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Agreement on how to fight recessions in a low-interest-rate world remains elusive

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The low road

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Free exchange

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The right way to help declining places

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Free exchange

ONE day, perhaps quite soon, it will happen. Some gale of bad news will blow in: an oil-price spike, a market panic or a generalised formless dread. Governments will spot the danger too late. A new recession will begin. Once, the response would have been clear: central banks should swing into action, cutting interest rates to boost borrowing and investment. But during the financial crisis, and after four decades of falling interest rates and inflation, the inevitable occurred (see chart). The rates so deftly wielded by central banks hit zero, leaving policymakers grasping at untested alternatives. Ten years on, despite exhaustive debate, economists …

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A devil to sup with

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Herbert Hoover

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The right way to help declining places

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20th-century American history

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Hoover: An Extraordinary Life in Extraordinary Times. By Kenneth Whyte. Knopf; 752 pages; $35.
FOR his philanthropic efforts during the first world war, Herbert Hoover was described as a “man who began his career in California and will end it in heaven”. In a new biography, Kenneth Whyte lists the many hardships Hoover went through. Generally, he used them to his advantage—to increase his wealth, achieve fame and become America’s 31st president. At least, that is, until the Great Depression, which ruined him politically.

Born in Iowa in 1874, Hoover became determined early in life to earn a fortune for the security and independence it would bring. After graduating as a geologist from …

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Nearly 11 percent of the world’s population lives on less than two dollars a day, according to the World Bank.

(Image credit: EITAN ABRAMOVICH/AFP/Getty Images)

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Prices are high across a range of assets. Is it time to worry?

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The bull market in everything

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Asset prices

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It is not too late to stop the break-up of Spain

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The bull market in everything

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IN HIS classic, “The Intelligent Investor”, first published in 1949, Benjamin Graham, a Wall Street sage, distilled what he called his secret of sound investment into three words: “margin of safety”. The price paid for a stock or a bond should allow for human error, bad luck or, indeed, many things going wrong at once. In a troubled world of trade tiffs and nuclear braggadocio, such advice should be especially worth heeding. Yet rarely have so many asset classes—from stocks to bonds to property to bitcoins—exhibited such a sense …

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The next financial crisis may be triggered by central banks

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When the cycle turns

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Buttonwood

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The spotlight shifts from Germany to France

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Buttonwood

AS WITH London buses, don’t worry if you miss a financial crisis; another will be along shortly. The latest study on long-term asset returns from Deutsche Bank shows that crises in developed markets have become much more common in recent decades. That does not bode well.
Deutsche defines a crisis as a period when a country suffers one of the following: a 15% annual decline in equities; a 10% fall in its currency or its government bonds; a default on its national debt; or a period of double-digit inflation. During the 19th century, only occasionally did more than half of countries for which there are data suffer such a shock in a single year. But since the 1980s, in …

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AS EXPECTED, the Federal Reserve announced on September 20th that it will soon begin reversing the asset purchases it made during and after the financial crisis. From October, America’s central bank will stop reinvesting all of the money it receives when its assets start to mature. As a result, its $4.5trn balance-sheet will gradually shrink. However, the Fed did not give any clues as to what the endpoint for the balance-sheet should be. This is an important question. There are strong arguments for keeping the balance-sheet large. In fact, it might be better were the Fed not shedding any assets at all. Most commentators view a large balance-sheet, which is the result of quantitative easing (QE), as an extraordinary economic stimulus. Janet Yellen, the Fed’s chair, seems to agree: at a press conference after the Fed announcement, she said the balance-sheet should shrink because the stimulus it provides to the economy is no longer needed. But the claim that the balance-sheet is stimulating the economy is far from an established fact. The theoretical case for it is weak (Ben Bernanke, Mrs Yellen’s predecessor, famously quipped that QE “works in practice, but it doesn’t work in theory”). While most studies have shown that QE brought down long-term interest rates, it may have worked by …

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This week “The Economist explains” is given over to economics. Today’s is the third in a series of six explainers on seminal ideas.IN THE depths of the Great Depression, more than a quarter of America’s workers could not find employment. There was not enough demand for the goods and services they could supply. Today America’s workforce can produce more than 17 times as much, but unemployment is under 5%. Somehow demand, so inadequate in the 1930s, is sufficient to match a massively increased supply of goods and services eight decades later. This happy outcome would have surprised some economists of the 1930s, who worried about a “secular” (ie, persistent) stagnation of demand. But it would have been no surprise at all to an older generation of economists, led by Jean-Baptiste Say. His best-known work, “A Treatise on Political Economy”, ran to six editions between 1803 and 1841. It contained much of what became known as Say’s law, the notion that supply creates its own demand.Say and his intellectual allies pointed out that people would not go to all the trouble of producing a good or service, unless they intended to obtain something of equal value in return. So each addition to supply is accompanied by an intended addition to demand. Moreover, the act of production creates an …

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