Archive for February, 2016

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Attack of the zombies

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A lack of lending leaves Britons working less efficiently on lower wages

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COMPARED with most other rich countries, the British economy looks strong. In 2015 GDP grew by 2.2%, more than the 1.5% seen in the euro zone. And yet, nearly a decade after the financial crisis began, there is one serious weakness: productivity (defined as the amount each worker produces in a given period of time). In the period 2000-08 annual productivity growth was nearly 2%. In 2009-14, though, it was pretty much zero, far below what rivals like America and Germany have achieved. Stagnant productivity growth explains why British real wages are still 5% below their pre-crisis peak.
On February 24th the IMF released its yearly assessment of the state of the British economy. It zooms in on the productivity slowdown. Using a fine-grained dataset, containing over 30m observations of British firms between 2005 and 2014 (including their location and income statements), the IMF looks at …

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Out of ammo?

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Buttonwood

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Can weak markets be explained by changes in bank balance-sheets?

ECONOMISTS have been a bit puzzled by the market turmoil of early 2016. It seems to be driven, in part at least, by fears of either an American recession, or a sharp Chinese slowdown, neither of which looks likely from the data. Perhaps the answer to the conundrum is that market movements are not being driven solely by fundamentals but by recent developments in market liquidity.
Central banks’ support for markets, via quantitative-easing (QE) programmes, is well known. Emerging-market central banks have also been big buyers of government bonds as they have built up their foreign-exchange reserves. But the Federal Reserve stopped its QE programme in 2014 and, in recent months, Chinese foreign-exchange reserves have fallen by around $700 billion. This means the Chinese authorities are net sellers, rather than buyers, of financial assets. Low oil prices mean that sovereign-wealth funds in oil-producing countries may …

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A CENTRAL part of the Sanders economic plan is to break up big banks by reinstating the Glass-Steagall Act. Until its repeal in 1999 Glass-Steagall separated supposedly staid deposit-taking banks from riskier investment activities. Today, large “universal” banks like Citigroup and Bank of America both take in customer deposits and trade in risky global markets. Breaking up the banks has some merit as an idea; it is more realistic than many of Mr Sanders’s other proposals (see article). This week, Neel Kashkari, President of the Minneapolis Fed, said it was worth considering (among other policies). Nonetheless, a focus on Glass-Steagall—to the exclusion of other ideas for making banking safer—is misplaced.The root problem with banking is simple; that some banks are “too-big-to-fail”. The problem has two parts. First, the government feels obliged to bail out a large financial institution if it fails. Second, the probability of a bank failing is large enough to be worth worrying about. Glass-Steagall would address one part of the first problem, by moderately reducing the government’s incentive to bail out banks.One reason governments rescue banks at the height of a crisis is to protect the payments system. If a commercial bank goes into bankruptcy, depositors may not be able to access their funds to pay bills. This is catastrophic for the economy, as it causes spending to …

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Out of ammo?

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Free exchange

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Timid central bankers have failed to convince sceptical audiences

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IS THE job of central bankers more like that of technicians, carefully turning knobs as they fine-tune the economy, or magicians, manipulating the audience into the suspension of disbelief? Most of the time it is the former. Monetary maestros nudge interest rates up and down with meticulous precision. Yet in extreme cases—such as when economies become trapped in a low-growth rut—central bankers must try to conjure up a change in the public’s economic outlook. Just as uncertain magicians often fail to pull off their tricks, so central banks are finding their audiences in an ever-more sceptical mood.
Economists have long acknowledged the role of mass psychology in business cycles. In 1936 John Maynard Keynes described the “animal spirits” that could drive swings in spending or investment. The power of an abrupt …

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Out of ammo?

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Fighting the next recession

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Policymakers in rich economies need to consider some radical approaches to tackling the next downturn

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AT THE start of most years in the past decade, the list of worries about the world economy has seemed longer than that of reasons for hope. The first few weeks of 2016 have upheld this new tradition. Many emerging markets are wrestling with excessive debts, slow growth, plunging currencies and rising inflation. China, the world’s second-largest economy, is a source of a peculiarly intractable anxiety. If its growth falters, it stokes worries about the prospects for other emerging markets; if activity holds up, though, concerns shift to the ever-rising debt that makes such feats possible, but not necessarily sustainable. The euro area’s troubles are no longer acute; but a chronic condition with an uncertain prognosis is a hard thing from which to take much …

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Out of ammo?

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The world economy

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Central bankers are running down their arsenal. But other options exist to stimulate the economy

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WORLD stockmarkets are in bear territory. Gold, a haven in times of turmoil, has had its best start to a year in more than three decades. The cost of insurance against bank default has surged. Talk of recession in America is rising, as is the implied probability that the Federal Reserve, which raised rates only in December, will be forced to take them back below zero.
One fear above all stalks the markets: that the rich world’s weapon against economic weakness no longer works. Ever since the crisis of 2007-08, the task of stimulating demand has fallen to central bankers. The apogee of their power came in 2012, when Mario Draghi, boss of the European Central Bank (ECB), said he would do “whatever it takes” to save the euro. Bond markets rallied and the sense of crisis …

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SO FAR, 2016 has been something of a disaster around global markets. Equity and commodity prices have been hammered. Yields on safe government bonds are plumbing extraordinarily low levels. Investors seem to be terrified. But of what?Recession talk has increased, but real economic data in most countries don't look especially bad (though they are backward looking, and enough market pessimism can at any rate turn self-fulfilling). Some suspect the mess is a reaction to troubles in the European banking system. European bank shares are tumbling, ginning up bad memories of the financial crisis. But while European banks have their problems (and could create many more if the European economy sank back into serious recession) it does not look like the cause of current market jitters. European banks are better capitalised and have access to massive amounts of liquidity thanks to the European Central Bank. This is not a situation like 2008, when markets doubted banks' solvency, banks struggled to fund themselves, and credit markets collapsed.What about the widespread adoption by central banks of negative interest rates? On January 29th the Bank of Japan joined the negative interest rate club, and this morning the Swedish Riksbank reduced its policy rate deeper into negative territory. Negative rates, it is argued, squeeze bank margins, threatening profitability and potentially …

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