Archive for April, 2017

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BEFORE the financial crisis, America’s Federal Reserve held assets worth around $850bn. Today, the central bank’s balance-sheet is more than five times as large, at $4.5trn. It grew during and after the financial crisis as the Fed purchased vast quantities of government bonds and mortgage-backed securities using newly created money, most of it under a policy known as quantitative easing (QE). Now the Fed is preparing to sell some assets, and retire the corresponding money. Why and how will it do this?The Fed resorted to QE to stimulate the economy after it had moved the short-term interest rate, its usual policy instrument, as low as it could go. Debate rages over how, exactly, QE worked; Ben Bernanke, the former Fed chairman, once quipped that the policy “works in practice but not in theory”. But it is clear enough that QE pushed up the price of long-term bonds. This put downward pressure on long-term interest rates (which move inversely to bond prices). Today, however, the Fed, now led by Janet Yellen (pictured), is raising short-term rates, as it tries to keep a lid on inflation. So—the logic goes—it should also shrink its balance-sheet, to push up long-term rates.There are different ways to shrink the balance-sheet. The most aggressive approach would be to sell bonds. This would …

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Why the Federal Reserve should keep its balance-sheet large

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HOW much money should exist? The Federal Reserve must soon confront this deep question. The Fed has signalled that towards the end of 2017 it will probably begin to unwind quantitative easing (QE), the purchase of financial assets using newly created bank reserves. The central bank’s balance-sheet swelled from about $900bn on the eve of the financial crisis to about $4.5trn by 2015 as it bought mortgage-backed securities and government debt (see chart). If and when the Fed shrinks its balance-sheet, it will also retire the new money it created.
Economists such as Milton Friedman popularised the study of the quantity of money in the 1960s and …

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Why the history of economic growth should be all about recessions

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“THROUGHOUT history, poverty is the normal condition of man,” wrote Robert Heinlein, a science-fiction writer. Until the 18th century, global GDP per person was stuck between $725 and $1,100, around the same income level as the World Bank’s current poverty line of $1.90 a day. But global income levels per person have since accelerated, from around $1,100 in 1800 to $3,600 in 1950, and over $10,000 today.
Economists have long tried to explain this sudden surge in output. Most theories have focused on the factors driving long-term economic growth such as the …

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