By now it should be clear that the monetary experiment currently being carried out in Japan (known as “Abenomics”) is fundamentally different from the kind of quantitative easing which was implemented in the United States and the United Kingdom during the global financial crisis. In the US and the UK QE was implemented in order to stabilize the financial system, while in Japan, and now the Euro Area (EA) the objective is to end deflationary pressures and reflate economies which are arguably caught in some form of liquidity trap. Continue reading
Is something in the air? Do I detect a change in consensus on the way things are going in Japan? Certainly a slew of articles have been published in the financial press over the last month questioning where the Abenomics experiment is headed for. The general conclusion seems to be that wherever it is it is certainly not the originally designated endpoint. Continue reading
Occasionally, representatives of Germany’s Left party (Die Linke) will complain about being tagged as the successors to East Germany’s communist party. Well.
As part of the German parliament’s debate about the budget and foreign police, Gregor Gysi, parliamentary leader of Die Linke, spoke out forcefully against further sanctions against Russia. He called them “absolutely counterproductive.” He added that they provoked Russian countermeasures and hurt the economy. Rational policy, in his view, would be to lift the sanctions immediately.
Not to be outdone, Sara Wagenknecht, Gysi’s first deputy, said that economic warfare with Russia was damaging and “playing with fire.” She added that NATO maneuvers and EU sanctions were making the implementation of a ceasefire in Ukraine difficult.
Russia and the Russian government are, of course, utterly blameless in all of these events.
Not coincidentally, the party’s history as recounted on its English-language web site begins in 2007. If I had their background as the unreformed heirs to the Kremlin’s stooges, I’d keep it off the web site, too.
When Barack Obama told a CNBC interviewer last autumn that Wall Street ought to be “genuinely worried about what is going on in Washington” in reference to the US government shutdown he raised more than a few eyebrows. Normally political leaders try to calm and reassure markets, so this attempt to stir them up on the part of the US President was, in its way, something of a first.
Last May the Financial Times issued a similar warning in an editorial with a clear message: right now you should be more worried than you are about what is happening in Madrid. According to the newspaper, “secessionist demands have created a rolling crisis involving Catalonia and the national government in Madrid,” a crisis which it warns could end in a “head on collision” if the issues being raised are not addressed. Continue reading
“So what’s going on here? Well, it might sound like a hokey religion, but central banking is really a Jedi mind trick. Just saying something can be enough to make it happen. That’s because the power of the printing press gives their words a distinct power. Well, that and the fact that the economy is already one big self-fulfilling prophecy.” – Matt O’brien, “Abenomics has only worked because foreigners think it will” Continue reading
The euro zone crisis is not back — at least not yet.
Recent movements in global markets following concerns about Portugal’s Banco Espirito Santo really had as much to do with market nerves after a long spell of repressed volatility as it did with the state of the bank’s balance sheet. Despite the current calm, everyone knows that volatility will return one day, and no one wants to be caught on the back foot when it does arrive. So the initial response is to hit the “sell” button and then ask questions.
Beyond this context, there is a lack of certainty in the market about which way bond yields for the so-called “peripheral” euro zone countries are heading in the near term — and what exactly the risks associated with holding them really are. Riding the yield compression, in the case of the Portuguese 10-year bond from over 7 percent to under 3.5 percent was a one-way-bet no-brainer once the impact of Draghi’s July 2012 speech became crystal clear. Continue reading
There has been lot’s of debate in the press and in academic circles over the last week or so about whether Italy’s latest contraction constitutes a triple dip recession or simply a continuation of what’s been going on over many many years. This is an interesting theoretical nicety, but in fact what is happening in Italy at the moment goes a lot further than problems faced by a recession dating committee. The real issue that arises in the context of the Euro Area at the moment is a far more specific one. Will the ECB do QE? And if it does when will it push the button? And what could happen if it doesn’t. Perhaps a case study of the Italian case is worth the effort here. What is likely to happen to Italian debt if there is no ECB intervention soon? Let’s take a look at the dynamics. Continue reading
If this week’s economics news is positive then that is good. But if it’s bad then that’s even better, since there is more potential for it to improve next week, and if it doesn’t, well that’s doubly better since there will be even more reason for central banks to step in and push up asset prices. Maybe all this sounds peculiar, even perverse, but it would seem to be how many people working in financial markets are reasoning these days.
“Spain has turned the corner”. With this stark statement the IMF opened it’s annual Article IV consultation report for 2014. Naturally the statement rankled, with this author among others, because at first sight it seems to be saying something which on closer reading of the report you find it isn’t. At best it’s misleading, possibly from a PR point of view intentionally so, but then Article IV reports are supposed to be more sober, measured assessments. One Spanish journalist summed up the surprise many felt in the following tweet.
You can’t say “Spain has turned the corner” and “the unemployment remains unacceptably high” in the same paper
Bank for International Settlements 84th Annual Report, page 11 –
Second, as growing evidence suggests, balance sheet recessions are less responsive to traditional demand management measures (Chapter V). One reason is that banks need to repair their balance sheets. As long as asset quality is poor and capital meagre, banks will tend to restrict overall credit supply and, more importantly, misallocate it. As they lick their wounds, they will naturally retrench. But they will keep on lending to derelict borrowers (to avoid recognising losses) while cutting back on credit or making it dearer for those in better shape. A second, even more important, reason is that overly indebted agents will wish to pay down debt and save more. Give them an additional unit of income, as fiscal policy would do, and they will save it, not spend it. Encourage them to borrow more by reducing interest rates, as monetary policy would do, and they will refuse to oblige.
Note the contradictory logic of the two reasons. The first says that banks will only lend to bad borrowers and willing good borrowers can’t get credit. The second says people getting extra income from fiscal or monetary stimulus will only use it to pay down debt, reducing demand. But what about those good borrowers who can’t get credit due to the first reason? And what about those people who are paying down debt, thus helping banks get into better shape and thus, er, lend?
What starts out as an argument for weak multipliers doesn’t add up, and it’s not made any easier to follow by the apparent decision not to directly address their main critic on this point, Paul Krugman.