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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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On balance

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As Turkey votes on a new constitution, it is sliding into dictatorship

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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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TWO months into the Trump administration and we have had more sound and fury than concrete proposals about its economic agenda. The most alarming sign so far is that America forced the G20 to drop a pledge about resisting “all forms of protectionism” from a joint statement but this may be purely symbolic.Nevertheless, Mr Trump’s determination to shake up the status quo may yet have global consequences. In a research note, Chris Watling of Longview Economics suggests thatTrump’s policies might inadvertently bring about a new international monetary order as the administration struggles to fulfil campaign promises in the light of the original misdiagnosis of the ‘trade deficit’ problem.The current monetary system emerged from the downfall of Bretton Woods in the 1970s. Under the Bretton Woods system, devised in part by John Maynard Keynes (pictured, left), currencies were fixed to the dollar (with scope for occasional devaluations or revaluations) and the dollar was fixed against gold. But this required America to act as the anchor of the system; other central banks were entitled to sell their dollars for gold. In order to maintain confidence in the system, America would have to tighten policy if its gold reserves fell; that is, subordinate domestic economic policy to international demands. …

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All around the world, the economy is picking up

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From deprivation to daffodils

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The world economy

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The global economy enjoys a synchronised upswing

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From deprivation to daffodils

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“IF WINTER comes,” the poet Shelley asked, “can Spring be far behind?” For the best part of a decade the answer as far as the world economy has been concerned has been an increasingly weary “Yes it can”. Now, though, after testing the faith of the most patient souls with glimmers that came to nothing, things seem to be warming up. It looks likely that this year, for the first time since 2010, rich-world and developing economies will put on synchronised growth spurts.
There are still plenty of reasons to fret: China’s debt mountain; the …

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A synchronised global upturn is under way. Thank stimulus, not the populists

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On the rise

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ECONOMIC and political cycles have a habit of being out of sync. Just ask George Bush senior, who lost the presidential election in 1992 because voters blamed him for the recent recession. Or Chancellor Gerhard Schröder, booted out by German voters in 2005 after imposing painful reforms, only to see Angela Merkel reap the rewards.
Today, almost ten years after the most severe financial crisis since the Depression, a broad-based economic upswing is at last under way (see article). In America, Europe, Asia and the emerging markets, for the first time since a brief rebound in 2010, all the burners are firing at once.

But the political mood is sour. A populist rebellion, …

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WESTERN AUSTRALIA’S iron ore and Queensland’s coal were at the centre of Australia’s recent mining boom, stoked by the red-hot growth of China’s steelmaking industry. At its height about five years ago, mining investment accounted for 9% of national GDP. But as investment started to decline in 2013, Western Australia’s debt soared. At 6.5%, its unemployment is now Australia’s highest. If the pattern of earlier booms had followed, Western Australia’s plight would have reverberated around the country and ended in a national bust. Yet the economy’s growth has stayed intact, notching up 25 years without a recession. How has Australia managed a feat that has defied most other rich countries? Australia’s mining booms over the past 160-odd years made the country feel rich and confident while they lasted. Workers made big money, and this brought prosperity to far-flung regions producing gold, coal, gas and other commodities. Recessions followed nearly all earlier booms, including the most recent one, in the 1980s, largely because the upheaval proved too big a shock for an economy that was highly regulated. When negative growth was recorded in the third quarter of 2016, some anticipated the start of another recession (technically defined as two successive quarters of …

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