Archive for October, 2014

Daily chart: QE RIP

Posted: October 31, 2014 in economy
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The end of quantitative easing in America 

ON OCTOBER 29th the Federal Reserve brought to a close the monetary-stimulus programme known as “QE3”. The Fed first began using quantitative easing—the purchase of assets like government debt and mortgage-backed securities with newly created money—in late 2008, after its main interest rate was cut all the way to zero. By injecting liquidity into rattled markets and lifting asset prices quantitative easing is meant to boost investment and to raise growth, hiring, and inflation (all of which plummeted in the recession). Although the initial bout of QE seemed to work, the Fed had to restart purchases in late 2010 and again in late 2012 when economic momentum slipped, in the process accumulating more than $4 trillion in assets. It could perhaps have added even more: expectations for future inflation have sunk to the lowest level in three years.
Comment Expiry Date: 

Sat, 2014-11-15

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IF THE markets were suffering from withdrawal symptoms after the Fed’s halting of QE on Wednesday, they did not have to wait long for their next hit. This morning, the Bank of Japan today announced an increase in its annual target for expansion of the monetary base from Y60-70 trillion to Y80 trillion. Even at Y110 to the dollar, that is still a chunky $700 billion a year increase (or about 2% of GDP). The aim is to get inflation higher; if the recent sales tax increase is excluded, core inflation is still running at 1%, too close to deflation for comfort.The decision, on a 5-4 vote, was a big surprise and pushed the Japanese market up sharply, with the Nikkei 225 hitting a seven-year high. European markets, already encouraged by Wall Street’s strength yesterday, have duly pushed higher.But perhaps the most interesting response has been in the currency markets, where the yen dropped more than 2% against the dollar, a big move by normal standards. There is now a genuine divergence between monetary policy in the developed economies. That creates a lot more scope for currency volatility than in the long years when virtually all banks had their feet on the monetary accelerator.The talk of currency wars a few years ago was focused on emerging markets, which felt the developed world was devaluing at their expense. In a sense, however, this was the right thing to happen; over …

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standard article

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Free exchange

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Ending quantitative easing may be penny-wise, pound-foolish

Main image: 

20141101_woc110.png

ON OCTOBER 29th the Federal Reserve said it would end “QE3”: the programme of asset purchases it first announced in September 2012 and began shrinking last December. Quantitative easing, or the buying of assets with newly created money, has been the workhorse of monetary policy since rich-world interest rates fell almost to zero in 2008-09. Despite its expansive use since then, many still see it as an exotic and possibly dangerous monetary tool. They raise three pressing questions: did it work, did it have unacceptable side effects, and was the Fed right to stop?
Though QE is often described as an “unconventional” form of monetary policy (as opposed to mundane adjustments to interest rates), it has actually been in use for some time. The Federal Reserve tried it from 1932 to 1936, and the Bank of Japan in the early 2000s. Both have used it again since the financial crisis, along with the Bank of England.
QE is …

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UNICEF, a branch of the United Nations, has just released an interesting report on child poverty during the Great Recession. The report’s results have been reported widely and are distressing. It shows that since 2008 2.6 million children in rich countries have sunk below the poverty line. In 23 of the 41 countries analysed, child poverty has jumped since 2008. In Ireland, Croatia, Latvia, Greece and Iceland rates rose by over 50%.

Change in child poverty, 2008 to 2012 (anchored in 2008)
I should say at the outset that I am generally convinced by what I’ve read in this report. It is a very important topic and one that needs to be debated more. But for people serious about analysing poverty, the report is not good enough. I’ve been puzzling over a few things in particular.Making assumptions is all well and good in economics research: it is often unavoidable. But researchers usually spend a long time justifying their assumptions, and showing what happens when they make different ones.But in this report the authors make assumptions that are not adequately justified. Take their definition of “poverty”. Usually academics define poverty as those people with incomes below 60% of their country’s median. That’s a relative measure, of course. Here, though, the authors use income figures from 2008—before the crisis really hit—as a “benchmark” against which to compare the incomes of …

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The world’s biggest economic problem

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Real wages

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Workers continue to feel the pinch

DESPITE headwinds from the continent, Britain’s economy continues to do pretty well. GDP has exceeded forecasts so far this year, and in the second quarter was 3.1% larger than a year ago. The economy has at last surpassed its pre-crisis peak. Yet working Britons are not feeling the benefit. Real wages have fallen for seven consecutive years, and are 6.9% below their 2007 level. Britain is experiencing its longest period of pay stagnation since records began in 1855 (see chart).
On October 18th, 90,000 workers took to London’s streets to join a protest organised by the Trades Union Congress (TUC). Participants bemoaned not just pay stagnation, but also inequality: FTSE 100 chief executives now typically earn 120 times as much as their average employee, up from 47 times as much in 2000, according to Incomes Data Services, a research company. On October 20th the Social Mobility and Child Poverty Commission, headed by Alan …

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The world’s biggest economic problem

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Fannie Mae and Freddie Mac

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America restores the weak lending standards that led to the housing crash

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New York

WHEN politicians bashed Wall Street for its reckless mortgage lending in the wake of the subprime crisis, bankers retorted that it was the politicians’ enthusiasm for expanding home ownership, even if it meant small deposits and low credit standards, that had really fomented the disaster. Yet that enthusiasm is undimmed: in a speech on October 20th Mel Watt, head of the Federal Housing Finance Authority (FHFA), announced plans to reintroduce mortgages with deposits as low as 3% through Fannie Mae and Freddie Mac, the two government-backed housing giants it regulates.
Both Fannie and Freddie were bailed out during the financial crisis. There was much talk in Congress of winding them down; in the meantime, they tightened loan requirements to limit the risk to taxpayers. But that changed …

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The dangers of deflation

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Politicians and central bankers are not providing the world with the inflation it needs; some economies face damaging deflation instead

Location: 

WASHINGTON, DC

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20141025_FBD001_0.jpg

IT IS a pernicious threat, all the more so because, at its onset, it seems almost benign. After two generations of fighting against inflation, why be worried if the victory looks just a bit too complete, if the ancient enemy is so cowed as to no longer strain against the chains in which it is bound? But the stable low inflation fought for in the 1980s and 1990s and inflation hazardously close to zero are not so far apart. And as inflation drops, slipping into deflation becomes ever easier. It is in that dangerous position that the world now stands.
In America, Britain and the euro zone central banks have a 2% target for inflation. In all three, it is below that target. In Italy, Spain and Greece, which have experienced …

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