Can you spot the winners?
Not Olaf with the mike, it’s Norbert and Saskia on the right. SPD left wingers whose victory may nudge the markets to price in a grand coalition fracas. Is this Deutschland’s Corbyn moment?
Most German media seem to think it’s the end of the SPD rather than the end of Merkel, let alone Black Zero Worship. So don’t hold your breath.
The metallist Temple has already let it be known that one prefers to wait for a disaster before one really spends any money. As previously posted, in “a real crisis” the government will, as The Economist reported, “spend money like hell.” ECB hawk Madis Muller has since also assured us that he can “…imagine even more unconventional things if the situation gets really bad.”
Why act now if you can wait for later?
Meanwhile the central money plot is proceeding as expected. As Lagarde suggested in her Frankfurt speech, the ECB’s ultraloose monetary policy would “achieve its goal faster and with fewer side effects” if euro area governments supported it with fiscal policy.
For depth read Philip Lane’s Dublin speech (excerpts below.) It reads like the academic rationale for Lagarde’s diplomacy. A well tuned team? I wonder what Christine and Philip really think. After all, most professional brains seem to have an official and an unofficial voice. Privately one might be aware of the scientific and theoretical vacuity of the edifice that is the Mainstream Theory of Central Banking these days. If intellectually enclined one might enjoy reading oneself like Romer read Lucas, perhaps?
“Chère Christine …
… Die EZB ist zum Hauptaufkäufer von Staatsanleihen und auch von einigen privaten Anleihen von Großkonzernen geworden, was deren Kurse schön hochdrückte und sich in den Bilanzen der Kreditinstitute gut machte. Oder diese konnten die Wertpapiere zu guten Preisen an die EZB als Ersatzversicherer weiterverkaufen. So entstand eine monetäre Zentralverwaltungswirtschaft mit völlig verzerrten Preisen und dieses Aufkaufprogramm soll seit Deinem Amtsantritt wiederaufgenommen werden. Ganz nebenbei habt Ihr es geschafft, dass man nicht mehr risikoarm sparen kann. Wer nichtspekulativ sein Geld hält, verliert jedes Jahr Geld. Und die Vermögen der bereits Wohlhabenden, die Aktien, Immobilen usw. besitzen, steigen dank Eurer Geldflutung immer weiter.
Wenn Ihr wirklich nachfragewirksam Geld unters Volk bringen wollt, dann schenkt doch jedem Bürger ein paar tausend Euro (Helikopter-Geld), ihr könnt und dürft das. Das wäre mal nicht Umverteilung nach oben. Aber ihr bildet ja eine Interessengemeinschaft mit (Groß)Banken und dem Politestablishment, das hätten wir fast vergessen.”
Or what would they say to Thomas Meyer who recently argued in the FAZ why the ECB should ditch its delusion of maesuring purchasing power as well as its illusion of an inflation target? Instead the ECB should consider a digital euro…
“forex live” : reports that Digital ECB money is on Lagarde’s list and according to Bloomberg “The ECB said … that it’ll develop its own digital currency if the private sector can’t make cross-border payments faster and cheaper, arguing that technological innovation is quickly transforming how retail payments are made. In a document prepared for the European Parliament, the central bank said it is analyzing the situation and will be ready to respond if needed.
The People’s Bank of China is already working on a digital currency and the Bank for International Settlements, a hub for monetary cooperation, published a survey this year showing most central banks are considering the implications of doing so. BIS head Agustin Carstens said last week that they “have a responsibility to be at the cutting edge of the debate.”
Bank of England Governor Mark Carney has gone so far as to suggest that a global central bank digital currency might one day replace the dollar as the international reserve currency.”
As to QE being supported or replaced by fiscal policy Justin Low writes on forexlive:
“ECB reportedly faces pushback from euro area finance ministers over NIRP. The report says that the ECB is facing increasing pushback against their negative interest rate policy in private engagements with the region’s finance ministers. Adding that some euro area finance chiefs are challenging the ECB’s stance during confidential discussions on the economy, complaining about its detrimental impact on savings and pension systems, according to people familiar with the situation. However, it is said that the ECB rebutted by noting that negative rates wouldn’t last so long if governments did more to stimulate economies instead. I reckon this is going to be quite a debate in the next year or so especially if the euro area economy is seen struggling once again in 2020.”
You bet …
Determinants of the real interest rate
Remarks by Philip R. Lane, Member of the Executive Board of the ECB, at the National Treasury Management Agency Dublin, 28 November 2019
excerpts (all bold added)
… Understanding the root causes of the low level of real interest rates is a high priority for monetary and fiscal policymakers, financial-sector participants and the wider populations of savers and investors….
The falling trend in yields can be interpreted as a decline in the so-called natural or neutral rate of interest (labelled as r* in academic research and policy discussions). The natural rate of interest corresponds to the level of the real short-term interest rate that defines a neutral policy stance: this corresponds to a situation in which the economy is operating at potential and inflation is at its target value, such that there is no reason for the central bank to either inject or withdraw stimulus.
In what follows I will explore the causes of this trend decline in r*.
Causes of the persistent low real yield environment
I will structure my discussion of the drivers of r* around three broad driving forces: first, the determinants of potential growth rates; second, demographics; and third, diverging developments in the returns on risky and safe financial assets. These three factors are embedded in the textbook economic growth model, which relates the equilibrium rate of interest to economic growth, population growth and the discount rate. I will primarily focus on common international trends, even if cross-country differences in these driving forces have important implications for return differentials and international capital flows.,
The decline in potential growth rates, demographic trends and the portfolio shift towards safe assets combine to put downward pressure on the equilibrium real rate of interest. This rate is not directly observable: at any given point in time, temporary factors push the economy away from its underlying steady state so that the measured real interest rate also reflects these shocks (and the associated policy responses). However, analysis by the ESCB Working Group on Econometric Modelling indicates that, taking the impact of these driving factors into account, the equilibrium real interest rate in the euro area has been around zero or negative in recent years (Chart 19). Similar estimates are reported in the growing literature on the global equilibrium real interest rate. While Chart 19 shows that estimates of r* are inevitably not very precise, the general downward drift is quite clear.
What are the implications of low equilibrium real rates for policy?
Taking monetary policy first, it is important to recognise that the primary determinants of long-term equilibrium real rates are non-monetary in nature: potential growth rates; demographics; risk preferences in portfolios. Nonetheless, the implications of the level of real interest rates for the formulation of monetary policy are profound. In particular, monetary policy ultimately has to be calibrated vis-à-vis the underlying equilibrium rate of interest. If, for example, inflation stabilisation calls for monetary stimulus due to a negative demand shock, the central bank is required to engineer an easing of financial conditions relative to the steady state. If the prevailing inflation rate falls short of the inflation aim and the equilibrium real rate is low – or even negative – this may call for a substantially negative policy rate in order to stabilise medium-term inflation.
Furthermore, if the policy rate is already close to the effective lower bound, alternative methods of providing monetary stimulus may be required to substitute for deeper rate cuts. For example, a 1 percentage point decline in steady-state inflation translates into an equivalent loss of capacity to cut the policy rate in the event of an adverse shock: this is a large magnitude, given standard calculations of the monetary easing required during downturns in order to stabilise inflation over the medium term. Options to ease monetary policy when the conventional policy space is constrained include forward guidance about the future path of policy rates; asset purchase programmes; and targeted lending operations. Since the summer of 2014, the ECB has been active in employing all of these instruments and our assessment is that these unconventional policy measures have been highly effective in easing monetary and financial conditions. At the same time, to avoid that the effective lower bound constrains monetary policy too frequently – and thus to reduce the need for unconventional policy tools – it is essential that inflation is centred at its target over the medium term, so that the limitations imposed by a low equilibrium real rate are not further compounded by an inflation trend that is also too low.
In relation to other policy dimensions, a low equilibrium real rate reflects – as I discussed earlier – low expected potential growth rates. It follows that growth-enhancing structural policies and growth-optimising public investment rates would translate into an upward shift in the equilibrium real rate. In addition, population ageing poses many policy challenges, and the policy choices that are made will have significant implications for trend savings and investment rates. In addition, in the event of negative shocks, the speed of convergence back to steady state can be accelerated if macroeconomic stabilisation is supported by counter-cyclical fiscal policies (where feasible) in addition to the stabilisation policies of central banks.
In addressing the safe-asset premium, policies that reduce negative tail risk are essential. Much has been done in the aftermath of the crisis to mitigate tail risks, especially in relation to the financial system: bank capitalisation levels have been increased, reinforced by an additional layer of loss-absorbing debt instruments; supervisory oversight has been enhanced, including through the creation of the Single Supervisory Mechanism; macroprudential policy frameworks have been initiated; macro-financial imbalances are more contained; and the European Stability Mechanism is a source of stability in the sovereign debt market. Still, it is also clear that the current system for bearing risk remains far from optimal, with the completion of banking union and the deepening of capital markets union offering much potential for risk sharing. In turn, a greater degree of risk sharing reduces the need for individual entities to self-insure through the accumulation of safe assets.
On the supply side, the sustained through-the-cycle maintenance of fiscal discipline (in combination with an active role for counter-cyclical fiscal stabilisation policies, which can help maintain the equilibrium real rate at a higher level) will over time lead to an improvement in the risk assessments of the national sovereign debt of euro area countries. In addition, the supply of safe assets could be boosted at the euro area level through a range of innovations, even if some of these proposals require a significant deepening of fiscal union at the area-wide level.