Policy U-turns from the Fed and ECB are cascading around the world
Abrupt changes in the policies of the world’s largest central banks have rippled through smaller economies, leaving them with the prospect of low and even negative interest rates for years to come despite having mostly healthy economies.
The danger is that these easy-money policies could fuel destabilizing bubbles in real estate and other asset markets. They may also leave banks with little ammunition to respond to the next economic downturn.
Economies like Switzerland’s, whose central bank signaled no change in its negative-rate policies for years to come, are small compared with the U.S. and eurozone. Still, they are home to major global banks and companies that are sensitive to exchange rates and financial conditions. With financial markets so interconnected, problems in small countries can quickly spread to larger ones.
.. The Swiss National Bank said Thursday that it would keep its policy rate at minus 0.75%, where it has been since January 2015, and reduced its inflation forecast to 0.3% this year and 0.6% in 2020. The SNB cited weaker overseas growth and inflation and “the resulting reduction in expectations regarding policy rates in the major currency areas going forward.”
.. Here’s why Fed and ECB decisions matter for countries that don’t use the dollar or euro: Switzerland and countries near the eurozone but not part of it—like Sweden and Denmark—rely on the bloc for much of their exports and imports. That makes growth and inflation highly dependent on the exchange rate. Central-bank stimulus tends to weaken a country’s exchange rate, so when the ECB embraces easy-money policies as it did two weeks ago it tends to weaken the euro against other European currencies such as the Swiss franc. Because the ECB is so large, Switzerland and others can do little to offset it.
.. “They are hostage to the fortunes of what the ECB does,” said David Oxley, economist at Capital Economics.
.. “The gravity pull is very strong” from the Fed and ECB, said Sebastien Galy, macro strategist at Nordea Asset Management. “The consequence is [non-euro central banks in Europe] mostly end up importing policy from the ECB, so you end up with housing bubbles and a misallocation of capital.”
(Visit: http://www.uctv.tv/) Economist Robert Reich, the Clinton-era Labor Secretary and prominent Democratic pundit, gives a rousing talk on how the intersection of politics and economics led to the rise of Donald Trump and describes the concerns he shares with Republicans who fear that Trump’s way of governing is harming American institutions. Reich is the featured speaker at UC Berkeley’s Goldman School of Public Policy’s Board of Advisors Dinner held in March 2017. Recorded on 03/29/2017. Series: “The UC Public Policy Channel” [4/2017] [Public Affairs] [Show ID: 32116]
The response to the 2008 economic crisis has relied far too much on monetary stimulus, in the form of quantitative easing and near-zero (or even negative) interest rates, and included far too little structural reform. This means that the next crisis could come soon – and pave the way for a large-scale military conflict.
BEIJING – The next economic crisis is closer than you think. But what you should really worry about is what comes after: in the current social, political, and technological landscape, a prolonged economic crisis, combined with rising income inequality, could well escalate into a major global military conflict.
The 2008-09 global financial crisis almost bankrupted governments and caused systemic collapse. Policymakers managed to pull the global economy back from the brink, using massive monetary stimulus, including quantitative easing and near-zero (or even negative) interest rates.
But monetary stimulus is like an adrenaline shot to jump-start an arrested heart; it can revive the patient, but it does nothing to cure the disease. Treating a sick economy requires structural reforms, which can cover everything from financial and labor markets to tax systems, fertility patterns, and education policies.1
Policymakers have utterly failed to pursue such reforms, despite promising to do so. Instead, they have remained preoccupied with politics. From Italy to Germany, forming and sustaining governments now seems to take more time than actual governing. And Greece, for example, has relied on money from international creditors to keep its head (barely) above water, rather than genuinely reforming its pension system or improving its business environment.
The lack of structural reform has meant that the unprecedented excess liquidity that central banks injected into their economies was not allocated to its most efficient uses. Instead, it raised global asset prices to levels even higher than those prevailing before 2008.
In the United States, housing prices are now 8% higher than they were at the peak of the property bubble in 2006, according to the property website Zillow. The price-to-earnings (CAPE) ratio, which measures whether stock-market prices are within a reasonable range, is now higher than it was both in 2008 and at the start of the Great Depression in 1929.
As monetary tightening reveals the vulnerabilities in the real economy, the collapse of asset-price bubbles will trigger another economic crisis – one that could be even more severe than the last, because we have built up a tolerance to our strongest macroeconomic medications. A decade of regular adrenaline shots, in the form of ultra-low interest rates and unconventional monetary policies, has severely depleted their power to stabilize and stimulate the economy.
If history is any guide, the consequences of this mistake could extend far beyond the economy. According to Harvard’s Benjamin Friedman, prolonged periods of economic distress have been characterized also by public antipathy toward minority groups or foreign countries – attitudes that can help to fuel unrest, terrorism, or even war.
For example, during the Great Depression, US President Herbert Hoover signed the 1930 Smoot-Hawley Tariff Act, intended to protect American workers and farmers from foreign competition. In the subsequent five years, global trade shrank by two-thirds. Within a decade, World War II had begun.
To be sure, WWII, like World War I, was caused by a multitude of factors; there is no standard path to war. But there is reason to believe that high levels of inequality can play a significant role in stoking conflict.
According to research by the economist Thomas Piketty, a spike in income inequality is often followed by a great crisis. Income inequality then declines for a while, before rising again, until a new peak – and a new disaster.
This is all the more worrying in view of the numerous other factors stoking social unrest and diplomatic tension, including
- technological disruption, a
- record-breaking migration crisis,
- anxiety over globalization,
- political polarization, and
- rising nationalism.
All are symptoms of failed policies that could turn out to be trigger points for a future crisis.
.. Voters have good reason to be frustrated, but the emotionally appealing populists to whom they are increasingly giving their support are offering ill-advised solutions that will only make matters worse. For example, despite the world’s unprecedented interconnectedness, multilateralism is increasingly being eschewed, as countries – most notably, Donald Trump’s US – pursue unilateral, isolationist policies. Meanwhile, proxy wars are raging in Syria and Yemen.
Against this background, we must take seriously the possibility that the next economic crisis could lead to a large-scale military confrontation. By the logicof the political scientist Samuel Huntington , considering such a scenario could help us avoid it, because it would force us to take action. In this case, the key will be for policymakers to pursue the structural reforms that they have long promised, while replacing finger-pointing and antagonism with a sensible and respectful global dialogue. The alternative may well be global conflagration.
Income inequality describes the gap between a six-figure salary and minimum wage. But the more alarming gap occurs in wealth — a household’s total assets minus debts.
.. According to our research, wealth inequality is much worse among families with children, and the gap has widened greatly over the past two decades
.. The demographer Samuel Preston warned in 1984 that the United States had made “a set of private and public choices that have dramatically altered the age profile of well-being,” by devoting resources toward improving conditions for the elderly while neglecting to do the same for families with children.
.. Unlike income, which can change quickly because of a booming economy or a rise in the minimum wage, changes in wealth usually happen slowly.
.. Parental wealth is also a critical determinant of where children live and the quality of the schools they attend. It can affect the kind of job they have, if and when they marry, and whether they own their homes.
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.
That racial stereotyping hides the real cause and scale of economic damage to blue-collar and white-collar Americans families amid the rising wealth of the technocratic globalized elite which dominates the Democratic Party and at least half of the GOP.
.. That government failure is exemplified by the housing bubble, which destroyed a huge percentage of wealth held by black Americans.
A 2011 report by the Pew Research Center showed that the median wealth of black American households dropped by 53 percent because of the property bubble. The mid-point median of black American wealth crashed from $12,124 in 2005 to just $5,677 in 2009, according to the Pew report.
.. White Americans suffered far less from the bubble because many had already paid off their mortgages, because their debts were a small percentage of their income, and because whites had more assets in the stock market and other sectors outside the housing market. Still, the median wealth of white households also dropped by a huge 16 percent, from $134,992 in 2005 to $113,149 in 2009.
.. Meanwhile, wages for all men have remained flat for the past 44 years since 1973, according to the Census Bureau.
.. when Obama settled into the White House during the housing implosion, his economic policies helped very clever people invest their way back up to more wealth. The New York Post described the process:
The years 2008 through 2015 should be known as the Great Fleecing.
During that time, the greatest transfer of wealth in the history of the world occurred. Some $4.5 trillion was given to Wall Street banks through its Quantitative Easing program, with the American people picking up the IOU … Who did this help? The 1%, and pretty much only the 1%.
.. The report does not discuss how technology is concentrating wealth among higher-skilled people, and it omits any talk of globalized outsourcing. It also avoids family stability and it ignores the topic of immigration, which has flooded the nation’s marketplace with cheap labor that effectively imposes a 5 percent tax on labor — and then transfers $500 billion a year to company owners and investors.
.. the report then lists a series of unrealistic demands, including a massive tax increase on the wealthy, a massive financial grant to children that could be spent when they become adults, more house-buying aid for poor people, a higher minimum wage, and “a federal jobs guarantee [that] would function similarly to the Works Progress Administration of the 1930s.”
.. But many people of all colors who cannot get through college are falling behind because technology, work, and business are becoming more complex. This increasing complexity ensures that an increasing share of income and wealth goes to people who are smart enough to arbitrage the increasing social and technological diversity, regardless of color... the Democratic elite prefers to import foreign voters rather than accept the equal social status of all blue-collar Americans... four million Americans turn 18 each year and begin looking for good jobs. However, the government imports roughly 1 million legal immigrants to compete against Americans for jobs... That Washington-imposed policy of mass-immigration floods the market with foreign labor, spikes profits and Wall Street values by cutting salaries for manual and skilled labor offered by blue-collar and white-collar employees. It also drives up real estate prices, widens wealth-gaps, reduces high-tech investment, increases state and local tax burdens, hurts kids’ schools and college education, pushes Americans away from high-tech careers, and sidelines at least 5 million marginalized Americans and their families, including many who are now struggling with opioid addictions.
The problem is with the behavior and the incentive structure of the practitioners. There is overwhelming pressure to produce work that supports the status quo (i.e. redistributing to the rich), that doesn’t question authority, and that is needlessly complex. The result is a discipline in which much of the work is of little use, except to legitimate the existing power structure.
.. When I tried to raise these issues in years prior to the crash, my arguments were largely laughed off by a wide range of economists. I didn’t have the stature, and besides, the argument was far too simple.
.. I pointed out that his Administration’s assumed rates of return in the stock market were impossible given the current price-to-earnings (P/E) ratios in the market and the economic growth rates assumed by the Social Security trustees. This was an argument based on simple algebra.
.. it was necessary to have something more complex than simple algebra to be taken seriously at Brookings.
.. And how about a little accountability for economists when they mess up? There is a large literature on the importance of being able to dismiss workers who do not perform their jobs well. We all know and expect that a dishwasher who keeps breaking the dishes or a custodian who can’t clean the toilets loses his job.
.. I have suggested that economists who prescribe policies that turn out badly, or who can’t see multi-trillion dollar housing bubbles coming whose collapse sinks the economy, ought to pay a price in terms of their careers. Invariably people think I am joking. When they realize I am serious, they think I am crazy or vindictive.