MMT vs. Austrian School Debate

A public debate on macroeconomic theory and policy with leading thinkers from Modern Monetary Theory (MMT) and the Austrian School. Warren Mosler represents MMT, Robert Murphy, Ph.D, represents the Austrian School, and John Carney moderates.

 

WARREN MOSLER is an early developer of Modern Monetary Theory (MMT), the President of Valance Co, Inc., and Senior Financial Advisor to Senator Ronald E. Russell, President of the 29th Legislature of the U.S. Virgin Islands. He is the founder and current manager of the III Funds, which peaked at over $5 billion AUM in 2007 and currently manages about $1.5 billion, as well as the Founder and President of Mosler Automotive, which manufactures the MT900 sports car in Riviera Beach, Florida. Mr. Mosler has written a number of academic papers on issues relating to macroeconomics and monetary policy, and is the author of Seven Deadly Innocent Frauds of Economic Policy (2010). He maintains a personal blog, The Center of the Universe (http://moslereconomics.com), and can be followed on Twitter at http://moslereconomics.com.
ROBERT MURPHY, Ph.D, is a Senior Economist with the Institute for Energy Research and an Associated Scholar at the Ludwig von Mises Institute, where he teaches at the Mises Academy. He is also an adjunct scholar at the Mackinac Center for Public Policy. From 2003 until 2006, Murphy was Visiting Assistant Professor of Economics at Hillsdale College in Michigan, U.S. From 2006 until early 2007, he was employed as a research and portfolio analyst with Laffer Associates, an economic and investment consultancy in New York. He runs the blog Free Advice (http://consultingbyrpm.com/blog) and writes a column for Townhall.com and has also written for LewRockwell.com. He is the author of a number of books including The Politically Incorrect Guide to Capitalism and Lessons for the Young Economist. MODERATOR JOHN CARNEY is a senior editor at CNBC.com, covering Wall Street, hedge funds, financial regulation and other business news. Prior to joining CNBC.com, Carney was the editor of Business Insider’s Clusterstock.com and DealBreaker.com. He has also written for The Wall Street Journal, The New York Times, The New York Sun, Page Six Magazine, Gawker, TheAtlantic.com, The Daily Beast, Time Out New York, Fortune and New York magazine. Carney practiced corporate law at firms such as Skadden, Arps, Slate, Meagher & Flom and Latham & Watkins, primarily representing banks, hedge funds and private equity firms. He received his law degree from the University of Pennsylvania.

 

What are the ingredients which Suggest a Financial Crisis?

@RaoulGMI identified the following factors contributing to a crisis, before Coronavirus:

  1. Stocks: Largest Equity Bubble of All Time: (Pension Crisis & Buyback Bubble)
  2. Demographics:
    • Largest Retiree Wave, all wanting to sell stocks and bonds at the same time
    • Millennials are too poor and indebted (make 20% less than parents)
  3. Corporate Credit: Largest Credit Bubble of All Time
    • ($10 Trillion + Off balance Sheet = 75% of GDP)
  4. Student Loan Bubble:
    • $1.6 Trillion
  5. Auto Loan Bubble
    • ($1.2 Trillion)
  6. Indexation Bubble
  7. ETF/Market Structure Bubble
  8. Foreign Borrowings (Dollar Standard Bubble)
  9. Monetary Policy Bubble (The Central Bank Bubble)
  10. EU Banking Crisis
  11. A Trade War:
    • The Trade Wars “shattered” supply chains
  12. Coronavirus
    • Largest Supply & Demand Shocks of all Time

 

Big Picture:

Central Banks have been fighting for the last 20 years:

  • Full Scale Debt Deflation and a Solvency Crisis

Turns into:

  • A loss of confidence in the Dollar Standard and the Entire Financial Architecture

(page 29-30)

The Era of Fed Power is Over. Prepare for a More Perilous Road Ahead.

Central banks have long exercised influence over booms and busts, but their ability is shrinking.

The Federal Reserve and other central banks have long been the unchallenged drivers of financial markets and the business cycle. “Don’t fight the Fed,” goes one Wall Street adage.

That era is drawing to a close. In many countries, interest rates are so low, even negative, that central banks can’t lower them further. Tepid economic growth and low inflation mean they can’t raise rates, either.

Since World War II, every recovery was ushered in with lower rates as the Fed moved to stimulate growth. Every recession was preceded by higher interest rates as the Fed sought to contain inflation.

But with interest rates now stuck around zero, central banks are left without their principal lever over the business cycle. The Eurozone economy is stalling, but the European Central Bank, having cut rates below zero, can’t or won’t do more. Since 2008, Japan has had three recessions with the Bank of Japan, having set rates around zero, largely confined to the sidelines.

The U.S. may not be far behind. “We are one recession away from joining Europe and Japan in the monetary black hole of zero rates and no prospect of escape,” said Harvard University economist Larry Summers. The Fed typically cuts short-term interest rates by 5 percentage points in a recession, he said, yet that is impossible now with rates below 2%.

Workers, companies, investors and politicians may need to prepare for a world where the business cycle rises and falls largely without the influence of central banks.

 

The business cycle we’re used to is a bad guide to business cycles going forward,” said Ray Dalio, founder of Bridgewater Associates LP, the world’s biggest hedge fund.

In November, Fed chairman Jerome Powell warned Congress that “the new normal now is lower interest rates, lower inflation, probably lower growth…all over the world.” As a result, he said, the Fed is studying ways to alter its strategy and develop tools that can work when interest rates approach zero.

Fed chairman Jerome Powell on Capitol Hill in November. PHOTO: SAM CORUM/EPA/SHUTTERSTOCK

Central banks are calling on elected officials to employ taxes, spending and deficits to combat recessions. “It’s high time I think for fiscal policy to take charge,” Mario Draghi said in September, shortly before stepping down as ECB president.

There are considerable doubts that any new tools can restore the influence of central banks, or that countries can overcome obstacles to more robust fiscal policy, particularly political opposition and steep debt.

Business cycles in the future may resemble those of the 19th century, when monetary policy didn’t exist. From 1854 to 1913, the U.S. had 15 recessions, according to the National Bureau of Economic Research, the academic research group that dates business cycles. Many were severe. One slump lasted from 1873 to 1879, and some historians argue it lingered until 1896.

Fed’s Fading Influence

U.S. recessions were more frequent before the Federal Reserve took control over interest rates, using them as a lever to slow inflation or boost the economy. Low rates have weakened the central bank by giving it little room to reduce rates further.

The Fed’s sway over the economy has also been weakened by a decline in durable manufacturing and construction, which are sensitive to rates, and the growth in services, which aren’t.

Sources: National Bureau of Economic Research (recessions); Sidney Homer and Richard Sylla (interest rates 1854-1933); Federal Reserve (interest rates 1934-present); U.S. Commerce Department (value-added shares of GDP)
Kathryn Tam/THE WALL STREET JOURNAL

The causes of business cycles were diverse, Wesley Claire Mitchell, an NBER founder, wrote in 1927. They included “the weather, the uncertainty which beclouds all plans that stretch into the future, the emotional aberrations to which business decisions are subject, the innovations characteristic of modern society, the ‘progressive’ character of our age, the magnitude of savings, the construction of industrial equipment, ‘generalized overproduction,’ the operations of banks, the flow of money incomes, and the conduct of business for profits.”

He didn’t mention monetary or fiscal policy because, for all practical purposes, they didn’t exist. Until 1913, the U.S. hadn’t had a central bank, except for two brief periods. As for fiscal policy, U.S. federal spending and taxation were too small to matter.

When central banks were established, they didn’t engage in monetary policy, which means adjusting interest rates to counter recession or rein in inflation. Many countries were on the gold standard which, by tying the supply of currency to the stock of gold, prevented sustained inflation.

The Fed was established in 1913 to act as lender of last resort, supplying funds to commercial banks that were short of cash, not to manage inflation or unemployment. Not until the Great Depression did that change.

In 1933, Franklin D. Roosevelt took the U.S. off the gold standard, giving the Fed much more discretion over interest rates and the money supply. Two years later, Congress centralized Fed decision-making in Washington, better equipping it to manage the broader economy.

Modern times

Macroeconomics, the study of the economy as a whole instead of individuals and firms, was born from the work of British economist John Maynard Keynes. He showed how individuals and firms, acting rationally, could together spend too little to keep everyone employed.

In those circumstances, monetary or fiscal policy could generate more demand for a nation’s goods and services, Mr. Keynes argued. Just as a dam regulates the flow of a river to counter flooding and drought, monetary and fiscal-policy makers must try to regulate the flow of aggregate demand to counter inflation and recession.

The Employment Act of 1946 committed the U.S. to the idea of using fiscal and monetary policy to maintain full employment and low rates of inflation.

The next quarter-century followed a textbook script. In postwar America, rapid economic growth and falling unemployment yielded rising inflation. The Fed responded by raising interest rates, reducing investment in buildings, equipment and houses.

  • The economy would slide into recession, and inflation would fall.
  • The Fed then lowered interest rates, investment would recover, and growth would resume.

The textbook model began to fray at the end of the 1960s. Economists thought low interest rates and budget deficits could permanently reduce unemployment in exchange for only a modest uptick in inflation. Instead, inflation accelerated, and the Fed induced several deep and painful recessions to get it back down.

By the late 1990s, new challenges emerged. One was at first a good thing. Inflation became both low and unusually stable, barely fluctuating in response to economic growth and unemployment.

The second change was less beneficial. Regular prices were more stable, but asset prices became less so. The recessions of 2001 and 2008 weren’t caused by the Fed raising rates. They resulted from a boom and bust in asset prices, first in technology stocks, then in house prices and mortgage debt.

After the last bust, the Fed kept interest rates near zero from 2008 until 2015. The central bank also purchased government bonds with newly created money—a new monetary tool dubbed quantitative easing—to push down long-term interest rates.

Despite such aggressive stimulus, economic growth has been slow. Unemployment has fallen to a 50-year low, but inflation has persistently run below the 2% target the Fed set. A similar situation prevails abroad.

In Japan, Britain and Germany, unemployment is down to historic lows. But despite short-and long-term interest rates near and sometimes below zero, growth has been muted. Since 2009, inflation has averaged 0.3% in Japan and 1.3% in the Eurozone.

The textbook model of monetary policy is barely operating, and economists have spent the last decade puzzling why.

One explanation focuses on investment, the main driver of long-term economic growth. Investment is financed out of saving. When investment is high relative to saving, that pushes interest rates up because more people and businesses want to borrow. If saving is high relative to investment, that pushes rates down. That means structurally low investment coupled with high saving by businesses and aging households can explain both slow growth and low interest rates.

Richard Clarida, the Fed’s vice chairman, cited another reason during a speech in November. Investors in the past, he said, demanded an interest rate premium for the risk that inflation would turn out higher than they expected. Investors are now so confident central banks will keep inflation low that they don’t need that premium. Thus, central banks’ success at eradicating fear of inflation is partly responsible for the low rates that currently limit their power.

While the Fed’s grip on growth and inflation may be slipping, it can still sway markets. Indeed, Mr. Dalio said, the central bank’s principal lever for sustaining demand has been its ability to drive up asset prices as well as the debt to finance assets, called leverage. Since the 2008 crisis, low rates and quantitative easing have elevated prices of stocks, private equity, corporate debt and real estate in many cities. As prices rise, their returns, such a bond or dividend yield, decline.

That dynamic, he said, has reached its limit. Once returns have fallen close to the return on cash or its equivalent, such as Treasury bills, “there is no incentive to lend, or invest in these assets.” At that point, the Fed is no longer able to stimulate spending.

Less than zero

A central bank can always raise rates enough to slow growth in pursuit of lower inflation; but it can’t always lower them enough to ensure faster growth and higher inflation.

The European Central Bank has tried—cutting interest rates to below zero, in effect charging savers. Its key rate went to minus 0.5% from minus 0.4% in September. At that meeting and since, resistance has grown inside the ECB to even more negative rates for fear that would reduce bank lending or have other side effects.

In December, Sweden’s central bank, which implemented negative rates in 2015, ended the experiment and returned its key policy rate to zero. Fed officials have all but ruled out ever implementing negative rates.

In a new research paper, Mr. Summers, who served as President Clinton’s Treasury secretary and President Obama’s top economic adviser, and Anna Stansbury, a Ph.D. student in economics at Harvard, say very low or negative rates are “at best only weakly effective…and at worst counterproductive.”

They cited several reasons why. Some households earn interest from bonds, money-market funds and bank deposits. If rates go negative, that source of purchasing power shrinks. Some people nearing retirement may save more to make up for the erosion of their principal by very low or negative rates.

Moreover, the economy has changed in ways that weaken its response to interest-rate cuts, they wrote. The economy’s two most interest-sensitive sectors, durable goods manufacturing, such as autos, and construction, fell to 10% of national output in 2018 from 20% in 1967, in part because America’s aging population spends less on houses and cars. Over the same period, financial and professional services, education and health care, all far less interest sensitive, grew to 47% from 26%.

They concluded the response of employment to interest rates has fallen by a third, meaning it is harder for the Fed to generate a boom.

The U.S. isn’t likely to plunge into another financial crisis like 2008, Mr. Dalio said, as long as interest rates remain near zero. Such low rates allow households and companies to easily refinance their debts.

More likely, he said, are shallow recessions and sluggish growth, similar to what Japan has experienced—what he called a “big sag.”

Former Fed chairman Ben Bernanke this month estimated that through quantitative easing and “forward guidance,” committing to keep interest rates low until certain conditions are met, the Fed could deliver the equivalent of 3 percentage points of rate cuts, enough, in addition to two to three points of regular rate cuts, to counteract most recessions.

Mr. Clarida warned, however, that quantitative easing may suffer from diminishing returns in the next recession. Moreover, the next recession is likely to be global, he said this month, and if all major countries weaken at the same time, it will push rates everywhere toward zero. That would make it harder for the Fed or any other central bank to support its own economy than if only one country were in trouble.

Fiscal fix

With central banks so constrained, economists say fiscal policy must become the primary remedy to recessions.

History shows that aggressive fiscal policy can raise growth, inflation and interest rates. The U.S. borrowed heavily in World War II. With help from the Fed, which bought some of the debt and kept rates low, the economy vaulted out of the Great Depression. Once wartime controls on prices and interest rates were lifted, both rose.

Today, mainstream academic economists are again recommending higher inflation and deficits to escape the low-growth, low-rate trap.

Advocates of what is called modern monetary theory say the Fed should create unlimited money to finance government deficits until full employment is reached. Some economists call for dialing up “automatic stabilizers,” the boost that federal spending gets during downturns, via payments to individuals and state governments as well as infrastructure investment.

Yet fiscal policy is decided not by economists but by elected officials who are more likely to be motivated by political priorities that conflict with the economy’s needs. In 2011, when unemployment was 9%, a Republican-controlled Congress forced Mr. Obama to agree to deficit cuts. In 2018, when unemployment had fallen to 4%, President Trump and the GOP-controlled Congress slashed taxes and boosted spending, sharply raising the budget deficit. Mr. Trump has pressured Mr. Powell to cut rates more and resume quantitative easing, which the Fed chairman has resisted.

Fiscal policy in the Eurozone is hampered by rules that limit the debt and deficits of its member countries. It is also hamstrung by divergent interests: Germany, the country that can most easily borrow, needs it least. In recent years it has refused to open the taps to help out its neighbors.

Still, Mr. Dalio predicted that a weakened Fed will eventually join hands with the federal government to stimulate demand by directly financing deficits.

Once central banks have agreed to finance whatever deficits politicians wish to run, however, they may have trouble saying no when the need has passed.

The experience abroad and in the U.S.’s past suggests that once politicians are in charge of monetary policy, inflation often follows. In the 1960s and 1970s, presidents Johnson and Nixon pressured the Fed against raising rates, setting the stage for the surge in inflation in the 1970s. Such a scenario seems remote today, but it may not always be.

Central Banks Are the Fall Guys

For decades, the freedom of monetary policymakers to make difficult decisions without having to worry about political blowback has proven indispensable to macroeconomic stability. But now, central bankers must ease monetary policies in response to populist mistakes for which they themselves will be blamed.

CHICAGO – Central-bank independence is back in the news. In the United States, President Donald Trump has been  the Federal Reserve for keeping interest rates too high, and has reportedly explored the possibility of forcing out Fed Chair Jerome Powell. In Turkey, President Recep Tayyip Erdoğan has fired the central-bank governor. The new governor is now pursuing sharp rate cuts. And these are hardly the only examples of populist governments setting their sights on central banks in recent months.

In theory, central-bank independence means that monetary policymakers have the freedom to make unpopular but necessary decisions, particularly when it comes to combating inflation and financial excesses, because they do not have to stand for election. When faced with such decisions, elected officials will always be tempted to adopt a softer response, regardless of the longer-term costs. To avoid this, they have handed over the task of intervening directly in monetary and financial matters to central bankers, who have the discretion to meet goals set by the political establishment however they choose.

This arrangement gives investors more confidence in a country’s monetary and financial stability, and they will reward it (and its political establishment) by accepting lower interest rates for its debt. In theory, the country thus will live happily ever after, with low inflation and financial-sector stability.

Having proved effective in many countries starting in the 1980s, central-bank independence became a mantra for policymakers in the 1990s. Central bankers were held in high esteem, and their utterances, though often elliptical or even incomprehensible, were treated with deep reverence. Fearing a recurrence of the high inflation of the early 1980s, politicians gave monetary policymakers wide leeway, and scarcely ever talked about their actions publicly.

But now, three developments seem to have shattered this entente in developed countries. The first development was the 2008 global financial crisis, which suggested that central banks had been asleep at the wheel. Although central bankers managed to create an even more powerful aura around themselves by marshaling a forceful response to the crisis, politicians have since come to resent sharing the stage with these unelected saviors.

Second, since the crisis, central banks have repeatedly fallen short of their inflation targets. While this may suggest that they could have done more to boost growth, in reality they don’t have the means to pursue much additional monetary easing, even using unconventional tools. Any hint of further easing seems to encourage financial risk-taking more than real investment. Central bankers have thus become hostages of the aura they helped to conjure. When the public believes that monetary policymakers have superpowers, politicians will ask why those powers aren’t being used to fulfill their mandates.

Third, in recent years many central banks changed their communication approach, shifting from Delphic utterances to a policy of full transparency. But since the crisis, many of their public forecasts of growth and inflation have missed the mark. That these might have been the best estimates at the time convinces no one. That they were wrong is all that matters. This has left them triply damned in the eyes of politicians: they

  1. failed to prevent the financial crisis and paid no price; they are
  2. failing now to meet their mandate; and they
  3. seem to know no more than the rest of us about the economy.

It is no surprise that populist leaders would be among the most incensed at central banks. Populists believe they have a mandate from “the people” to wrest control of institutions from the “elites,” and there is nothing more elite than pointy-headed PhD economists speaking in jargon and meeting periodically behind closed doors in places like Basel, Switzerland. For a populist leader who fears that a recession might derail his agenda and tarnish his own image of infallibility, the central bank is the perfect scapegoat.

Markets seem curiously benign in the face of these attacks. In the past, they would have reacted by pushing up interest rates. But investors seem to have concluded that the deflationary consequences of the policy uncertainty created by the unorthodox and unpredictable actions of populist administrations far outweigh any damage done to central bank independence. So they want central banks to respond as the populist leader desires, not to support their “awesome” policies, but to offset their adverse consequences.

A central bank’s mandate requires it to ease monetary policy when growth is flagging, even when the government’s own policies are the problem. Though the central bank is still autonomous, it effectively becomes a dependent follower. In such cases, it may even encourage the government to undertake riskier policies on the assumption that the central bank will bail out the economy as needed. Worse, populist leaders may mistakenly believe the central bank can do more to rescue the economy from their policy mistakes than it actually can deliver. Such misunderstandings could be deeply problematic for the economy.

Furthermore, central bankers are not immune to public attack. They know that an adverse image hurts central bank credibility as well as its ability to recruit and act in the future. Knowing that they are being set up to take the fall in case the economy falters, it would be only human for central bankers to buy extra insurance against that eventuality. In the past, the cost would have been higher inflation over the medium term; today, it is more likely that the cost will be more future financial instability. This possibility, of course, will tend to depress market interest rates further rather than elevating them.

What can central bankers do? Above all, they need to explain their role to the public and why it is about more than simply moving interest rates up or down on a whim. Powell has been transparent in his press conferences and speeches, as well as honest about central bankers’ own uncertainties regarding the economy. Shattering the mystique surrounding central banking could open it to attack in the short run, but will pay off in the long run. The sooner the public understands that central bankers are ordinary people doing a difficult job with limited tools under trying circumstances, the less it will expect monetary policy magically to correct elected politicians’ errors. Under current conditions, that may be the best form of independence central bankers can hope for.

Putin’s Unlikely Ally in His Standoff With the West: His Central Banker

Elvira Nabiullina has earned an unusual degree of freedom to buttress an economy buffeted by sanctions

After Russia’s central-bank chief, Elvira Nabiullina, moved to shut down a large lender last year for allegedly falsifying accounts, the nation’s top prosecutor’s office issued an order to leave the bank alone.

She closed it anyway.

In her five years in office, Ms. Nabiullina has closed hundreds of weak banks, stymied the exodus of Russian wealth abroad and transformed monetary policy to bring inflation to record lows. That has earned her an unusual amount of freedom to make tough decisions, even if that means treading on powerful interests.

.. As President Vladimir Putin bids to return Russia to great-power status, challenging the U.S. and Europe from Syria to Ukraine, it’s her job to shore up the economy against volatile oil markets and sanctions. Russia’s ability to continue its quest rests in large part on whether Ms. Nabiullina can keep the financial system stable.

Ms. Nabiullina has earned public praise from

  • Mr. Putin, who rarely commends subordinates, as well as from abroad. Last year at the Kremlin, Mr. Putin told her that “under your leadership, the central bank has done a great deal to stabilize the economic situation.” Managers at big investment funds, from
  • Pacific Investment Management Co. to Pictet Asset Management, call Ms. Nabiullina one of the world’s most skilled central bankers.
  • Christine Lagarde, managing director of the International Monetary Fund, lauded her in May for setting “standards of quality for macroeconomic policy.”

.. In 2006, the central-bank official responsible for revamping the system, Andrey Kozlov, was shot dead in his car. Russian financier Alexey Frankel, whose banking license Mr. Kozlov had revoked earlier that year, was later convicted of organizing the killing.

.. She has earned a reputation for bookishness, personal honesty and fixation on detail

.. Industry veterans said that before Ms. Nabiullina took over, banking licenses were mostly used as mechanisms to funnel money abroad and process insider deals.

.. “We used to open a newspaper in the morning and look at the banking deals and said—that’s capital flight, and that’s asset stripping,” said Sergey Khotimskiy, co-founder of one of Russia’s largest private banks, Sovcombank. “The dodgy enrichment schemes were obvious to everyone.”
.. When she took over the institution, banks and companies were moving $5 billion out of the country every month, and inflation topped 7%.She shut down 70 banks in her first year.

.. Ms. Nabiullina stopped a longstanding policy of spending billions of dollars from the country’s reserves to try to prop up the ruble. In December 2014, with the ruble continuing to fall, the central bank nearly doubled its key lending rate to 17% at an emergency late-night meeting.

.. The rate increase restored calm to markets but strangled the country’s consumer-fueled growth. The country’s emerging middle class, which had become used to foreign vacations and European cars, is still feeling the effects of the ruble’s collapse.
..  Since she took office, she has halved the number of Russian banks, shutting down about 440 lenders. She has reduced capital outflows by about 50% to $2.5 billion a month.
.. Many of the banks she closed had been considered untouchable, analysts said. Some, such as Promsviazbank, counted lawmakers and state-company executives among its shareholders and held money for national oil companies and the Orthodox Church.
.. Others, like Bank Sovetskiy, had served political objectives, providing banking services in Crimea, the Ukrainian region the Kremlin annexed in 2014.

.. When the central bank took over Yugra last June following repeated warnings, it said it found a $600 million deficit in its balance sheet masked with bad loans. Just hours before the bankrupt bank’s license was due to expire, the prosecutor’s office ordered a halt to the closure, calling the bank “a financially stable credit organization.” Ms. Nabiullina rejected the order.

.. “It was a test of will, and she won,” said banking analyst Mr. Lukashuk.
.. In January, inflation hit a record low for the post-Soviet period of 2.2%, a result of Ms. Nabiullina’s decision to keep interest rates high after the Crimea sanctions. Some tycoons have urged a faster reduction.
.. Still, she has struggled to regulate Russia’s lesser, underperforming state-owned banks, whose executives often treat them as fiefs, analysts said. These banks are kept afloat by constant injections of state funds, which the executives have funneled into unrelated assets ranging from supermarkets to railroad cars.
.. Almost a trillion rubles of public capital, about $16 billion at today’s rate, went to just three state-owned banks—
  1. VTB,
  2. Gazprombank and
  3. Rosselkhozbank—

in the first four years of Ms. Nabiullina’s central-bank term, according to Fitch Ratings. All are still saddled with bad debts or illiquid assets.

.. Her modest economic forecasts have consistently lagged behind Mr. Putin’s goals, which she said can only be achieved through deep, unpopular changes to the system.

Even if the price of oil rose to $100, from around $65 today, she said, “it’s very unlikely that our economy can grow above 1.5% to 2%” a year.

Asset prices are high across the board. Is it time to worry?

With ultra-loose monetary policy coming to an end, it is best to tread carefull

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 of invulnerability.

.. Rarely have creditors demanded so little insurance against default, even on the riskiest “junk” bonds. And rarely have property prices around the world towered so high. American house prices have bounced back since the financial crisis and are above their long-term average relative to rents.

.. If today’s asset prices have been propped up by central-bank largesse, its end could prompt a big correction. Second, signs are appearing that fund managers, desperate for higher yields, are becoming increasingly incautious. Consider, for instance, investors’ recent willingness to buy Eurobonds issued by Iraq, Ukraine and Egypt at yields of around 7%.

.. But look carefully at the broader picture, and there is some logic to the ongoing rise in asset prices. In part it is a response to an improving world economy.

.. A widespread concern is that the Fed and its peers have grossly distorted bond markets and, by extension, the price of all assets. Warren Buffett, the most famous disciple of Ben Graham, said this week that stocks would look cheap in three years’ time if interest rates were one percentage-point higher, but not if they were three percentage points higher.

.. But if interest rates and bond yields were unjustifiably low, inflation would take off—and puzzlingly it hasn’t. This suggests that factors beyond the realm of monetary policy have been a bigger cause of low long-term rates. The most important is an increase in the desire to save, as ageing populations set aside a larger share of income for retirement. Just as the supply of saving has risen, demand for it has fallen. Stagnant wages and the lower price of investment goods mean companies are flush with cash.

Why Soaring Assets and Low Unemployment Mean It’s Time to Start Worrying

Today’s conditions expose vulnerabilities that make a recession or market meltdown more likely

 If you drew up a list of preconditions for recession, it would include the following: a labor market at full strength, frothy asset prices, tightening central banks, and a pervasive sense of calm.In other words, it would look a lot like the present.

.. Companies meanwhile have responded to slow, stable growth and low rates by borrowing heavily, often to buy back stock or pay dividends. Corporate debt as a share of economic output is at levels last seen just before the past two recessions.

.. Last week Janet Yellen, the Fed chairwoman, said she thought there wouldn’t be another financial crisis “in our lifetimes.” Fair enough: crises as catastrophic as the last happen twice a century. But small crises are inevitable as risk migrates to financial players who haven’t drawn the attention of regulators.

..  in a world with permanently lower inflation and growth, businesses will struggle to earn their way out of debt