Archive for June, 2014

AS MY colleague noted over the weekend, the stopped clock that is the Bank for International Settlements (“the central bank for central banks”) is showing the same face to the world that it has for the last few years. In 2011, when unemployment rates in both Europe and America were above 9%, the BIS argued that global growth needed to slow in order to reduce inflationary pressure. In 2012 it warned that central banks shouldn’t do any more to boost growth lest they create financial instability and discourage structural reform, even as the crisis in the euro area threatened to tip the rich world back into serious recession. Though the BIS’s diagnoses of the global economy’s ills have evolved over time its policy recommendations have not. In its latest annual report, it argues that what the world needs now is higher interest rates. One of these days the BIS may just turn out to be right.Not this year. The BIS reckons central banks need not worry about doing more to support growth, since monetary policy is not particularly effective now anyway and deflation isn’t actually as bad as tales from the Depression would lead one to believe. But its main point in favour of rate rises is that central banks ought to be less focused on business cycles and more concerned with financial cycles: waves of rising indebtedness followed by crises and balance-sheet recessions. Low rates are not …

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CENTRAL banks in the developed world continue to keep monetary policy as loose as possible for as long as possible in order to facilitate a stronger recovery from the painfully weak upturn after the financial crisis and the “great recession”. America’s Federal Reserve may be phasing out its programme of asset purchases but it is determined to delay any rise in interest rates. The Bank of England is closer to a rate increase, but to the extent that any clear message can be deciphered from its confused communications such a move may still be some time off even though the base rate has been at a three-centuries low for over five years. In Japan quantitative easing carries on apace. And in the euro area the European Central Bank (ECB) has become the first big central bank to introduce negative interest rates and will lend funds to banks at rock-bottom rates fixed for as long as four years in a bid to ease credit conditions for firms in southern Europe.The new monetary-policy orthodoxy bears a disconcerting resemblance to someone maxing out their credit card but its proponents have an array of respectable arguments to justify their loose stance, such as continuing reserves of spare capacity in most advanced economies and surprisingly weak inflation. In the euro area, high levels of private as well as public indebtedness warrant measures to minimise the risk of a lurch into …

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AMID the adulation of Lionel Messi and the angst over the country’s ongoing battle with its holdout creditors, it was easy to miss another piece of news from Argentina this week. On June 23rd the country’s statistics agency announced that Argentina’s economy had officially entered recession, shrinking by 0.8% in the first quarter of 2014 after a 0.5% contraction in the final quarter of 2013. Many economists are expecting the first calendar-year recession since Argentina’s devastating 2001-2002 financial crisis.The economy’s contraction can be attributed largely to a devaluation of 20% in January, accompanied by interest-rate hikes. That subdued output and spurred on inflation, predicted to reach almost 40% by year-end. For Miguel Kiguel of EconViews, a consultancy, expectations of devaluation also played their part, by pulling some economic activity into 2013: “People stocked up on durable goods such as cars, and they were smart to do so given that prices have since spiked and the peso has lost value.”Many of Argentina’s problems are familiar. Inflation has plagued Argentina for much of the past decade; it still grew by an average of 5.6% from 2005-2013. Exchange and trade controls have long made it hard to get hold of primary materials, stifling production. But whereas in the past Argentina could maintain growth by propping up the peso and consumers’ purchasing …

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UK Only Article: 
standard article

Issue: 

How far can Amazon go?

Fly Title: 

Central banks

Rubric: 

In both Britain and America financial excesses are best countered with rules, not with interest rates

INVESTORS lulled into believing that low interest rates would last for ever got a cold dose of reality this month. First, Mark Carney, the governor of the Bank of England, told an audience in the City that rates could rise “sooner than markets currently expect”. Now America’s Federal Reserve, which like the bank has kept rates near zero for more than five years, has signalled its intention to keep them there at least until next year; but it too faces ever louder calls, including some from its own officials, to abandon that pledge (see article).
Advocates of fast action worry that rates left near zero for too long will cause inflation to accelerate in both countries. And they fear that even if prices stay quiescent, too much cheap money for too long is inflating asset bubbles: their eventual popping will create another financial crisis. These worries are not …

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UK Only Article: 
standard article

Issue: 

How far can Amazon go?

Fly Title: 

Monetary policy and asset prices

Rubric: 

Central banks around the world are struggling to promote growth without fomenting worrisome risk-taking

Location: 

Washington, DC

Main image: 

20140621_FND001_0.jpg

UNTIL the global financial crisis, central banks treated bubbles with benign neglect: they were hard to detect and harder to deflate, so best left alone; the mess could be mopped up after they burst. No self-respecting central bank admits to benign neglect any longer. “No one wants to live through another financial crisis,” Janet Yellen, then a candidate to head the Federal Reserve, said last year. “I would not rule out using monetary policy as a tool to address asset-price misalignments.”
After six years of interest rates near zero the tension between central banks’ responsibility for output and inflation on one hand and financial stability on the …

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How the financial crisis made everyone poorer

THE financial crisis tore through economies and shattered lives. Only now are we starting to see the full extent of the damage. The economic hardship fell disproportionately on the poorest, according to figures released today by the OECD. An insightful metric is the extra spending-money people have (officially known as household disposable income). Between 2007 and 2011, the poorest in society saw their money either fall more during the crisis, or gain less during the recovery, than the wealthier people.In Spain, for example, the richest in society suffered a modest decline in disposable income, while the poorest were heavily stung. By contrast, in egalitarian Germany, everyone’s spending money increased slightly. In the US and France, the rich got richer and the poor got poorer—which may explain recent unrest, from the “Occupy” movement exclaiming “We are the 99 percent” to demonstrations across France. And the data leans in favour of Thomas Piketty’s thesis that wealth inequality is increasing: certainly the period of the financial crisis upholds that depressing view. 
Comment Expiry Date: 

Fri, 2014-07-04

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FOR months residents of Sana’a, Yemen’s capital, have been complaining about deteriorating security, shortages in fuel and electricity and the rising cost of living in the Arab world’s poorest country. On June 10th an attack by tribesmen on a power plant that supplies the city with electricity brought frustrations to a head.In the midst of a 36-hour blackout the day after, young men set up roadblocks, first in the backstreets and then on the city’s main roads and squares, bringing activity to a halt. “We are here because there is no fuel, no electricity, no water, everything is expensive, there are no jobs and the government does nothing to help us,” says 24-year-old Muhammad Saleh. “Something needs to change.Abd Rabbo Mansour al-Hadi, Yemen’s president, responded with a government reshuffle and announced that more fuel would be brought into the capital from the western port of Hodeidah. The protesters left the streets, but they are likely to return. Government officials gloomily predict worsening shortages—and unrest—in the coming months. The simple fact, they admit, is that Yemen is running out of cash.Since 2011 attacks by tribesmen on an export pipeline linking the oil-rich Mareb province in central Yemen with export facilities on the country’s west coast have cut off lucrative oil sales on the international market as well as the supply of cheap oil to Yemen’s …

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