Friday, January 27, 2012

Weekend links

1--The Fed will Keep Rates at "Exceptionally Low Levels" Through Late 2014, economist's view

Excerpt: The Press Release describing the decisions of the Fed's monetary policy committee decisions was released this morning, and it is very similar to the press release from its last meeting in mid December with one notable exception. The Fed announced a commitment to "maintain a highly accommodative stance for monetary policy" by keeping the federal funds rate at "exceptionally low levels" at least through late 2014. The previous policy was to keep rates low through "at least through mid-201," so this extends the commitment by a year and a half and represents an easing of policy... from the latest release:

Press Release, January 25, 2012 , Federal Reserve Board: Information received since the Federal Open Market Committee met in December suggests that the economy has been expanding moderately, notwithstanding some slowing in global growth. While indicators point to some further improvement in overall labor market conditions, the unemployment rate remains elevated. Household spending has continued to advance, but growth in business fixed investment has slowed, and the housing sector remains depressed. Inflation has been subdued in recent months, and longer-term inflation expectations have remained stable.

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee expects economic growth over coming quarters to be modest and consequently anticipates that the unemployment rate will decline only gradually toward levels that the Committee judges to be consistent with its dual mandate. Strains in global financial markets continue to pose significant downside risks to the economic outlook. The Committee also anticipates that over coming quarters, inflation will run at levels at or below those consistent with the Committee's dual mandate.

To support a stronger economic recovery and to help ensure that inflation, over time, is at levels consistent with the dual mandate, the Committee expects to maintain a highly accommodative stance for monetary policy. In particular, the Committee decided today to keep the target range for the federal funds rate at 0 to 1/4 percent and currently anticipates that economic conditions--including low rates of resource utilization and a subdued outlook for inflation over the medium run--are likely to warrant exceptionally low levels for the federal funds rate at least through late 2014.

2--What drives surges in capital flows?, VOX EU

Excerpt: In the immediate aftermath of the global financial crisis, there was a rapid surge in net capital flows to emerging market economies. The subsequent decline in recent months has been even more rapid. Looking at data on 56 capital surges between 1980 and 2009, this column examines the causes of the mercurial movement of capital flows across countries and outlines the implications for policy.

After collapsing during the 2008 global financial crisis, capital flows to emerging market economies surged in late 2009 and 2010, raising both macroeconomic challenges and financial-stability concerns. Several commentators have argued that country-specific determinants – or ‘pull’ factors – in emerging markets were the dominant factor in accounting for the post-crisis surge (eg Fratzscher 2011). By the second half of 2011, however, amid a worsening global economic outlook, capital flows receded rapidly, eliminating much of the cumulated currency gains, and leaving emerging markets grappling with sharply depreciating currencies in their wake. While such volatility is nothing new – historically, flows have been episodic (Figure 1) – it rekindles questions about the nature of capital flows to emerging markets....

Our analysis also shows that inflow surges to emerging markets are mainly liability-driven – only one third of the net flow surges correspond to changes in residents’ foreign assets. The factors driving the two types of surges turn out to be quite similar: global factors matter for both, with lower US interest rates (or greater risk appetite) encouraging both foreigners to invest more in emerging markets, and domestic residents to invest less abroad. Yet some differences are discernible. Foreign investors are equally attuned to local conditions (the external financing need, real economic growth, capital-account openness, and institutional quality) as domestic investors, but tend to be more sensitive to changes in the real US interest rate and global market volatility, and are also more subject to regional contagion than domestic investors.

Policy implications

These findings hold important policy implications.

Inasmuch as surges reflect exogenous supply-side factors that could reverse abruptly, or are driven by contagion rather than by fundamentals:
•There is a stronger case for imposing capital controls (provided macro policy prerequisites have been met, Ostry et al 2011) on inflow surges that may cause economic or financial disruption.

•Greater policy coordination between capital source and recipient countries may also be called for.

If the aggregate volume of capital flows to emerging markets is largely determined by supply-side factors, but the allocation of flows across countries depends on local factors (including capital-account openness):

There may also be a need for coordination among recipient countries to ensure that they do not pursue beggar-thy-neighbour policies in an effort to deflect unwanted surges to each other.

Further, while the drivers of asset- and liability-driven surges may be largely similar, policy responses may need to be adjusted to the type of surge, for example:

•Prudential measures might be more important for dealing with financial-stability risks caused by asset-driven surges,

•Capital controls on inflows may be an additional option for liability-driven surges.

Disclaimer: The views expressed herein are those of the authors, and should not be attributed to the IMF, its Executive Board, or its management.

3--Dow Rises to Highest Level Since May 2008, Bloomberg

Excerpt: U.S. stocks advanced, sending the Dow Jones Industrial Average toward the highest level since May 2008, after earnings at companies including Caterpillar Inc., 3M Co. (MMM) and Time Warner (TWC) Cable Inc. exceeded analysts’ estimates....

The Standard & Poor’s 500 Index advanced 0.3 percent to 1,329.49 at 10:13 a.m. New York time, rising a second day. The Dow increased 65.84 points, or 0.5 percent, to 12,819.09 today.

“The backdrop that is coming forth is a nightmare for those who are way underinvested in U.S. equities,” Jeffrey Saut, chief investment strategist at Raymond James & Associates in St. Petersburg, Florida, said in a telephone interview. His firm manages $300 billion. “Earnings continue to come in better than expected, our economy is improving and the Fed stands ready to do whatever is necessary. In addition, it looks like the ‘euro-quake’ situation appears, at least in the short term, to be on the back burner. And the list goes on and on.”

4--Bernanke Makes Case for More Bond Buying, Bloomberg

Excerpt: Ben S. Bernanke laid the groundwork for a third round of large-scale asset purchases should unemployment remain higher than the Federal Reserve would like while inflation falls below a newly-established target.
The Federal Open Market Committee “recognizes the hardships imposed by high and persistent unemployment in an underperforming economy, and it is prepared to provide further monetary accommodation,” Bernanke said yesterday at a press conference in Washington....

The U.S. central bank’s “two main tools” to boost growth are asset purchases and communications, and bond buying is “an option that is certainly on the table,” Bernanke said. “The unemployment level is elevated and the inflation outlook is subdued.”

Policy makers yesterday set a long-term goal of 2 percent inflation, and forecast that price increases would fall short of that target this year and next. The personal consumption expenditures price index (SPX) climbed 2.5 percent for the 12 months ending in November.

5--UK: Into Recession, econbrowser

Excerpt: So much for expansionary fiscal contraction in the UK. Not that that’s a surprise.

The UK Office of National Statistics has just released preliminary estimates for real GDP growth in 2011Q4. The 0.8% contraction (q/q SAAR) was large than consensus [1], and in fact larger than the 0.6% decline forecasted by Deutsche Bank on 1/18. Figure 1 illustrates the fact that a year and a half after the election of a coalition government bent on a path of austerity, the UK economy is likely to be entering a new recession (not that growth was so great even before the dip)....

In my view, this is pretty much the nail in the coffin that an expansionary fiscal contraction will occur, even in a relatively small, open economy with a flexible exchange rate (see JEC/Republicans for an exposition, and this post for a critique).

Simon Wren-Lewis at Mainly Macro provides additional commentary, which I think advocates of austerity in the US would do well to heed:

The first estimate of UK growth in the last quarter of 2011 was negative. As these updated NIESR charts show, no other UK recovery has stalled in this way. Of course very little is ever certain, but we can be pretty sure that growth would have been significantly better if the current government had not imposed severe additional austerity measures beginning in 2010. (This is the counterfactual that matters, and just looking at GDP components can be a misleading way at getting at this for reasons I discussed here.) Of course growth might have been better too if the Euro crisis had not happened, but this government had no control over the Euro crisis, while it does decide fiscal policy.

I do not have anything very new to say about this, in part because many people predicted growth would be harmed before the policy was introduced. (See, for example, this letter from 80 economists published during the 2010 election campaign.) What was the reason for this major macroeconomic policy error? For some I think it was a political calculation that it would be advantageous to get as much of the cuts out of the way early, well before the next general election. However I think others in the coalition were genuinely spooked by events in Greece and elsewhere.

Unfortunately the key difference between economies in the Eurozone and those with their own central bank was not appreciated. Today the claim that if these additional austerity measures had not been introduced UK interest rates on debt would have suffered the same fate as many Eurozone countries looks pretty implausible. In Denmark we even have an example of a country that has recently undertaken stimulus measures, and where interest rates have continued to fall in line with other countries outside the Eurozone (see David Blanchflower here).

So I believe we must add 2010 to a list of major macroeconomic policy errors made in the UK since the war. Like the failed monetarist experiment in the early 1980s, it is the result of a government adopting a policy which relied on a mistaken macroeconomic analysis that was not supported by the majority of academic opinion. And like that earlier failure, it will leave unemployment significantly higher than it need to have been for many years.

6--Why Home Prices Have Much Further To Fall, advisors perspectives

Excerpt: There has been a deluge of articles recently about the upticks in the housing data. The consensus is that these data points are surely indicating, finally, a bottom in the depressing decline of real estate. Let me acknowledge that I do not dispute the improvement in the data regarding home starts, permits, pending sales, etc. However, let's be clear that all of these data points are still mired at very depressed levels. So, while optimism is certainly always a welcome thing, for the average American, the world is quite different....

Over the last 30 years, a big driver of home prices has been the unabated decline of interest rates. When declining interest rates were combined with lax lending standards, home prices soared off the chart. No money down, ultra-low interest rates and easy qualification gave individuals the ability to buy much more home for their money. The demand for home ownership, promulgated by the Fed, the finance and real-estate industry, drove prices far beyond rational levels. Easy credit terms combined with a plethora of psychological encouragement, from home flipping and house decorating television to direct advertisement of the "dream of homeownership", enticed families to bite off way more than they could ever hope to chew...

The decline in home prices so far has largely been due to the initial process of the real estate bust and the deleveraging of the American household balance sheet. According to recent data, as much as 2/3rds of the sales completed so far have been distressed in some form or fashion. However, the real potential for declines in price will come when interest rates began to rise.

At some point in the future interest rates will begin to rise back towards the long term median of 8.9%. From the current 4% rate, that is a substantial rise. However, before you guffaw the idea entirely, let me just remind you that 30-year interest rates were almost 7% in mid-2006. Therefore a rise to the long term median is not entirely out of the question - the only debate will be the timing and the trigger of the event....

With this in mind, let's review how home buyers are affected. If we assume a stagnant purchase price of $125,000, as interest rates rise from 4% to 8% by 2024 (no particular reason for the date - in 2034 the effect is the same), the cost of the monthly payment for that same priced house rises from $600 a month to more than $900 a month - a 33% increase. However, this is not just a solitary effect. ALL home prices are affected at the margin by those willing and able to buy and those that have "For Sale" signs in their front yard. Therefore, if the average American family living on $55,000 a year sees their monthly mortgage payment rise by 33%, this is a VERY big issue.

Let's look at this another way. Assume an average American family of four (Ward, June, Wally and The Beaver) are looking for the traditional home with the white picket fence. Since they are the average American family, their median family income is approximately $55,000. After taxes, expenses, etc., they realize they can afford roughly a $600 monthly mortgage payment. They contact their realtor and begin shopping for their slice of the "American Dream."

At a 4% interest rate they can afford to purchase a $125,000 home. However, as rates rise, that purchasing power quickly diminishes. At 5% they are looking for $111,000 home. As rates rise to 6% it is a $100,000 property, and at 7%, just back to 2006 levels mind you, their $600 monthly payment will only purchase a $90,000 shack. See what I mean about interest rates?...

This is why the Fed has been so adamant to suppress interest rates at very low levels and have injected trillions of dollars to achieve that goal. They understand the ramifications of rising interest rates, not only on home prices, but also on the $3 Trillion in debt they are currently carrying on their balance sheet.

There are basically two possible outcomes from here. First, Ben Bernanke and his gang artificially suppress interest rates for a very long period of time creating the "Japan Syndrome" in the US, which leads to rolling recessions and a general economic malaise. Or, secondly, interest rates rise back towards more normalized levels as the economy begins a real and lasting recovery. I am really hoping for the later. In either case there is a negative and sustained impact to housing going forward. The excesses that were created over the last 20 years will have to be absorbed into the system, allowing prices to return to a more normalized and sustainable level.

None of this means that home construction, sales, etc. can't stabilize at these lower levels even as prices revert to their long term median price. However, stabilization and a recovery, such as the media is currently hoping for, are two vastly different things. We are very early in the entire deleveraging process, and until the excesses are removed from the system, the real housing bottom may be more elusive than anyone expects.

7--The British Economy Is Now Doing Worse than it Did in the Great Depression, Grasping Reality

Excerpt: Yep. This many months after the start of the Great Depression, the British economy was rapidly converging back to its pre-depression level of production under Chancellor of the Exchequer Neville Chamberlain's policy of using stimulative policies to restore the price level to its pre-Great Depression trajectory.

By contrast, the Cameron-Osborne policies of expansion-through-austerity have produced a flatline for real GDP, and the odds are high that British real GDP is headed down again.

In less than a year, if current forecasts come true, the Cameron-Osborne Depression will not be the worst depression in Britain since the Great Depression, but the worst depression in Britain… probably ever.
That is quite an accomplishment.

As Phillip Inman of the Guardian puts it:

the UK's plan for recovery from the financial crisis was based on a full-throttle recovery in 2012... consumer confidence, business investment and general spending would converge to send the economy on a trajectory of above-average growth... the lack of investment will perplex ministers. They have done what the right-wing economists told them to do and moved out of the way – the theory being that public sector spending and investment was ‘crowding out’ the private sector...

It did not work: “Spain is showing the way with its austerity-driven recession. Where the weak tread, we [in Britain] look keen to follow...”
That expansionary austerity is not working in Britain should give all of its advocates great pause, and lead to a great rethinking. Britain is a highly open economy with a flexible exchange rate. Britain has some room for further monetary ease. There is no risk or default premium baked into British interest rates to indicate that fear of future political-economic chaos down the road is discouraging investment. There was an argument--I’m not saying that it was true, but there was an argument--that the Blair-Brown governments had overshot Britain’s long-term sustainable government-spending share of GDP (in contrast to those countries that had reduced their debt-to-GDP levels in the 2000s, where there was no such argument, and in contrast to the United States where the problem was not spending overshoot but taxation undershoot under the Bush administration) and that spending cutbacks were advisable in the long run.

Yet with a ten-year nominal interest rate in Britain of 2.098% per year, if low long-term Treasury interest rates were the key to recovery, Britain would be in a boom. If there was ever a place where expansionary austerity would work well--where private investment and exports would stand up as government purchases stood down--if its advocates’ view of the world was reality rather than fantasy, it would be Britain today.
But it is not working.

And the lesson is general.

If it is not working in Britain, how well can it possibly work elsewhere in countries that are less open, that don’t have the exchange-rate channel to boost exports, that don’t have the degree of long-term confidence that investors and businesses have in Britain?...

Policy makers elsewhere in the world take note: starving yourself is no road to health, and pushing unemployment higher now is no road to market confidence.

8--Big questions about Obama’s mass-refinancing plan, Washington Post

Excerpt: The ongoing housing crisis is among the biggest reasons that our economy is still in a funk, and on Tuesday, President Obama laid out a new plan to help resolve it. He wants Congress to pass a bill that would allow “every responsible homeowner” to refinance at lower interest rates, estimating that it would save every participant about $3,000 a year on their mortgage. Obama would pay for his mass-refinancing plan by levying a new fee on big financial institutions. But economists on both left and right have raised large questions about the plan.

The biggest concern is how much risk taxpayers would be taking on through this approach to mass refinancing. A White House official, speaking on the condition on anonymity, indicated that the plan would be fairly broad in scope: It would not only include mortgages that the government already holds through Fannie Mae and Freddie Mac, but also to holders of loans backed by the private sector as well.

That approach could potentially help a large number of homeowners and prevent more foreclosures. But there also is the risk that we would be “transferring massive amounts of bad debt from the current holders to the government,” says Dean Baker, co-director of the left-leaning Center for Economic Policy Research. “If the government is going to guarantee refinancing in this way, then we are giving much more money to banks and investors than to homeowners,” he argues.

Columbia University’s Glenn Hubbard, an economic policy adviser to the Romney campaign, echoed some of Baker’s concerns. Hubbard has proposed a mass refinancing plan that would be restricted to mortgages held by Government-Sponsored Enterprises, and he thinks Obama’s plan to extend it beyond such mortgages would be placing taxpayers at greater risk. “In the case of GSEs, the government already had the risk. Here the administration is needlessly taking on new risk because it can’t or won’t manage the GSEs and FHFA,” Hubbard said in an e-mail. “As I understand the plan, the President took a good idea and turned it into a bad one.”

9--State of the Union Preview: Housing and Fairness Don’t Connect, CNBC

Excerpt: Let’s start with that principal forgiveness. Some Democrats have been hounding the regulator of Fannie Mae and Freddie Mac (the FHFA and its leader Ed DeMarco) to initiate a program to reduce the value of mortgages where the mortgage is larger than the value of the home, i.e. “underwater”. The idea is that this will keep those borrowers from defaulting on these mortgages.

DeMarco is against this, so Democrats, or at least Rep. Elijah Cummings, the ranking Democrat on the House Oversight Committee, went so far as to request proof of Demarco’s contention that such a program would do more harm than good. This after the Federal Reserve officials, in a recent “White Paper,” suggested, “some actions that cause greater losses to be sustained by the [GSE’s] in the near term might be in the interest of taxpayers to pursue if those actions result in a quicker and more vigorous economic recovery.”

The losses to Fannie and Freddie, according to DeMarco, would be somewhere around $100 billion, if they were to write down principal on all 3 million underwater mortgages backed by the two. That money, DeMarco noted in a letter back to the Congressman, would come from taxpayers, who have already footed a $150 billion bill from Fannie and Freddie.

Then there’s that pesky refi plan that’s been floating around for a few years now. The idea is that Fannie and Freddie would refinance about 14 million of their own borrowers to 4 percent or less, as long as the borrowers are current on their loans. This would supposedly juice the economy with household savings of about $36 billion a year. Administration officials have already told me they are not considering such a program as it is too expensive in too many ways. And then there’s that fairness issue again, as in why should the government fund refinances for borrowers with Fannie and Freddie loans but not for the other half of American borrowers who don’t have Fannie and Freddie loans?...

The one potential housing fix that does seem fair is the REO to rental program being hashed out among federal regulators and the FHFA. This would be for Fannie, Freddie and the FHA to sell their REO’s (foreclosed properties they now own) in bulk to investors. There would likely be some tax incentives offered, but this is the fastest way to get rid of distress in the housing market, thereby stabilizing overall home prices. It would also put more rental inventory on the market, as demand has been high, pushing up rents higher. The trouble is this isn’t particularly politically popular, as it runs contrary to the American Dream of home ownership, not to mention it helps investors, who are largely blamed for the housing mess in the first place. And there’s that pesky fairness thing again.

10--President Obama Proposes Mortgage Refinances for 'Responsible Borrowers', CNBC
Excerpt: "I'm sending this Congress a plan that gives every responsible homeowner the chance to save about $3,000 a year on their mortgage, by refinancing at historically low interest rates. No more red tape. No more runaround from the banks," the President announced in his State of the Union address.

Unlike previous efforts in the refinance space, including a recently revamped and expanded government program for borrowers who owe more on their mortgages than their homes are currently worth, this plan would not be limited to those with loans backed by Fannie Mae and Freddie Mac, according to senior administration officials. The two mortgage giants own or guarantee about half of the nation's mortgages. It would be open to all borrowers current on their loans.

The Obama administration is offering precious few details, promising more in the coming weeks, but several sources say the plan is to ask Congress to allow the government mortgage insurer, the Federal Housing Administration (FHA), to back refinances of underwater mortgages. No estimates were given as to how many borrowers such a plan could potentially help, only that this would be a voluntary, borrower-initiated plan, and not a blanket refinance of all borrowers....

The idea is to remove the barriers and "frictions" that have kept many borrowers out of refinancing to historically low rates. Some of those include high levels of negative equity, loan level price adjustments, loan origination dates, put-backs on loans that default, and borrower qualifications.

Then there is the very basic problem of politics. Whatever the details of the plan are, Republicans, despite the fact that they have been calling for more refinances, are unlikely to hand President Obama a popular victory on the eve of a presidential election. They may also oppose anything that makes Fannie Mae and Freddie Mac bigger, when the two are allegedly winding down.

11--(A really brilliant bit of reasoning) Philip Pilkington: Is QE/ZIRP Killing Demand?, naked capitalism

Excerpt: Warren Mosler recently ran a very succinct account of why the Fed/Bank of England’s easy monetary policies – that is, the combination of Quantitative Easing and their Zero Interest Rate Programs – might actually be killing demand in the economy.

Mosler’s argument runs something like this: when interest rates hit the floor they suck interest income payments that might flow to rentiers and savers. And no, we’re not just talking about Johnny Moneybags refusing to buy his daughter a new Prada handbag (which, say what you will, creates job opportunities). We’re also talking about regular savers and, as the Fed recently noted, pension funds seeing their income fall – not to mention certain industries, like insurance, finding their profits lowered (and hence their premiums raised?).
Mosler sums it up well:

Lowering rates in general in the first instance merely shifts interest income from ‘savers’ to borrowers. And with the federal government a net payer of interest to the economy, lowering rates reduces interest income for the economy.

He then goes on to make the point that we’d have to see borrowers spending more than savers to see any real stimulative effect on the real economy. But alas, such is probably not the case.

The only way a rate cut could add to aggregate demand would be if, in aggregate, the propensities to consume of borrowers was higher than savers. But fed studies have shown the propensities are about the same, and, again, so does the actual empirical evidence of the last several years. And further detail on this interest income channel shows that while income for savers dropped by nearly the full amount of the rate cuts, costs for borrowers haven’t fallen that much, with the difference going to net interest margins of lenders. And with lenders having a near zero propensity to consume from interest income, versus savers who have a much higher propensity to consume, this particular aspect of the institutional structure has caused rate reductions to be a contractionary and deflationary bias.

In her seminal book The Accumulation of Capital – truly a forgotten classic of 20th century economics, right up there with Keynes’ General Theory – Joan Robinson trashes out the implications of falling interest rates. Of the investor she writes:

If he has been successful in the guessing game (on the advice of his broker or backing of his own fancy) and made [investments] which have risen in price so that his capital has appreciated, he has to debate with his conscience whether he has a right to realise the appreciation and spend it, and his decision turns very much upon whether he may expect similar gains in the future, so that they are properly to be regarded as a continuing income.

The point that Robinson is making is that investors have a peculiar morality – she calls it a ‘peasant morality’ – which leads them to separate in their own mind their capital and their income. Investors tend to prefer to spend based on income – that is: dividends, interest etc. – and preserve their capital intact. It’s a bit like the drug dealer’s street wisdom: “Never get high on your own supply”. Spending out of capital – even if this capital has accumulated in the short-to-medium run – is seen by the investor as being somehow immoral. And for this reason investors tend not to dip into their outstanding capital lest their net worth fall as a result.

Robinson then goes on to make a point that would certainly resonate with bond traders today who are, due in large part to the Fed and the Bank of England’s easy monetary policies, seeing value increase and yields (which are essentially interest income) fall.

If the value of [the investor’s] holdings has risen, not because of his personal skill as [an investor], but because of a general fall in the level of interest rates which is expected to be permanent, he is faced with a different problem. For the time being his receipts are unchanged and the value of his [investments] has risen, but, unless all his holdings are in very long-dated bonds, or in shares in whose future capacity to pay dividends the market has great confidence, he will later have to replace money at a lower return, so that his prospect of future income has fallen.
Robinson’s point is that in the investor’s mind his income has fallen. And such a fall in income leads him to retract consumption spending. This leads, as Mosler points out, to a dampening of effective demand in the economy.

It also, I should think, affects investor psychology in that a lack of future income leads them to see the future as being all the more bleak. Their prospect of future income having fallen, this could well lead to a far greater propensity to hoard. It could also make investors more edgy as they try to preserve their capital in what has come to seem like a very uncertain environment. This could lead them to seek out what they think to be safe investments – such as gold and other commodities – thereby inflating bubbles that further exacerbate consumer spending power.

Monetary policy is a slippery beast indeed. But it has become the mantra of the day. For many central bankers, whom I have no doubt go to bed at night dreaming that their governments would initiate stimulus programs, it is all they have. That said, they should really take a look at the facts and not assume simple causal relations that may hold good (to some extent) some of the time, but by no means hold good all of the time.

Yet, the internet commentariat continue to call for more ‘innovative’ monetary policy. A good recent example of this is Clare Jones over at the FT:

What’s clear already though is that, unless the Fed opts to give more quantitative easing — or something more radical — a try, there’s little else it can do to lower the cost of borrowing.

Analysts need to drop their preconceptions. There are very few hard and fast causal relations in capitalist or any other economies. These economies are constantly changing and as they toss this way and that causal relations alter and break down. To try to come up with simple rules to understand the workings of an economy is to excuse oneself for giving up on actually thinking things through.

In truth, negative real interest rates – which, I believe, is what Jones is alluding to – even if they could be implemented (which I don’t believe they can), would be rather dangerous in the current environment. They would likely lead to more hoarding behaviour as investors became ever more nervous about the future. Its expansionary fiscal policy we need. Strong-armed expansionary fiscal policy. There is no alternative.

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