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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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