come from the Bavar­i­an CSU. With the refugee cri­sis hav­ing fad­ed into the back­ground, par­ty head Horst See­hofer has made his oppo­si­tion to Draghi his next major issue. Bavar­i­an Finance Min­is­ter Markus Söder has already set the tone: “The zero-inter­est pol­i­cy is an attack on the assets of mil­lions of Ger­mans, who have placed their mon­ey in sav­ings accounts and in life insur­ance poli­cies,” he says.

    Söder believes that emphat­ic cri­tique of the ECB will bring polit­i­cal ben­e­fits. The ECB may be inde­pen­dent, but it isn’t omnipo­tent, he says. “We need a debate in Ger­many about the erro­neous poli­cies of the ECB,” he says. “The Ger­man gov­ern­ment must demand a change in direc­tion on mon­e­tary pol­i­cy. If things con­tin­ue as they have, it will be a boon for the AfD.” Ahead of a July con­clave of the Bavar­i­an state cab­i­net, Söder has been charged with devel­op­ing ideas for what can be done to counter Draghi’s course.

    See­hofer and his peo­ple aren’t just think­ing about the con­cerns of Ger­man savers. They are also act­ing as lob­by­ists for the finan­cial firms that have their head­quar­ters in the Bavar­i­an cap­i­tal of Munich. Such com­pa­nies are of course pri­mar­i­ly inter­est­ed in their bot­tom lines, but their polit­i­cal argu­ments are sim­i­lar to those of the CSU: They empha­size the inter­ests of Ger­man savers.

    Niko­laus von Bomhard is one of them. Polit­i­cal­ly cor­rect to a fault, but with a deep sen­si­tiv­i­ty to the mood of the peo­ple, Bomhard is the head of glob­al rein­sur­ance giant Munich Re. He recent­ly launched a sav­age attack on the ECB. Because its loose mon­e­tary pol­i­cy has dri­ven up stock and real estate prices, he said, it is pri­mar­i­ly ben­e­fit­ing the wealth­i­est peo­ple in the coun­try. He said it was serv­ing to redis­trib­ute wealth to the upper class­es and it had become impos­si­ble to sit back and say noth­ing. “The peo­ple of Ger­many aren’t stu­pid,” he said, adding that polit­i­cal lead­er­ship was required.

    With the smile of some­one who knows he has the peo­ple on his side, Bomhard also revealed that Munich Re had set aside gold and, recent­ly, also cash in the com­pa­ny’s safes. It is a move that many nor­mal Ger­mans have already made. Accord­ing to bank­ing asso­ci­a­tions, the demand for safes and lock­ers has gone up as peo­ple are appar­ent­ly con­cerned that they may soon have to pay neg­a­tive inter­est rates to their banks, just as com­mer­cial banks must now pay the ECB.

    Bomhard isn’t the only one tar­get­ing the ECB. Allianz Chair­man of the Board Oliv­er Bäte told SPIEGEL in an inter­view not long ago that the ECB is devalu­ing savers’ mon­ey. Georg Fahren­schon, pres­i­dent of the Ger­man Sav­ings Bank Asso­ci­a­tion, warned: If low inter­est rates con­tin­ue, increas­ing num­bers of peo­ple will have to work until they are 70 or even longer. In March, the Asso­ci­a­tion of Ger­man Banks even went so far as to com­mis­sion a sur­vey. The sav­ings morale of Ger­mans, the sur­vey found, is crum­bling under the low inter­est rates dic­tat­ed by the Euro­pean Cen­tral Bank.

    The ori­gins of this wave of rage are not dif­fi­cult to pin­point. There is no oth­er sec­tor that feels the con­se­quences of mon­e­tary pol­i­cy to the degree that insur­ance and bank­ing does. It has a direct effect on their prof­its and, for small­er insur­ance com­pa­nies, threat­ens their very exis­tence.

    Mon­ey in the Mat­tress­es

    It is most­ly life/retirement insur­ance poli­cies that are suf­fer­ing. Insur­ance providers have pri­mar­i­ly invest­ed their cus­tomers’ mon­ey in sov­er­eign bonds. But returns are extreme­ly low, in part because of the mas­sive ECB pur­chas­es of such bonds. Banks, for their part, must accept cer­tain loss­es because they are not able to pass on to their cus­tomers the neg­a­tive inter­ests on deposit they pay to the ECB. To off­set the loss­es, they have raised fees, which may ulti­mate­ly encour­age cus­tomers to con­sid­er sim­ply keep­ing their mon­ey in their mat­tress­es at home.

    That, too, is a rea­son for Ger­man frus­tra­tion with Draghi. In hard­ly any oth­er euro-zone coun­try is the finan­cial invest­ment sec­tor so dom­i­nat­ed by sav­ings accounts and insur­ance poli­cies. But Draghi appears to have lim­it­ed inter­est in the pecu­liar­i­ties of the Ger­man finan­cial sec­tor and the polit­i­cal cli­mate in the euro zone’s largest mem­ber state. The ECB head is rarely to be found in his office in the ECB tow­er in Frank­furt. And since the Ger­man Jörg Asmussen left the bank two years ago, there are few peo­ple left in his cir­cle who can explain to him the com­pli­cat­ed rela­tion­ships that gov­ern polit­i­cal Berlin.

    Draghi has become increas­ing­ly annoyed by the con­stant crit­i­cism com­ing from Ger­many. He feels unjust­ly tar­get­ed and has insist­ed even more stub­born­ly on the cor­rect­ness of his poli­cies as a result — such as dur­ing a recent speech to Ger­man stock traders just out­side of Frank­furt. What haven’t his Ger­man crit­ics tried in their efforts to shed doubt on the mea­sures he has tak­en, Draghi com­plained. They have warned of mega-infla­tion and of a red ECB bal­ance sheet, the ECB head con­tin­ued, but none of it has come to pass. “Repeat­ed­ly, those who have called our deci­sions into ques­tion, have been proven wrong,” Draghi said. It was the Mario Draghi that many of his Ger­man lis­ten­ers were all too famil­iar with: the man who is nev­er wrong.

    The divide between Berlin and Frank­furt is inten­si­fy­ing the destruc­tive forces that are already buf­fet­ing the Euro­pean com­mon cur­ren­cy zone — forces that may soon prove uncon­trol­lable. Ger­mans are dis­tanc­ing them­selves from Europe’s cen­tral bank and Europe’s cen­tral bank is dis­tanc­ing itself from the Ger­mans. Is there a dan­ger it could lead to an unwant­ed dis­in­te­gra­tion of the euro zone?

    ...

    “Fol­low­ing the dis­as­trous results of the three recent state elec­tions in Ger­many — elec­tions which saw the AfD suc­ceed at the expense of Merkel’s Chris­t­ian Demo­c­ra­t­ic Union (CDU) and Gabriel’s SPD — the gov­ern­ment in Berlin has dif­fer­ent pri­or­i­ties. Par­tic­u­lar­ly among Ger­man con­ser­v­a­tives — a des­ig­na­tion that includes the CDU as well as its Bavar­i­an sis­ter par­ty, the Chris­t­ian Social Union (CSU) — wor­ries are grow­ing that, with the refugee cri­sis abat­ing, the AfD could turn its fury on the ECB. Such a shift could cost con­ser­v­a­tives addi­tion­al vot­ers, par­tic­u­lar­ly since the con­cerns of savers have long been a cen­tral issue for the CDU.
    It’s quite a damned if you do, damned if you don’t sit­u­a­tion: If Ger­many’s main par­ties don’t ramp up the oppo­si­tion to the ECB’s mon­e­tary stim­u­lus poli­cies, the AfD might find itself with a new issue to gar­ner even more sup­port. But, of course, if the CDU does decide to make stop­ping the ECB at all costs one of its strate­gies for avoid­ing polit­i­cal per­il, and the ECB real­ly is forced to aban­don its “unortho­dox” poli­cies too soon, the under­ly­ing weak­ness of the euro­zone economies could once again buck­le under the pre­dictable col­lapse in cred­it.

    On top of all that, the big Ger­man finan­cial insti­tu­tions, which are prob­a­bly best posi­tioned to with­stand a renewed euro­zone finan­cial cri­sis and also best posi­tioned to buy up new­ly dis­tressed assets at fire sale prices, appear to have real­ized that Ger­many’s pow­er­ful finan­cial sec­tor and the AfD have shared interests...in high­er inter­est rates:

    ...
    See­hofer and his peo­ple aren’t just think­ing about the con­cerns of Ger­man savers. They are also act­ing as lob­by­ists for the finan­cial firms that have their head­quar­ters in the Bavar­i­an cap­i­tal of Munich. Such com­pa­nies are of course pri­mar­i­ly inter­est­ed in their bot­tom lines, but their polit­i­cal argu­ments are sim­i­lar to those of the CSU: They empha­size the inter­ests of Ger­man savers.

    Niko­laus von Bomhard is one of them. Polit­i­cal­ly cor­rect to a fault, but with a deep sen­si­tiv­i­ty to the mood of the peo­ple, Bomhard is the head of glob­al rein­sur­ance giant Munich Re. He recent­ly launched a sav­age attack on the ECB. Because its loose mon­e­tary pol­i­cy has dri­ven up stock and real estate prices, he said, it is pri­mar­i­ly ben­e­fit­ing the wealth­i­est peo­ple in the coun­try. He said it was serv­ing to redis­trib­ute wealth to the upper class­es and it had become impos­si­ble to sit back and say noth­ing. “The peo­ple of Ger­many aren’t stu­pid,” he said, adding that polit­i­cal lead­er­ship was required.

    With the smile of some­one who knows he has the peo­ple on his side, Bomhard also revealed that Munich Re had set aside gold and, recent­ly, also cash in the com­pa­ny’s safes. It is a move that many nor­mal Ger­mans have already made. Accord­ing to bank­ing asso­ci­a­tions, the demand for safes and lock­ers has gone up as peo­ple are appar­ent­ly con­cerned that they may soon have to pay neg­a­tive inter­est rates to their banks, just as com­mer­cial banks must now pay the ECB.

    Bomhard isn’t the only one tar­get­ing the ECB. Allianz Chair­man of the Board Oliv­er Bäte told SPIEGEL in an inter­view not long ago that the ECB is devalu­ing savers’ mon­ey. Georg Fahren­schon, pres­i­dent of the Ger­man Sav­ings Bank Asso­ci­a­tion, warned: If low inter­est rates con­tin­ue, increas­ing num­bers of peo­ple will have to work until they are 70 or even longer. In March, the Asso­ci­a­tion of Ger­man Banks even went so far as to com­mis­sion a sur­vey. The sav­ings morale of Ger­mans, the sur­vey found, is crum­bling under the low inter­est rates dic­tat­ed by the Euro­pean Cen­tral Bank.

    The ori­gins of this wave of rage are not dif­fi­cult to pin­point. There is no oth­er sec­tor that feels the con­se­quences of mon­e­tary pol­i­cy to the degree that insur­ance and bank­ing does. It has a direct effect on their prof­its and, for small­er insur­ance com­pa­nies, threat­ens their very exis­tence.
    ...

    So the finan­cial sec­tor and the AfD, which con­clud­ed last year that the ECB’s bond buy­ing pro­gram war­rant­ed leav­ing the euro­zone, are find­ing their inter­ests increas­ing­ly aligned, and it’s the rise of the AfD that has the Ger­man polit­i­cal estab­lish­ment all freaked out. That def­i­nite­ly does­n’t bode well for the ECB’s abil­i­ty to “do what­ev­er it takes” to avoid a new full blown cri­sis in the Euro­pean finan­cial mar­kets.

    One crit­i­cal thing to keep in mind is that the desire for high­er inter­est rates isn’t going to be lim­it­ed to the Ger­man finan­cial sec­tor. The US com­mer­cial bank­ing sec­tor freaked out when the Fed did­n’t raise rates back in Sep­tem­ber. So it’s very pos­si­ble that LOTS of banks all over the world would like to see the AfD suc­ceed in apply­ing the polit­i­cal pres­sure required to force Berlin into a sit­u­a­tion where it basi­cal­ly forces the ECB to jack up rates (by threat­en­ing to leave the euro­zone or some­thing along those lines).

    Also keep in mind that, for all the focus on the ECB and what it should or should­n’t be doing to hold the euro­zone togeth­er, one of the best alter­na­tive meth­ods to neg­a­tive inter­est rates for stim­u­lat­ing infla­tion is fis­cal stim­u­lus, espe­cial­ly for the ‘periph­ery’. And that’s not some­thing the ECB can do any­thing about, unless it real­ly did engage in “heli­copter cash”. That’s a job for the EU par­lia­ment and euro­zone gov­ern­ments. And, of course, it’s not going to hap­pen.

    At the same time, if a slow­ing glob­al econ­o­my con­tin­ues to ham­mer away at Ger­many’s econ­o­my, there’s no rea­son we should­n’t expect far-right pop­ulists like the AfD call for more fis­cal stim­u­lus for Ger­mans and only Ger­mans. After all, one of the poli­cies that has long been called for across the euro­zone is to have the wealth­i­er economies, like Ger­many, engage in fis­cal stim­u­lus at home (while still block­ing fis­cal stim­u­lus in places like Greece or Spain), in the hopes of stim­u­lat­ing the over­all euro­zone econ­o­my and rais­ing infla­tion. And that’s why it’s not impos­si­ble that a weak­en­ing Ger­man econ­o­my, which would like­ly lead to an even greater rise in the pop­u­lar­i­ty of groups like the AfD, could result in a sit­u­a­tion where we simul­ta­ne­ous­ly see a dis­rup­tion of the ECB’s mon­e­tary stim­u­lus poli­cies along with fis­cal stim­u­lus pro­grams in the wealth­i­est euro­zone nations. So the rich­er euro­zone mem­bers might final­ly start doing at least some of the spend­ing they should have been doing all along at the same time the poor­er mem­ber states get kicked in the teeth again.

    Yes, tech­ni­cal­ly the ECB is inde­pen­dent and should­n’t have to give in to whims of Berlin, but that ignores the real­i­ty that a pay­mas­ter coun­try like Ger­many can always threat­en to leave the euro­zone and blow the whole thing up. And few sit­u­a­tions make that threat of leav­ing more real than the rise of the AfD. In oth­er words, the rise of the AfD is giv­ing Merkel & Friends exact­ly the kind of ammu­ni­tion it needs to make very seri­ous back­room threats amount­ing to “if you don’t do XYZ, the AfD will sweep into pow­er and remove us from the euro­zone any­way”.

    It’s all a reminder that the anti-euro par­i­ties like the AfD that rep­re­sent an exis­ten­tial threat to the Euro­pean Project are poten­tial­ly turn­ing into the best friends of the pro-euro/pro-aus­ter­i­ty fac­tions led by folks like Merkel and Schaeu­ble who are, them­selves, an exis­ten­tial threat to the Euro­pean Project. The AfD wants to dis­solve the euro­zone now while Merkel & Friends want to make it so bad that it either implodes or morphs into a Clause­witz­ian night­mare. The worse Merkel & Friends make the sit­u­a­tion, the more groups like the AfD rise in pop­u­lar­i­ty by claim­ing to have the best inter­est of aver­age peo­ple in mind and demand poli­cies that are even worse for the rest of the euro­zone. And the more groups like the AfD rise, the more Merkel & Friends can demand they the rest of the euro­zone con­cedes to their demands. Or else. And as long as either side wins, the banks win too. At least the banks that aren’t about to expe­ri­ence a wave of finan­cial tur­moil as a result of either side win­ning. So some banks win and some lose if either side wins. And soci­ety over­all los­es.

    It’s quite a rack­et.

    Posted by Pterrafractyl | April 9, 2016, 7:22 pm
  11. Uh oh. The drum beat is con­tin­u­ing to ramp up in the CDU and CSU to pres­sure the ECB to hike rates, offi­cial­ly so Ger­man savers can earn more inter­est (but the­fi­nan­cial sec­tor isn’t going to be com­plain either). And a new argu­ment has been trot­ted out: look­ing at the hun­dreds of bil­lions lost by Ger­man savers in reduced inter­est since 2010 due the ECB’s low­ered rates. This was, of course, the peri­od dur­ing which the euro­zone expe­ri­enced depres­sion in part due to a melt­down in the sov­er­eign bond mar­kets, but the ECB was appar­ent­ly not sup­posed to low­er rates and try to avoid full blown defla­tion or melt­down of the finan­cial sys­tem so savers could save a lit­tle bit more while the euro melt­ed down:

    Reuters

    Ger­man crit­i­cism of ECB gets loud­er as politi­cians say savers are los­ing out

    Sun Apr 10, 2016 6:18pm BST

    A cho­rus of con­ser­v­a­tive Ger­man politi­cians have crit­i­cised the Euro­pean Cen­tral Bank for its inter­est rate pol­i­cy, which they say is hit­ting the retire­ment pro­vi­sions of ordi­nary Ger­mans, could lead to asset bub­bles and even boost the right-wing.

    Ger­man Finance Min­is­ter Wolf­gang Schaeu­ble part­ly blamed the ECB’s pol­i­cy for the suc­cess of the right-wing Alter­na­tive for Ger­many (AfD) in recent region­al elec­tions, which saw it take up to a quar­ter of votes in a set­back to Schaeuble’s con­ser­v­a­tives, accord­ing to the Wall Street Jour­nal.

    The news­pa­per quot­ed Schaeu­ble as say­ing he had told ECB Pres­i­dent Mario Draghi: “Be very proud: You can attribute 50 per­cent of the results of a par­ty that seems to be new and suc­cess­ful in Ger­many to the design of this [mon­e­tary] pol­i­cy.” A finance min­istry spokesman declined to con­firm the com­ments.

    In March the ECB unveiled a large stim­u­lus pack­age that includ­ed cut­ting its deposit rate deep­er into neg­a­tive ter­ri­to­ry, expand­ing asset buys and offer­ing free loans to the cor­po­rate sec­tor to stim­u­late growth.

    “The ECB is tak­ing a very risky path,” Trans­port Min­is­ter Alexan­der Dobrindt told Ger­man news­pa­per Welt am Son­ntag, adding that the cen­tral bank’s pol­i­cy sig­nalled to cit­i­zens that there was no point in sav­ing or putting mon­ey by for their retire­ment.

    “The dis­ap­pear­ance of inter­est is cre­at­ing a gap­ing hole in cit­i­zens’ retire­ment pro­vi­sions so the efforts many peo­ple are mak­ing to ensure their pros­per­i­ty in old age could van­ish into thin air,” said Dobrindt, a mem­ber of the Chris­t­ian Social Union (CSU), the Bavar­i­an sis­ter par­ty to Chan­cel­lor Angela Merkel’s Chris­t­ian Democ­rats (CDU).

    The news­pa­per cit­ed cal­cu­la­tions by DZ Bank as show­ing Ger­mans los­ing out on 343 bil­lion euros (£276.7 bil­lion) in inter­est on their sav­ings in cur­rent accounts, secu­ri­ties and insur­ance between 2010 and 2016. That com­pared with inter­est sav­ings — due to cheap loans for home con­struc­tion, for exam­ple — of 144 bil­lion euros in the same peri­od, it said.

    Senior CSU mem­ber Andreas Scheuer told the news­pa­per the ECB’s pol­i­cy was an “attack on small savers” and warned that prac­ti­cal­ly abol­ish­ing inter­est could lead to asset bub­bles and exces­sive lev­els of debt.

    The politi­cians were adding their voice to a grow­ing group of crit­ics in Ger­many. Finance pol­i­cy offi­cials from the con­ser­v­a­tive bloc have said the ECB is oper­at­ing at the lim­it of its man­date to deliv­er price sta­bil­i­ty with its pol­i­cy of neg­a­tive inter­est rates.

    ‘NOT LOUD ENOUGH’

    Michael Fuchs, a senior CDU law­mak­er, was quot­ed by mag­a­zine Der Spiegel as say­ing the rul­ing coali­tion of con­ser­v­a­tives and Social Democ­rats need­ed to make clear it thought the bank’s inter­est rate pol­i­cy was “wrong”, adding: “We’re not loud enough yet.”

    The CSU’s Ger­da Has­selfeldt told Welt am Son­ntag the ECB’s lat­est mea­sures looked like an “act of des­per­a­tion” by a bank that was run­ning out of options and warned if new expan­sion­ary mea­sures kept evap­o­rat­ing with almost no effect, the bank would increas­ing­ly lack trust.

    ...

    “The news­pa­per cit­ed cal­cu­la­tions by DZ Bank as show­ing Ger­mans los­ing out on 343 bil­lion euros (£276.7 bil­lion) in inter­est on their sav­ings in cur­rent accounts, secu­ri­ties and insur­ance between 2010 and 2016. That com­pared with inter­est sav­ings — due to cheap loans for home con­struc­tion, for exam­ple — of 144 bil­lion euros in the same peri­od, it said.”
    Yes, the extra inter­est that Ger­man savers could have made if the ECB had not low­ered its rates at all over the last 6 years dur­ing the euro­zone finan­cial cri­sis is now appar­ent­ly being used as an argu­ment for why the ECB should raise rates now, now, now. So per­haps it would be worth recall­ing that the ECB actu­al­ly raised rates mul­ti­ple times back in 2011, to the com­plete con­tra­dic­tion of all pru­dent advice, and this hap­pened:

    The Econ­o­mist

    The ECB realis­es infla­tion may not be Europe’s biggest wor­ry just now

    Aug 4th 2011, 14:06 by R.A. | WASHINGTON

    IT REALLY is dif­fi­cult to over­state the extent of the Euro­pean Cen­tral Bank’s fail­ure in recent months. Ear­li­er this year, head­line infla­tion rose in Europe behind ris­ing com­mod­i­ty prices. The Bank of Eng­land and the Fed­er­al Reserve con­sid­ered the increase in infla­tion, looked at emerg­ing mar­ket efforts to tight­en pol­i­cy, tight­en­ing fis­cal con­di­tions in their economies, and gen­er­al eco­nom­ic weak­ness and con­clud­ed that the bump would be short-lived. It’s not going too far to say that it was obvi­ous it would be short-lived. But the ECB appar­ent­ly suf­fers from a severe case of cen­tral-bank myopia, and so it respond­ed to high­er head­line infla­tion with an April inter­est rate increase, despite the vul­ner­a­bil­i­ty of the euro-zone econ­o­my, and despite an extreme­ly seri­ous ongo­ing euro-zone debt cri­sis.

    Since that time, com­mod­i­ty prices have dropped, just as every­one expect­ed they would. Infla­tion has eased; in the euro zone, pro­duc­er prices indi­cate that it’s come to a screech­ing halt. Mean­while, much of the euro zone is fac­ing a return to reces­sion. Indus­tri­al pro­duc­tion is con­tract­ing across south­ern Europe. And the euro zone is on the precipice of an exis­ten­tial cri­sis. Ital­ian stocks have fall­en near­ly 30%. Span­ish stocks are down 20%. Even Ger­man shares are off 13%. Oh, and did I men­tion that the ECB raised rates again just last month?

    Hav­ing dri­ven the euro zone to the brink of col­lapse, the ECB is seem­ing­ly hap­py to let some­one else push the econ­o­my over the edge. In today’s mon­e­tary pol­i­cy announce­ment, the cen­tral bank con­tin­ued to warn about infla­tion but opt­ed not to raise inter­est rates yet again. The ECB may also resume pur­chas­es of bonds to try and main­tain func­tion in sov­er­eign-debt mar­kets and lim­it ris­es in bond yields. It hard­ly mat­ters at this point; the dam­age has been done. Euro­pean mar­kets con­tin­ue to drop, and bond yields con­tin­ue to edge upward. It will take mas­sive gov­ern­ment inter­ven­tion to stem the cri­sis, and even if euro-zone gov­ern­ments suc­ceed there is a risk the euro-zone econ­o­my will fol­low its periph­er­al mem­bers into reces­sion. If the euro zone does fall apart, a fit­ting epi­taph might read, “The ECB feared 3% infla­tion”.

    “If the euro zone does fall apart, a fit­ting epi­taph might read, “The ECB feared 3% infla­tion”.”
    So that hap­pened. About a month after the ECB’s sec­ond rate hike in 2011 that every­one said was nuts. And then this hap­pened:

    Bloomberg

    Draghi Says ECB Will Do What’s Need­ed to Pre­serve Euro: Econ­o­my

    Jeff Black and Jana Randow
    July 26, 2012 — 8:50 AM CDT

    Euro­pean Cen­tral Bank Pres­i­dent Mario Draghi said pol­i­cy mak­ers will do what­ev­er is need­ed to pre­serve the euro, sug­gest­ing they may inter­vene in bond mar­kets as surg­ing yields in Spain and Italy threat­en the exis­tence of the 17-nation cur­ren­cy bloc.

    “To the extent that the size of these sov­er­eign pre­mia ham­per the func­tion­ing of the mon­e­tary pol­i­cy trans­mis­sion chan­nel, they come with­in our man­date,” Draghi said in a speech at the Glob­al Invest­ment Con­fer­ence in Lon­don today. “With­in our man­date, the ECB is ready to do what­ev­er it takes to pre­serve the euro,” he said, adding: “believe me, it will be enough.”

    Finan­cial mar­kets surged on spec­u­la­tion the ECB will act to low­er Span­ish bor­row­ing costs after yields on the nation’s bonds rose to lev­els that prompt­ed bailouts for Greece, Por­tu­gal and Ire­land. The ECB reluc­tant­ly start­ed buy­ing Span­ish and Ital­ian debt in August last year as part of its bond pur­chase pro­gram. The buy­ing had lit­tle last­ing effect and the ECB sus­pend­ed the pro­gram in March.

    “His com­ments cer­tain­ly sug­gest that ECB pur­chas­es of Span­ish and Ital­ian bonds are back on the table for dis­cus­sion,” said Chris Sci­clu­na, head of eco­nom­ic research at Dai­wa Cap­i­tal Mar­kets Europe. “But — just like last sum­mer — we would expect any new ECB bond pur­chas­es to be tem­po­rary and lim­it­ed until oth­er poli­cies are put in place.”

    Slump­ing Yields

    Span­ish yields slumped after Draghi’s remarks, with the rate on the 10-year bond drop­ping as much as 39 basis points to 6.91 per­cent. It touched a record 7.69 per­cent ear­li­er this week. The euro jumped and stocks rose. The sin­gle cur­ren­cy climbed as high as $1.2318 after trad­ing at $1.2118 before Draghi spoke. The Stoxx Europe 600 Index gained 2 per­cent.

    The euro may have been buoyed by traders cut­ting bets on the shared cur­ren­cy falling against the dol­lar, or so-called short posi­tions. Last week futures traders increased net bets the euro would fall against the green­back to 167,249 con­tracts, accord­ing to the Com­mod­i­ty Futures Trad­ing Com­mis­sion data.

    “There is final­ly light at the end of the tun­nel,” said Chris Rup­key, Chief Finan­cial Econ­o­mist at Bank of Tokyo-Mit­subishi UFJ Ltd in New York. “When the ECB is done there won’t be a short against the euro left on the plan­et.”

    Oth­er econ­o­mists said it’s unlike­ly that the ECB will take large-scale action soon, point­ing to Europe’s two bailout funds.

    ...

    “To the extent that the size of these sov­er­eign pre­mia ham­per the func­tion­ing of the mon­e­tary pol­i­cy trans­mis­sion chan­nel, they come with­in our mandate...Within our man­date, the ECB is ready to do what­ev­er it takes to pre­serve the euro...believe me, it will be enough.”
    That’s right, Mario Draghi’s infa­mous “do what­ev­er it takes” speech in 2012 was a direct con­se­quence of the ECB’s lunatic deci­sion to raise rates in 2011 despite the mas­sive crises play­ing out in mul­ti­ple coun­tries sim­ply because of a small tem­po­rary spike in infla­tion. But at half a per­cent ECB rate rise in 2011 earned Euro­pean savers a half a per­cent more or so in extra inter­est. Because you often need all the mon­ey you can get dur­ing what hap­pened next:

    The Wash­ing­ton Post

    Worse than the 1930s: Europe’s reces­sion is real­ly a depres­sion

    By Matt O’Brien August 20, 2014

    As I was argu­ing last week, it’s time to call the euro­zone what it real­ly is: one of the biggest cat­a­stro­phes in eco­nom­ic his­to­ry.

    There have been plen­ty of those late­ly. And it’s not just the Great Reces­sion. It’s the way we’ve strug­gled to make up the ground we lost since. The Unit­ed States, for one, has had its slow­est post­war recov­ery. Britain has had its slow­est one, peri­od. But, six and a half years lat­er, Europe has dis­tin­guished itself by not hav­ing much of a recov­ery at all. And, as you can see above, that’s about to make it worse than the worst of the 1930s.

    I’ve tak­en the chart above from Nicholas Crafts, and extend­ed it a bit to put Europe’s depres­sion in, well, even more depress­ing per­spec­tive. Euro­zone GDP still has­n’t got­ten back to its 2007 lev­el, and does­n’t look like it will any­time soon. Indeed, it already was­n’t clear if its last reces­sion was even over before we found out the euro­zone had stopped grow­ing again in the sec­ond quar­ter. And not even Ger­many has been immune: its GDP just fell 0.2 per­cent from the pre­vi­ous quar­ter.

    It’s a pol­i­cy-induced dis­as­ter. Too much fis­cal aus­ter­i­ty and too lit­tle mon­e­tary stim­u­lus have crip­pled growth like almost nev­er before. Europe is doing worse than Japan dur­ing its “lost decade,” worse than the ster­ling bloc dur­ing the Great Depres­sion, and bare­ly bet­ter than the gold bloc then—though even that sil­ver lin­ing isn’t much of one. That’s because, at this rate, it’ll only be anoth­er year until the euro­zone is well behind the gold bloc, too.

    So how is Europe mak­ing the Great Depres­sion look like the good old days of growth? Easy: by ignor­ing every­thing we learned from it.

    ...

    “So how is Europe mak­ing the Great Depres­sion look like the good old days of growth? Easy: by ignor­ing every­thing we learned from it.”
    Yeah, it’s hard to see how the aus­ter­i­ty-onom­ics rep­re­sents any­thing oth­er than a direct rejec­tion of what we learned from the Great Depres­sion. And that has yet to change. But as we saw with the attempt to swing pop­u­lar opin­ion against the ECB’s poli­cies by cre­ate Ger­man saver out­rage over the lost inter­est since 2010, it’s clear that we’ve moved on from for­get­ting the lessons of the Great Depres­sion to for­get­ting all the lessons learned in the lessons of the cur­rent cri­sis.

    And that does­n’t just include the lessons from the ECB’s dis­as­trous deci­sion to raise rates in 2011. It also includes all the oth­er pol­i­cy blun­ders that go far beyond the ECB’s domain like fis­cal pol­i­cy at the nation­al and euro­zone or EU lev­el. And because of all the dam­age done so far, end­ing aus­ter­i­ty isn’t enough at this point. Europe needs “do what it takes, for as long as it takes” stim­u­lus, and there’s basi­cal­ly no hope of that hap­pen­ing. But if the ECB is going to see the macro-eco­nom­ic con­di­tions it needs to return to more nor­mal inter­est rates, “do what­ev­er it takes” stim­u­lus, on pub­lic infra­struc­ture and oth­er use­ful pub­lic pro­grams and invest­ments, is prob­a­bly the best bet cre­at­ing those con­di­tions that allow rates to sus­tain­ably rise.

    In oth­er words, what’s hurt­ing Euro­pean savers the most isn’t too lit­tle inter­est on their sav­ings. What’s hurt­ing their sav­ings the most is their gov­ern­ments not spend­ing enough. It’s fun­ny how that works.

    Posted by Pterrafractyl | April 10, 2016, 10:42 pm
  12. The ECB’s long bat­tle with Bun­des­bank over vir­tu­al­ly all of the ECB’s pol­i­cy respons­es since the euro­zone cri­sis start­ed has tak­en a num­ber of twists and turns over the years. And one of the more sur­pris­ing twists just hap­pened: Bun­des­bank chief Jens Wei­d­mann has found him­self defend­ing the ECB over a grow­ing cho­rus anti-ECB cho­rus from Ger­many’s polit­i­cal class. He’s even had a war of words with Wolf­gang Schaeu­ble. Well, it turns out this recent sur­pris­ing twist has a twist:

    Reuters

    Wei­d­mann is Draghi new ally — for now

    Mon May 9, 2016 9:46am EDT
    Bal­azs Koranyi and Paul Tay­lor

    Under assault from Ger­many’s rul­ing politi­cians, Euro­pean Cen­tral Bank Pres­i­dent Mario Draghi has found an unusu­al ally: Jens Wei­d­mann, head of the Bun­des­bank and nor­mal­ly his biggest crit­ic.

    Hav­ing long con­demned ECB efforts to stim­u­late the euro­zone econ­o­my with a mix of easy mon­ey, sub-zero rates and asset buys, Wei­d­mann has unex­pect­ed­ly leapt to the Bank’s defence after Ger­man Finance Min­is­ter Wolf­gang Schaeu­ble accused it in April of harm­ing Ger­man savers and so help­ing the euroscep­tic AfD par­ty.

    Nei­ther Wei­d­mann nor the Bun­des­bank want­ed to com­ment for this arti­cle on what lay behind his more con­cil­ia­to­ry tone.

    But while Wei­d­man­n’s endorse­ment of ECB pol­i­cy gives Draghi some respite, con­ver­sa­tions with eight sources in and close to the ECB’s Gov­ern­ing Coun­cil indi­cat­ed it sig­nals no change in the hos­til­i­ty from the Bun­des­bank towards Draghi’s stim­u­lus line and is instead seen as Wei­d­mann prepar­ing for bat­tles ahead.

    Specif­i­cal­ly, those sources inter­pret­ed Wei­d­man­n’s move as an attempt to recoup his influ­ence with­in the bank in time for the next big debate: whether there is a need for more stim­u­lus and how exist­ing mea­sures should start to be wound down.

    “Wei­d­mann lost influ­ence in the (ECB) Gov­ern­ing Coun­cil because of his neg­a­tive spoil­er role and his pub­lic crit­i­cism of deci­sions tak­en col­lec­tive­ly,” one of the sources said of Wei­d­man­n’s past habit of attack­ing ECB deci­sions, some­times with­in hours of them being made pub­lic.

    “Wei­d­mann shows some signs of return­ing to the main­stream and is final­ly start­ing to defend the ECB against polit­i­cal attacks in Ger­many after hav­ing done every­thing to legit­imise such attacks by sys­tem­at­i­cal­ly oppos­ing ECB pol­i­cy ini­tia­tives.”

    Hav­ing long brand­ed Draghi’s eas­ing course as unnec­es­sary and insist­ing that fore­casts of infla­tion per­sis­tent­ly falling short of tar­get were not wor­ri­some because of benign under­ly­ing fig­ures, Wei­d­mann has grad­u­al­ly changed tack — for exam­ple call­ing the ECB’s expan­sion­ary line “appro­pri­ate” in April.

    He now describes infla­tion­ary pres­sures as “extreme­ly” weak and says miss­ing the infla­tion tar­get of close to two per cent for too long would endan­ger the bank’s cred­i­bil­i­ty — a shift from his pre­vi­ous argu­ment that high­er core infla­tion points to under­ly­ing price growth and the need to hold steady on rates.

    The moti­va­tion and sig­nif­i­cance of that shift are still being chewed over in cen­tral bank­ing cir­cles.

    To be sure, infla­tion has failed to fol­low the more benign path Wei­d­mann saw ear­li­er. With oil prices hav­ing plunged in recent months, it turned neg­a­tive again in 2016 and has forced the bank to slash it pro­jec­tions to just 0.1 per cent for 2016.

    “Many of the risks out­lined in Octo­ber and Decem­ber have mate­ri­alised and Wei­d­mann real­ized that the ECB was not wrong that it act­ed,” said one Gov­ern­ing Coun­cil mem­ber.

    “Of course, he’ll nev­er say the ECB was com­plete­ly right but he accepts that the Bun­des­bank’s ‘don’t do any­thing’ stance has become unten­able giv­en how fast the out­look dete­ri­o­rat­ed.”

    Yet while some argue the fun­da­men­tals may have played into Wei­d­man­n’s change of tack, oth­ers say the sto­ry is more com­plex.

    VEHEMENCE

    One source famil­iar with his think­ing said Wei­d­mann, a civ­il ser­vant who once served as advis­er to Chan­cel­lor Angela Merkel, was deeply upset by the vehe­mence of Schaeuble’s crit­i­cism, believ­ing it crossed the line of what politi­cians should say about mon­e­tary pol­i­cy — the pre­serve of the inde­pen­dent ECB.

    But the Bun­des­bank’s main line — that of being fun­da­men­tal­ly opposed to quan­ti­ta­tive eas­ing and fur­ther stim­u­lus mea­sures — had not changed despite the per­cep­tion of a soft­er tone and greater engage­ment, the source added.

    “Wei­d­mann is not a dic­ta­tor and the Bun­des­bank is an archa­ic, con­ser­v­a­tive insti­tu­tion with a long tra­di­tion, great advis­ers and a his­to­ry of scep­ti­cism towards the ECB. Any change at the Bun­des­bank will be slow and Wei­d­mann could­n’t change it quick­ly even if he want­ed to,” anoth­er Gov­ern­ing Coun­cil mem­ber said.

    The shift rather points to a re-posi­tion­ing and coali­tion-build­ing for an offi­cial whose pol­i­cy stances have been in the minor­i­ty and whose behav­iour has on occa­sions alien­at­ed oth­ers, sources said.

    ...

    Wei­d­man­n’s more con­cil­ia­to­ry stance comes amid a domes­tic Ger­man debate over what many in the coun­try see as a lack of Ger­man influ­ence over the ECB, with one lead­ing con­ser­v­a­tive law­mak­er even say­ing the next ECB pres­i­dent must be Ger­man.

    The fact that some seats on the ECB board are due to open up in 2018/2019 has even led to spec­u­la­tion — dis­missed by the source close to Wei­d­mann — that he is angling for one of them.

    “Wei­d­mann did the right thing, the hon­ourable thing to stand up for the ECB’s inde­pen­dence because cred­i­bil­i­ty is our biggest asset,” a Gov­ern­ing Coun­cil mem­ber said. “The changed tone is wel­come but it does­n’t change the Ger­man line.”

    “Specif­i­cal­ly, those sources inter­pret­ed Wei­d­man­n’s move as an attempt to recoup his influ­ence with­in the bank in time for the next big debate: whether there is a need for more stim­u­lus and how exist­ing mea­sures should start to be wound down.”
    Huh, so Wei­d­man­n’s defense of the ECB, specif­i­cal­ly the ECB’s inde­pen­dence from Ger­many’s polit­i­cal demands in this case for an end to quan­ti­ta­tive eas­ing and high­er inter­est rates to ben­e­fit Ger­man savers, is appar­ent­ly part of a larg­er plan to regain enough clout with­in the ECB to...raise rates and roll back the ECB’s stim­u­lus. It would be nice if this was sur­pris­ing.

    Posted by Pterrafractyl | May 12, 2016, 9:32 pm
  13. One of the inter­est­ing pat­terns of the ECB’s bat­tle with its inter­nal demons through­out the euro­zone cri­sis has been the abil­i­ty of the Bun­des­bank-led oppo­si­tion to sane stim­u­lus pro­grams to thwart appro­pri­ate pol­i­cy (and man­date aus­ter­i­ty) right up to the point of a boil­ing-over fiscal/monetary/socioeconomic cri­sis, at which point san­er cen­tral bank­ing heads are allowed to pre­vail (unless it’s Greece) and the ECB is allowed to do what it takes to hold things togeth­er and pre­vent a com­plete implo­sion. That was the case in 2012 when ECB chief Mario Draghi was final­ly allowed to “Do what­ev­er it takes” to hold the sov­er­eign bond mar­kets togeth­er and then spend the next four years being the only enti­ty in the euro­zone “doing what­ev­er it takes” while the polit­i­cal paral­y­sis and aus­ter­i­ty man­dates con­tin­ue to erode Europe’s econ­o­my and the Euro­pean Project as a whole.

    So when Bun­des­bank chief Jens Wei­d­mann recent­ly came out in defense of the ECB’s ultra-low/neg­a­tive inter­est poli­cies in response to grow­ing Ger­man crit­i­cism of the cen­tral bank’s stim­u­lus pro­grams, it was look­ing like that gen­er­al pat­tern might be reassert­ing itself: The ECB might be saved from being com­plete­ly neu­tral­ized despite Ger­man domes­tic fer­vor, because doing so would tru­ly threat­en the euro­zone from a finan­cial sta­bil­i­ty stand­point. Keep­ing the finan­cial sys­tem intact is inevitably going to take pri­or­i­ty over the con­ve­nient pro-aus­ter­i­ty myths that have come to dom­i­nate the col­lec­tive under­stand­ing of how economies work when those myths threat­en finan­cial sys­tem. Plus, the ECB real­ly is set up as a polit­i­cal­ly inde­pen­dent enti­ty, so there was basi­cal­ly no way Wei­d­mann could avoid defend­ing its right to act inde­pen­dent­ly in ways that help it main­tain its sole man­date of achiev­ing infla­tion just below 2 per­cent. Wei­d­mann had to defend the ECB. Still, it was notable.

    It’s also notable because it’s look­ing like Wei­d­mann is going to be doing a lot more defend­ing of the ECB’s inde­pen­dence going for­ward if, as the arti­cle below points out, the law­suit brought against the ECB in Ger­many’s con­sti­tu­tion­al court by a group of pro­fes­sors and the recent com­ments by a Ger­man Eco­nom­ic Coun­cil mem­ber about the ECB need­ing to come under “par­lia­men­tary con­trols” are signs of things to come:

    Reuters

    UPDATE 1‑Professors and entre­pre­neurs file com­plaint against ECB pol­i­cy ‑news­pa­per

    Sun May 15, 2016 1:17pm EDT
    BERLIN

    May 15 A group of pro­fes­sors and entre­pre­neurs filed a com­plaint against the Euro­pean Cen­tral Bank’s mon­e­tary pol­i­cy this week at Ger­many’s top court, the Welt am Son­ntag news­pa­per said, as Ger­man crit­i­cism of the ECB grows loud­er.

    A com­plaint would open a new chap­ter in a long-run­ning legal bat­tle between Europe’s cen­tral bank (ECB) and groups with­in the euro zone’s biggest econ­o­my who want to curb the bank’s pow­er.

    A chal­lenge to an emer­gency plan the ECB made at the height of the euro zone cri­sis is also back at Ger­many’s Con­sti­tu­tion­al Court after being reject­ed by Europe’s top court in June. The Ger­man court will make a final rul­ing this year.

    There has been wide­spread crit­i­cism in Ger­many of the ECB’s mon­e­tary pol­i­cy in recent weeks, with politi­cians com­plain­ing that low inter­est rates are hit­ting the sav­ings and retire­ment pro­vi­sions of ordi­nary Ger­mans.

    Welt am Son­ntag said the issue in the lat­est com­plaint filed at the Con­sti­tu­tion­al Court was whether the ECB had over­stepped its man­date by exten­sive­ly buy­ing gov­ern­ment bonds and with its plan to start buy­ing cor­po­rate bonds.

    A spokesman for the Con­sti­tu­tion­al Court could not imme­di­ate­ly com­ment on the report.

    The news­pa­per said the pro­fes­sors and entre­pre­neurs thought the ECB was start­ing pro­grammes that con­tained incal­cu­la­ble risks for the Ger­man cen­tral bank’s bal­ance sheet, and hence for Ger­man tax­pay­ers, under the pre­tence of reach­ing its infla­tion tar­get of just under 2 per­cent in the medi­um term.

    “The ECB’s cur­rent pol­i­cy is nei­ther nec­es­sary nor appro­pri­ate to direct­ly revive the econ­o­my in the euro zone by increas­ing the infla­tion rate to around 2 per­cent in terms of con­sumer prices,” Markus Ker­ber, a lawyer and pro­fes­sor of pub­lic finance who ini­ti­at­ed the com­plaint, was quot­ed as say­ing.

    Ker­ber said the ECB was los­ing sight of the prin­ci­ple of the “pro­por­tion­al­i­ty” of its mea­sures, accord­ing to Welt am Son­ntag.

    ...

    In March, the ECB unveiled a large stim­u­lus pack­age that includ­ed cut­ting its deposit rate deep­er into neg­a­tive ter­ri­to­ry, expand­ing it asset buy­ing pro­gramme and offer­ing free loans to the cor­po­rate sec­tor to stim­u­late growth.

    Ger­man cen­tral bank gov­er­nor Jens Wei­d­mann, who sits on the Euro­pean Cen­tral Bank’s Gov­ern­ing Coun­cil, said on Wednes­day the ECB’s expan­sion­ary mon­e­tary pol­i­cy stance was “jus­ti­fied for now” while Bun­des­bank board mem­ber Andreas Dom­bret also said the ECB’s pol­i­cy was jus­ti­fied by a sub­dued growth out­look in the euro zone.

    The news­pa­per said Ker­ber was par­tic­u­lar­ly con­cerned about the bud­getary risks that could arise for Ger­many from the new cor­po­rate bond buy­ing pro­gramme.

    Ker­ber hoped to get the court to at least pre­vent the Bun­des­bank from con­tin­u­ing to be involved in ECB asset pur­chase pro­grammes and to stop it from par­tic­i­pat­ing in the ECB’s cor­po­rate bond buy­ing scheme due to start in June, it added.

    Sep­a­rate­ly, Isabel Schn­abel, a mem­ber of the Coun­cil of Eco­nom­ic Experts which advis­es Ger­man pol­i­cy­mak­ers, said in a news­pa­per inter­view pub­lished on Sun­day that the ECB had become too pow­er­ful.

    Speak­ing to Frank­furter All­ge­meine Son­ntagszeitung, Schn­abel said the ECB had become an “almost polit­i­cal insti­tu­tion” because politi­cians had often failed to act, such as dur­ing the Greek cri­sis, forc­ing the ECB to act instead.

    “The ECB had gained a lot of pow­er even though it is hard­ly sub­ject to par­lia­men­tary con­trols,” she said.

    “A com­plaint would open a new chap­ter in a long-run­ning legal bat­tle between Europe’s cen­tral bank (ECB) and groups with­in the euro zone’s biggest econ­o­my who want to curb the bank’s pow­er.”
    Yep. Ger­many’s pro-aus­ter­i­ty/pro-defla­tion forces are get­ting liti­gious. And that’s a big deal because it could have real con­se­quences. So let’s hope Jens Wei­d­man­n’s tepid defense of the ECB’s stim­u­lus poli­cies is ade­quate (we’re so screwed). Because when you hear a mem­ber of the Coun­cil of Eco­nom­ic Experts say­ing things like:

    ...
    “The ECB had gained a lot of pow­er even though it is hard­ly sub­ject to par­lia­men­tary con­trols.”

    you should prob­a­bly be rais­ing an eye­brow. Espe­cial­ly when this same mem­ber of the Coun­cil of Eco­nom­ic Experts was con­vey­ing that mes­sage as part of a gen­er­al lament of how how ultra-low/neg­a­tive inter­est rates were harm­ing the prof­itabil­i­ty of bank­ing and life insur­ance com­pa­nies:

    The Irish Times

    Ger­many will resist ECB rate plans, says expert
    Econ­o­mist Isabel Schn­abel warns there should be no more loos­en­ing of mon­e­tary pol­i­cy

    Arthur Beesley
    Tue, Mar 8, 2016, 01:00

    Loom­ing expan­sion of the Euro­pean Cen­tral Bank’s cam­paign to revive the euro zone econ­o­my is run­ning into resis­tance in Ger­many, rais­ing fresh ques­tions over the lim­its of the bank’s actions.

    At the start of a week in which ECB gov­er­nors meet in Frank­furt to dis­cuss new stim­u­lus mea­sures, a lead­ing Ger­man econ­o­mist told a Dublin audi­ence there should be no fur­ther loos­en­ing of mon­e­tary pol­i­cy, as steps already tak­en by the bank pre­sent­ed threats to finan­cial sta­bil­i­ty.

    Prof Isabel Schn­abel, a mem­ber of the influ­en­tial Ger­man Coun­cil of Eco­nom­ic Experts, warned that neg­a­tive inter­est rates cur­tail the prof­itabil­i­ty of banks and life insur­ers.

    The coun­cil, an inde­pen­dent body which advis­es Berlin on eco­nom­ic pol­i­cy, is also con­cerned that neg­a­tive inter­est rates encour­age exces­sive risk-tak­ing in pur­suit of “rel­a­tive­ly small” returns.

    Inter­est rates
    The biggest dan­ger to finan­cial mar­kets was that inter­est rates would rise sud­den­ly in a cou­ple of years, said Prof Schn­abel, who holds an aca­d­e­m­ic post at the Uni­ver­si­ty of Bonn.

    ECB chief Mario Draghi is wide­ly expect­ed to push the bank’s deposit rate deep­er into neg­a­tive ter­ri­to­ry on Thurs­day in a bid to encour­age lend­ing.

    The ECB may also expand the pro­gramme under which it buys €60 bil­lion in euro zone sov­er­eign bonds per month. The expec­ta­tion of such mea­sures, sig­nalled for weeks by the bank, drove the euro’s val­ue low­er yes­ter­day.

    How­ev­er, Prof Schn­abel speak­ing at the Insti­tute of Inter­na­tion­al and Euro­pean Affairs said that the ECB was incon­sis­tent: “The ECB argues that finan­cial sta­bil­i­ty risk should not be tack­led by mon­e­tary pol­i­cy but only by macro­pru­den­tial super­vi­sion.”

    ...

    Decline
    Her remarks came one day after the Bank for Inter­na­tion­al Set­tle­ments (BIS) – the cen­tral bank for cen­tral banks – warned of “great uncer­tain­ty” if neg­a­tive rates decline fur­ther.

    In a research paper at the week­end, BIS econ­o­mists said zero had not proved to be a “tech­ni­cal­ly bind­ing” low­er lim­it for cen­tral bank rates.

    “The via­bil­i­ty of banks’ busi­ness mod­el as finan­cial inter­me­di­aries may be brought into ques­tion,” the paper said.

    Faced with such ques­tion­ing, the ECB has already argued that euro zone banks can deal with record low rates and ben­e­fit from its efforts to encour­age growth and infla­tion. Last week ECB exec­u­tive board mem­ber Benoit Coeuré, a key Draghi ally, said many insti­tu­tions have been able to “more than off­set” declin­ing inter­est rev­enue with high­er lend­ing, low­er inter­est expens­es, low­er risk pro­vi­sion­ing and cap­i­tal gains.

    How­ev­er, Prof Schn­abel said the com­pres­sion of the spread between short- and long-term yields would hit Ger­man banks “quite sub­stan­tial­ly” in com­ing years.

    “In addi­tion, Ger­man life insur­ers will be hit very hard by the low inter­est rate envi­ron­ment. At the moment the aver­age guar­an­tee rates on the prod­ucts are around 3 per cent. It’s not easy to earn that in the mar­ket so there could be sub­stan­tial prob­lems in the Ger­man life insur­ance sec­tor.”

    “Prof Isabel Schn­abel, a mem­ber of the influ­en­tial Ger­man Coun­cil of Eco­nom­ic Experts, warned that neg­a­tive inter­est rates cur­tail the prof­itabil­i­ty of banks and life insur­ers.
    Keep in mind that much of the aus­ter­i­ty incurred by nations since the cri­sis start­ed was in order to pay back the loans to Ger­man banks. And now the cen­tral bank stim­u­lus, the only thing real­ly hold­ing the finan­cial sys­tem togeth­er, appar­ent­ly needs to be lim­it­ed over fears that it threat­ens finan­cial sta­bil­i­ty. And, of course, con­cerns that it harms the prof­itabil­i­ty of banks and insur­ers. It’s a reminder that it’s impor­tant to keep in mind, when con­sid­er­ing intro­duc­ing par­lia­men­tary over­sight for some­thing like cen­tral bank­ing pol­i­cy, that “par­lia­men­tary over­sight” is a dou­ble enten­dre.

    Posted by Pterrafractyl | May 15, 2016, 10:30 pm
  14. The G‑7 is meet­ing, which means is time for anoth­er reminder from the G‑7 that the G‑7 because it’s such a dys­func­tion­al mess that’s stran­gling the glob­al econ­o­my by refus­ing to get behind a coor­di­nat­ed glob­al stim­u­lus push, pri­mar­i­ly due to Ger­man finance min­is­ter Wolf­gang’s Schaeuble’s aus­ter­i­ty mad­ness and the UK’s Osborne-dri­ven aus­ter­i­ty mad­ness, but also the GOP’s per­pet­u­al mad­ness in the US. Still, it’s not all bad at the G‑7. Because as the arti­cle below points out, with the Trudeau gov­ern­ment tak­ing over in Cana­da, you can at least cross Cana­da off the list of coun­tries stand­ing in the way of a func­tion­al G‑7. But as the arti­cle also points out, there’s still plen­ty of resis­tance remain­ing on the oth­er side of the glob­al aus­ter­i­ty vs stim­u­lus inter­na­tion­al macro­eco­nom­ic debate. And with the US being a crit­i­cal play­er in that G‑7 debate that could have a huge impact on glob­al eco­nom­ic demand for the next four years, an assess­ment of the stim­u­la­tive vs aus­ter­ian macro­eco­nom­ic nature of the plat­forms of the US pres­i­den­tial can­di­dates is prob­a­bly rel­e­vant in the US pres­i­den­tial cam­paign. If the G‑7 was a func­tion­al and use­ful inter­na­tion­al orga­ni­za­tion, it prob­a­bly would­n’t be that rel­e­vant. But the G‑7 is unfor­tu­nate­ly very rel­e­vant:

    Bloomberg

    G‑7 Warns on Weak Glob­al Growth as Japan Bris­tles Over Yen

    Enda Cur­ran

    Toru Fujio­ka
    Andrew Maye­da

    May 21, 2016 — 2:13 AM CDT
    Updat­ed on May 21, 2016 — 4:21 AM CDT

    * Finance min­is­ters, cen­tral bank chiefs met in north­ern Japan
    * Japan is at odds with U.S. on cur­ren­cy mar­ket con­di­tions

    Finance chiefs from the world’s biggest devel­oped economies meet­ing in Japan under­scored con­cerns that glob­al growth is flag­ging and reaf­firmed a pledge not to delib­er­ate­ly weak­en their cur­ren­cies, even as Japan again warned on the yen’s surge.

    At the end of two days of talks, Group of Sev­en cen­tral bank gov­er­nors and finance min­is­ters high­light­ed risks from ter­ror­ism, refugee flows, polit­i­cal con­flicts and the poten­tial for a U.K. exit from the Euro­pean Union.

    While offi­cials agreed not to tar­get cur­ren­cies to stoke growth and warned of the neg­a­tive con­se­quences from dis­or­der­ly moves in exchanges rates, host Japan repeat­ed a stance that recent trad­ing in the yen has been one sided and spec­u­la­tive.

    Com­ments on the yen’s moves by Finance Min­is­ter Taro Aso hint at a grow­ing frus­tra­tion inside Japan’s gov­ern­ment about the impact on exporters after the cur­ren­cy surged 9 per­cent this year, spurring spec­u­la­tion that the gov­ern­ment may inter­vene. Aso raised the issued in a meet­ing with U.S. Trea­sury Sec­re­tary Jacob J. Lew on Sat­ur­day.

    “I told him that one-sided, abrupt, and spec­u­la­tive moves were seen in the FX mar­ket recent­ly, and abrupt moves in the cur­ren­cy mar­ket are unde­sir­able and the sta­bil­i­ty of cur­ren­cies is impor­tant,” Aso said to reporters.

    ...

    Diver­gent Views

    The posi­tion emerged that coun­try-spe­cif­ic con­di­tions need to be tak­en into account. This may reflect the diver­gent views among the G‑7 on whether to unleash extra gov­ern­ment spend­ing, as advo­cat­ed by Japan and Cana­da, but opposed by Ger­many. A sum­ma­ry of the meet­ing released by Japan said it’s impor­tant to imple­ment fis­cal strat­e­gy flex­i­bly while putting debt as a share of gross domes­tic prod­uct on a sus­tain­able path.

    “It is both dis­ap­point­ing and unex­pect­ed that there is a lack of ideas and will to secure new sources of glob­al growth,” said Dou­glas Paal, a vice pres­i­dent at the Carnegie Endow­ment for Inter­na­tion­al Peace.

    As planned, no com­mu­nique was issued after the event. Japan said its sum­ma­ry didn’t pur­port to be an offi­cial con­sen­sus.

    The G‑7 agreed that if U.K. vot­ers decide in a June ref­er­en­dum to leave the Euro­pean Union, it would be the wrong deci­sion and hurt the country’s eco­nom­ic growth. Offi­cials also sig­naled con­fi­dence that the Euro­pean Union will reach a deal with Greece at the meet­ing of his coun­ter­parts next week.

    Ter­ror­ist Financ­ing

    Oth­er dis­cus­sions includ­ed tack­ling cross bor­der tax eva­sion and an agree­ment on new ways to com­bat ter­ror­ist financ­ing.

    The talks took place against the back­ground of slow­ing glob­al growth and con­tin­u­ing con­cerns about the health of Japan’s econ­o­my, the world’s third largest. It dodged reces­sion in the first quar­ter on the back of gov­ern­ment spend­ing.

    Falling prices and low growth across much of the devel­oped world has stoked con­cerns that gov­ern­ments aren’t doing enough to stim­u­late demand as the influ­ence of mon­e­tary pol­i­cy wanes.

    The meet­ing brought togeth­er finance min­is­ters and cen­tral bank gov­er­nors from Britain, Cana­da, Italy, France, Ger­many, Japan and the U.S., plus lead­ers from the Inter­na­tion­al Mon­e­tary Fund, World Bank and Euro­pean Union.

    “The posi­tion emerged that coun­try-spe­cif­ic con­di­tions need to be tak­en into account. This may reflect the diver­gent views among the G‑7 on whether to unleash extra gov­ern­ment spend­ing, as advo­cat­ed by Japan and Cana­da, but opposed by Ger­many. A sum­ma­ry of the meet­ing released by Japan said it’s impor­tant to imple­ment fis­cal strat­e­gy flex­i­bly while putting debt as a share of gross domes­tic prod­uct on a sus­tain­able path.
    Trans­la­tion: Japan, and now Cana­da, wants to use the mul­ti­pli­er effect of gov­ern­ment stim­u­lus spend­ing to gen­er­ate eco­nom­ic growth and do it in a coor­di­nat­ed fash­ion amongst the devel­oped economies glob­al­ly, and Ger­many, which is run­ning trade and bud­get sur­plus­es, does­n’t want to do that. Which side the of that intra-G‑7 debate Hillary, Bernie, and Trump fall on seems like a pret­ty big deal.

    So let’s hope ques­tions about G‑7/international macro­eco­nom­ic out­look ques­tions are asked of the US pres­i­den­tial can­di­dates. Because can­di­dates can decide to side with the grue­some two-some of George Osborne and Wolf­gang Schaeu­ble and stick to the aus­ter­i­ty plan of hav­ing every econ­o­my simul­ta­ne­ous­ly export their way out of prob­lems by simul­ta­ne­ous­ly cut­ting costs (and there­fore demand) and simul­ta­ne­ous­ly going on a binge of a neolib­er­al busi­ness and labor law dereg­u­la­tions. Or they can go with Abe and Trudeau and join Team Stim­u­lus, which is a real team effort because the more coun­tries that engage is stim­u­lus (like over­due infra­struc­ture invest­ments), the greater the net stim­u­lus mul­ti­pli­er. In this con­text of glob­al demand slug­gish­ness mech­a­nis­ti­cal­ly thwart­ing the econ­o­my, glob­al stim­u­lus dri­ves in his­tor­i­cal­ly low inter­est rate envi­ron­ments are just win, win, win, etc. Plus, if Canada’s stim­u­lus efforts even­tu­al­ly fail due, in part, to a lack of team spir­it from its G‑7 part­ners, poor Cana­di­an chil­dren will be poor­er:

    Bloomberg Tech­nol­o­gy

    Trudeau Stim­u­lus Plan Puts Cana­da C$120 Bil­lion Into the Red

    Josh Wingrove
    March 22, 2016 — 3:07 PM CDT
    Updat­ed on March 22, 2016 — 4:04 PM CDT

    Prime Min­is­ter Justin Trudeau will run deficits total­ing almost C$120 bil­lion ($91.7 bil­lion) over six years, offer­ing some stim­u­lus to Canada’s strug­gling econ­o­my while try­ing to exer­cise restraint.

    Trudeau’s gov­ern­ment will add C$11 bil­lion in annu­al spend­ing for the fis­cal year that begins April 1, which will result in a pro­ject­ed deficit of C$29.4 bil­lion for the com­ing year. The fed­er­al bud­get offers no pro­ject­ed return to bal­ance over five years.

    That cumu­la­tive deficit, which far exceeds what Trudeau promised in last year’s elec­tion cam­paign, stems from the wors­en­ing out­look his Lib­er­als inher­it­ed even as they reject­ed calls for major new stim­u­lus. It also marks a shift for Cana­da, which was home to an anti-deficit ortho­doxy for three decades.

    “Our plan is rea­son­able and afford­able,” Finance Min­is­ter Bill Morneau said in his bud­get speech Tues­day, which focused heav­i­ly on new spend­ing mea­sures. “Today, we are seiz­ing the oppor­tu­ni­ty to invest in peo­ple and the econ­o­my, and to pre­pare Cana­da for a brighter future.”

    Trudeau had faced calls from some econ­o­mists for even more new spend­ing in order to take advan­tage of inter­est rates that are near his­toric lows as mon­e­tary pol­i­cy los­es its bite. While the mea­sures detailed Tues­day are fore­cast to give gross domes­tic prod­uct a 0.5 per­cent bump in 2016, the Lib­er­als steered clear of lofti­er deficits.

    ‘Dou­ble Down’

    “For those look­ing for the gov­ern­ment to dou­ble down on ear­li­er stim­u­lus pledges, they will be dis­ap­point­ed,” Nation­al Bank Finan­cial Econ­o­mist War­ren Love­ly said in an inter­view. “It’s stim­u­lus on a mod­est — to at most mod­er­ate — scale. This isn’t shock and awe fis­cal stim­u­lus.”

    Morneau’s plan projects growth of 1.4 per­cent in fis­cal 2016, and 2.2 per­cent in the two fol­low­ing years. It assumes an oil price of $40 a bar­rel this year and $52 a bar­rel in the next. It also builds in an unal­lo­cat­ed con­tin­gency fund of C$6 bil­lion per year in case growth is slug­gish. If not, Morneau told reporters the gov­ern­ment could return to bal­ance with­in five years.

    The cor­ner­stone of Trudeau’s bud­get is an over­haul of child-ben­e­fit pay­ments, with a net cost of C$4.5 bil­lion in 2016–17, which the gov­ern­ment expects will lift 315,000 chil­dren out of pover­ty in what Morneau called the “most sig­nif­i­cant social pol­i­cy inno­va­tion in a gen­er­a­tion.” Cana­da will also pro­vide C$8.4 bil­lion over five years in new fund­ing for its indige­nous com­mu­ni­ties.

    ...

    “The cor­ner­stone of Trudeau’s bud­get is an over­haul of child-ben­e­fit pay­ments, with a net cost of C$4.5 bil­lion in 2016–17, which the gov­ern­ment expects will lift 315,000 chil­dren out of pover­ty in what Morneau called the “most sig­nif­i­cant social pol­i­cy inno­va­tion in a gen­er­a­tion.” Cana­da will also pro­vide C$8.4 bil­lion over five years in new fund­ing for its indige­nous com­mu­ni­ties.”
    Stim­u­lus spend­ing that’s also spend­ing on the needy. What a rad­i­cal eco­nom­ic pol­i­cy. Espe­cial­ly in an ultra-low inter­est envi­ron­ment when bor­row­ing is ultra-cheap. As opposed to tax cuts for the rich, you can bet vir­tu­al­ly all of that mon­ey for the poor will be spent and the stim­u­lus mul­ti­pli­er effect will be felt across local com­mu­ni­ties. Now com­pare that that to a Trumpian tax for the rich.

    It all rais­es the point that, if gov­ern­ment is run like a busi­ness like so many say it should be, it would prob­a­bly bor­row and spend a lot more. Gov­ern­ment isn’t a busi­ness and G‑7 gov­ern­ments should spend more for a num­ber of oth­er rea­sons any­ways. But if gov­ern­ment was a busi­ness, it should still spend more when rates are this low. Espe­cial­ly on the poor and low­er mid­dle class who will spend all that stim­u­lus. Plus, when you’re a demo­c­ra­t­ic gov­ern­ment, your busi­ness real­ly does involve fos­ter­ing the devel­op­ment of cit­i­zens that are capa­ble of run­ning an awe­some gov­ern­ment capa­ble of fos­ter­ing the devel­op­ment of capa­ble cit­i­zens. And that requires things like invest­ments in infra­struc­ture and not depriv­ing poor kids of need­ed resources. So when inter­est rates are at his­toric lows, invest­ments in the peo­ple that cre­ate an econ­o­my capa­ble of ser­vic­ing the pop­u­la­tion who runs that awe­some gov­ern­ment seem like the kind of thing a busi­ness­man would do. And that includes pay­ing for things like ser­vices for poor kids and peo­ple in need in gen­er­al. Not only is it a wise social invest­ment but hav­ing the gov­ern­ment do more for ser­vic­ing pub­lic needs is a great stim­u­lus. Stim­u­lus for the poor ALL gets spent. And tran­si­tion­ing to a green econ­o­my is a mas­sive glob­al task that could use glob­al coor­di­na­tion.

    And that’s just a start for a glob­al econ­o­my with a big slack in demand. And when there’s a glob­al demand slack, a glob­al­ly coor­di­nat­ed gov­ern­ment stim­u­lus pact is the surest path to deal­ing with it fair­ly, which is what the G‑7 should be help­ing to coor­di­nate.

    So let’s hope the puta­tive pres­i­dents are asked about before the elec­tion. What the G‑7 needs to coor­di­nate in stim­u­la­tive team­work, and there is no “I” in team. Can­di­dates who don’t play well with oth­ers and have a mas­sive­ly gov­ern­ment-starv­ing sup­ply-side pol­i­cy plat­form are going to require extra G‑7-relat­ed scruti­ny.

    Posted by Pterrafractyl | May 22, 2016, 12:13 am
  15. Here’s the lat­est reminder that inhibit­ing wage growth is a top pri­or­i­ty of the major­i­ty of US pol­i­cy­mak­ers: With the US jobs report for May show­ing decent job growth cou­pled with unex­pect­ed­ly weak wage growth, Fed­er­al Reserve Bank of New York Pres­i­dent William Dud­ley, some­one gen­er­al­ly falling in the ‘Dove’ cat­e­go­ry, recent­ly explained why the Fed is stick­ing with its cur­rent plan of mul­ti­ple rate hikes despite infla­tion remain­ing well below the Fed’s 2 per­cent tar­get. It sounds like the Fed is pret­ty con­fi­dent that a tight labor mar­ket is going to lead to high­er wages and, in turn, high­er infla­tion. It has­n’t hap­pened yet, but the Fed is con­fi­dent it will hap­pen in the future and that’s why it’s ok to keep rais­ing rates despite the per­sis­tent­ly below-tar­get infla­tion. Addi­tion­al­ly, as Dud­ley puts it, the fear is that if the Fed does­n’t keep raise rates unem­ploy­ment will ‘crash’, lead­ing to high­er wage gains and, even­tu­al­ly, above-tar­get infla­tion:

    Bloomberg Mar­kets

    Fed’s Dud­ley Con­fi­dent That U.S. Expan­sion Has a ‘Long Way to Go’

    By Matthew Boesler
    and Christo­pher Con­don
    June 19, 2017, 8:03 AM CDT June 19, 2017, 8:58 AM CDT

    * NY Fed chief aligns with Yellen in expect­ing infla­tion rebound
    * Not tight­en­ing would risk ‘crash’ to very low unem­ploy­ment

    Fed­er­al Reserve Bank of New York Pres­i­dent William Dud­ley aligned him­self with Chair Janet Yellen in declar­ing his expec­ta­tion that a tight labor mar­ket will even­tu­al­ly trig­ger a rebound in infla­tion data that has been unex­pect­ed­ly weak in recent months.

    “We’re pret­ty close to what we think is full employ­ment,” Dud­ley said Mon­day in Platts­burgh, New York. “Infla­tion is a lit­tle bit low­er than what we would like, but we think if the labor mar­ket con­tin­ues to tight­en, wages will grad­u­al­ly pick up, and with that, we’ll see infla­tion get back to 2 per­cent.”

    ...

    Fed offi­cials last week raised their bench­mark inter­est rate for the third time in six months and pushed ahead on plans to begin reduc­ing the cen­tral bank’s $4.5 tril­lion bal­ance sheet lat­er this year — a move that may also tight­en pol­i­cy, in the face of grow­ing con­cerns over stalled infla­tion. In remarks that Dud­ley large­ly echoed, Yellen said at the time she expect­ed the U.S. econ­o­my would con­tin­ue to expand at a mod­er­ate pace for “the next few years.”

    Dud­ley, viewed as an influ­en­tial voice on the rate-set­ting Fed­er­al Open Mar­ket Com­mit­tee, also sound­ed a pos­i­tive note on the U.S. econ­o­my over­all, while say­ing the cen­tral bank want­ed to tight­en mon­e­tary pol­i­cy “very judi­cious­ly” to avoid derail­ing the expan­sion that began in mid-2009.

    In a Bloomberg sur­vey of econ­o­mists ear­li­er this month, respon­dents put a 60 per­cent prob­a­bil­i­ty, based on the medi­an esti­mate, on the expan­sion run­ning through at least July 2019 and there­by reach­ing 121 months, top­ping the 10 years of gains dur­ing the 1990s.

    “I’m actu­al­ly very con­fi­dent that even though the expan­sion is rel­a­tive­ly long in the tooth, we still have quite a long way to go,” Dud­ley said Mon­day. “This is actu­al­ly a pret­ty good place to be.”

    The Fed’s pre­ferred mea­sure of infla­tion, after strip­ping out food and ener­gy com­po­nents, slowed to 1.5 per­cent in the 12 months through April, well short of the cen­tral bank’s 2 per­cent tar­get. That has puz­zled econ­o­mists because it comes as unem­ploy­ment has con­sis­tent­ly declined and stood at a 16-year low of 4.3 per­cent in May.

    “If we were not to with­draw accom­mo­da­tion, the risk would be that the econ­o­my would crash to a very, very low unem­ploy­ment rate, and gen­er­ate infla­tion,” Dud­ley said.“Then the risk would be that we would have to slam on the brakes and the next stop would be a reces­sion.”

    ———-

    “Fed’s Dud­ley Con­fi­dent That U.S. Expan­sion Has a ‘Long Way to Go’” by Matthew Boesler and Christo­pher Con­don; Bloomberg Mar­kets; 06/19/2017

    ““If we were not to with­draw accom­mo­da­tion, the risk would be that the econ­o­my would crash to a very, very low unem­ploy­ment rate, and gen­er­ate infla­tion,” Dud­ley said.“Then the risk would be that we would have to slam on the brakes and the next stop would be a reces­sion.””

    Very, very low unem­ploy­ment that could gen­er­ate infla­tion from high­er-than-2-per­cent wage growth. That’s the big risk the Fed is try­ing to avoid by rais­ing rates and pulling back oth­er stim­u­la­tive mea­sures while infla­tion remains mys­te­ri­ous­ly and per­sis­tent­ly below tar­get. Because you got to have pri­or­i­ties.

    Posted by Pterrafractyl | June 23, 2017, 6:43 pm

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