The ECB could stand on its head and not have much impact

As the Bank of Japan began its hopeless quest to stimulate growth with negative interest rates (see my blog yesterday – The folly of negative interest rates on bank reserves), the latest data from the ECB came out on lending to households and non-financial institutions. It tells an interesting story. The story has to be framed within the knowledge that oil prices have now fallen by some 77 per cent. But the major factor that is not usually mentioned when commentators talk about ECB policy changes and the likely impacts is the on-going and manic fiscal austerity in the Eurozone, which puts the whole region in a recession-type straitjacket, where monetary policy changes, weak in impact at best, have little hope of achieving anything positive. The logic of the reliance on monetary policy for counter-stabilisation is also built on a failure to understand what drives the economic cycle. The belief that banks will suddenly lend just because the central bank imposes a tax on their reserve deposits (negative interest rates) or offers them cheap loans to on-lend to households and firms is misplaced. Banks do not loan out their reserves and firms will not borrow from banks no matter how cheap the money is if there are no profitable opportunities to pursue. It is time the authorities abandoned their neo-liberal myths and got real. The Eurozone needs a massive fiscal expansion and it needed it 7 or 8 years ago. The ECB is the only institution in the flawed system that can provide the financial resources to make that happen and it could, with Brussels approval, bypass the ‘no bailout’ clauses in the Treaty to make that happen. It won’t, and the Eurozone will muddle on with increased poverty rates and rising social instability. What folly!
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    Posted in Central banking, Eurozone | 8 Comments

    The folly of negative interest rates on bank reserves

    On Friday (January 29, 2016), the Bank of Japan issued a seven-page document – Introduction of “Quantitative and Qualitative Monetary Easing with a Negative Interest Rate” – which left me confounded. Do they actually know what they are doing or not? For years, the liquidity management conducted by the operations desk at the Bank has been impeccable, in the sense that they have maintained near zero interest rates in the face of growing fiscal deficits. There was always some doubt when they were the early users of quantitative easing which many claimed was to provide the banks with more reserves so that they would increase their lending to the private domestic sector in order to stimulate growth, after many years of rather moderate real performance to say the least. Of course, banks are not reserve constrained in their lending so the the only way that this aspect of ‘non-conventional’ monetary policy would be stimulatory would be if investment and purchasers of consumer durable were motivated to borrow at the lower interest rates that the asset swap (bonds for reserves) generated. The evidence is that the stimulus impact has been low and that there are many other factors other than falling interest rates governing whether borrowers will approach their banks for loans. In their latest announcement, the logic appears to be that by reducing reserves they will induce banks to lend more. Go figure that one out!
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      Posted in Central banking, Japan | 18 Comments

      The Weekend Quiz – January 30, 2016 – answers and discussion

      Here are the answers with discussion for the Weekend quiz. The information provided should help you work out why you missed a question or three! If you haven’t already done the Quiz from yesterday then have a go at it before you read the answers. I hope this helps you develop an understanding of Modern Monetary Theory (MMT) and its application to macroeconomic thinking. Comments as usual welcome, especially if I have made an error.
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        Posted in Saturday quiz | 2 Comments

        The Weekend Quiz – January 30, 2016

        Welcome to The Weekend Quiz, which used to be known as the Saturday Quiz! The quiz tests whether you have been paying attention over the last seven days. See how you go with the following questions. Your results are only known to you and no records are retained.
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          Listening to past Treasurers is a dangerous past-time

          On January 23, 2016, a former Australian Treasurer Peter Costello (1996-2007) gave a speech to the Young Liberals (the youth movement of the conservative party in Australia) – Balanced Budgets as a Youth Policy – which was sad in the sense that some people never get over being dumped as out of touch and unpopular and was ridiculous in the sense that it is a denial of reality and macroeconomic understanding. He mounted the same old arguments that have been used to justify the pursuit of fiscal surpluses (grandchildren etc) but failed to recognise that his period as Treasurer was abnormal in terms of our history and left the nation exposed to the GFC as a result of the massive buildup in private sector debt over his period of tenure. The only reason he achieved the surpluses was because growth was driven by the household credit binge which ultimately proved to be unsustainable. Fiscal deficits are historically normal and should not be resisted. They are the mirror image in a national accounting sense of non-government surpluses, which historically, have proven to be the best basis for sustained growth and low unemployment.
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            Posted in Economics, Fiscal Statements | 21 Comments

            European-wide unemployment insurance schemes will not solve the problem

            On June 10, 2015, the Italian finance minister wrote an Op Ed article for the UK Guardian – Couldn’t Brussels bail out the jobless? – which continued the call from those who sought ‘reform’ of the Economic and Monetary Union in Europe for a European-wide unemployment insurance scheme. This idea continues to resonate within European circles and is held out as a major improvement to the failed Eurozone system. My response is that if this is as far as the political imagination can go in Europe among progressives then there is little hope that the EMU will become a vehicle for sustained prosperity. The creation of a European-wide unemployment insurance scheme is better than the current situation where the responsibility for providing income support to the unemployed outside of the private insurance arrangements is left to their Member States who surrendered their currency sovereignty upon joining the Eurozone. But, it is a weak palliative at best and fails to address the basic problem of mass unemployment, which is inadequate capacity for Member States to run fiscal deficits of a size necessary to bridge the spending gap left by the savings desires of the non-government sector. Until the European debate shifts towards that issue and the policy players and the people who elect them realise that the fiscal design of the Eurozone is flawed at the most elemental level and that the fiscal rules superimposed upon that flawed design only serve to exacerbate the initial failure to construct a sustainable monetary union. Introducing a European-wide unemployment insurance scheme does not take us very far down that road of enlightenment.
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              Posted in Eurozone | 33 Comments

              The urban impact of the failure of austerity

              I use the descriptor ‘failure’ in a selective way, although it is probably the meaning that that vast majority of citizens would ascribe to the term. In this context, I’m thinking that successful policy improves the lives of the most disadvantaged citizens in a region. A small minority of people might think of success in terms of how rich the top end of the distribution becomes (in wealth or income). Yesterday (January 25, 2016), a UK research group, the Centre for Cities released their latest – Cities Outlook 2016 – which is a comprehensive analysis of how the larger cities in Britain are performing across a variety of indicators. In this release, the theme was centred on the claim by the British Chancellor that his policy design was intending to produce a “higher wage, low-welfare economy in Britain”. The report suggests the British government has failed and that “almost half of lower wages, and higher welfare, than the national average” and “welfare spending since 2010 has grown at a much faster rate in high-wage cities”. I’ve also been trying to disentangle the impacts of deindustrialisation on urban spaces, which began in the 1980s, from the more recent impacts of policy austerity, driven by misguided understandings of the capacities of currency-issuing governments. I want to address the claim from the Left, that the shifting patterns of capitalist production across regional spaces, is inevitable and undermines the capacity of cities to prosper. The shifting patterns might be inevitable but the conclusion that is drawn about the options available to cities are largely incorrect.
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                Posted in Britain, Demise of the Left, Economics, UK Economy, US economy | 22 Comments

                Exchange rate movements and exports

                There was an article a few weeks ago purporting to show that public deficit expansion (increased net public spending) has never worked. I won’t link to the article because I would not want the magazine to get any advertising revenue via my blog and also because, frankly, the article is one of those reinvent history efforts – along the lines of when the facts do not align with theory the way forward is to just make up some new facts and deny what actually happened. But one of the examples use to justify the claim “Keynesian deficit spending … over and over again … has not worked” is the Ireland and Denmark experience in the 1980s when these nations “reduced their government budget deficits, which according to Keynesian theory should have depressed the economy. But on the contrary, the economies did particularly well”. This example is often used these days to justify the claim that deficit spending does not promote growth and fiscal austerity does not damage growth. However, no ‘Keynesian’ theory I know suggests that cutting the fiscal deficit will ‘depress’ the economy. It all depends … and that is what this article (like all the others that use this example) fails to recognise or admit. It bears also on current events in Canada and Argentina, which are demonstrating some other interesting facets of macroeconomics.
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                  Posted in Canada, Economics, Eurozone | 16 Comments

                  The Weekend Quiz – January 23, 2016 – answers and discussion

                  Here are the answers with discussion for the Weekend quiz. The information provided should help you work out why you missed a question or three! If you haven’t already done the Quiz from yesterday then have a go at it before you read the answers. I hope this helps you develop an understanding of Modern Monetary Theory (MMT) and its application to macroeconomic thinking. Comments as usual welcome, especially if I have made an error.
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                    Posted in Saturday quiz | 3 Comments

                    The Weekend Quiz – January 23, 2016

                    Welcome to The Weekend Quiz, which used to be known as the Saturday Quiz! The quiz tests whether you have been paying attention over the last seven days. See how you go with the following questions. Your results are only known to you and no records are retained.
                    Read the rest of this entry »

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                      Posted in Saturday quiz | 3 Comments