tag:blogger.com,1999:blog-73145206957993266392024-03-06T06:59:43.535+00:00Your Neighbourhood EconomistEconomics made easy by someone in the know who might just live down the street.Your Neighbourhood Economisthttp://www.blogger.com/profile/00096015895608337029noreply@blogger.comBlogger163125tag:blogger.com,1999:blog-7314520695799326639.post-22898087857701718002015-07-22T15:29:00.001+01:002015-07-22T15:29:32.125+01:00China - staying out of the news<div dir="ltr" style="text-align: left;" trbidi="on">
<div class="MsoNormal">
<b><span lang="EN-GB">A
tumble in stock prices gives rise to more worries about China but it is not
deserving of the bad press <o:p></o:p></span></b></div>
<div class="MsoNormal">
<b><span lang="EN-GB"><br /></span></b></div>
<div class="MsoNormal">
<span lang="EN-GB">News about China often hits the front pages
as its swift rise is both scary and a source of economic salvation. Stock markets in China have been making news
recent due to a sharp selloff in shares.
The media are quick to jump on any potential hiccup in China’s rapid
expansion due to its growing importance as a global economic superpower. Yet, the peculiarities of stock markets in
China mean that the spill over effects are likely to be limited even though the
financial sector will continue to be a source for headlines in the future.<o:p></o:p></span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<b>New to this game</b></div>
<div class="MsoNormal">
<b><span lang="EN-GB"><br /></span></b></div>
<div class="MsoNormal">
<span lang="EN-GB">Picking the right stocks and when to buy
them is never easy but it is even trickier with China being a relative newcomer
to trading shares. The shorter the
period of time over which shares have been traded, the more difficult it is to
pin down what should be paid for stocks.
Many of the companies themselves are also still young and are still
fighting a fierce battle with rivals for survival. On top of this, the bulk of the investors in
the Chinese markets are locals and have less experience in trading stock. <o:p></o:p></span></div>
<div class="MsoNormal">
<span lang="EN-GB"><br /></span></div>
<div class="MsoNormal">
<span lang="EN-GB">The government further muddies the picture
with its plans for liberalising the financial markets. While fewer restrictions would be welcomed,
the reforms create jitters due to the potential pace of change depending on the
whims of its leaders. Yet, the
government regulations in themselves are part of the problem. One issue is limits on how much banks can pay
out in interest on savings accounts.
Starved of other places to put any spare cash, too many Chinese look to
make money in domestic share markets which are ill equip to deal with the
inflows.<span style="background: lightgrey; mso-highlight: lightgrey;"><o:p></o:p></span></span></div>
<div class="MsoNormal">
<span lang="EN-GB"><br /></span></div>
<div class="MsoNormal">
<span lang="EN-GB">While many eager investors have managed to
sidestep the barriers, heavy regulation of the financial markets keeps out many
more Chinese. This has the effect of
limiting any losses when the inevitable selloffs hit the stock markets. In this way, the government ensures that the underlying
economy is sheltered from any volatility in the stock markets. Neither is the stock market much of a
reflection of what is going on in the actual economy. Chinese stock prices had stagnated for a long
time prior to the recent ups and downs so it is unlikely that any bad news in
the stock markets will be a prelude to trouble with the economy.<o:p></o:p></span></div>
<div class="MsoNormal">
<b><span lang="EN-GB"><br /></span></b></div>
<div class="MsoNormal">
<b><span lang="EN-GB">Watch
this space</span></b><span lang="EN-GB"><o:p></o:p></span></div>
<div class="MsoNormal">
<span lang="EN-GB"><br /></span></div>
<div class="MsoNormal">
<span lang="EN-GB">All this would not make the headlines if
happening in any other emerging market but China is a big deal these days. Its importance as the main global driver for economic
growth makes outsiders nervous. Its
haphazard mix of free market and government control means that pessimists are
quick to spot its faults. But, just like
with the patchy rules governing financial markets, <a href="http://yourneighbourhoodeconomist.blogspot.com/2015/04/china-playing-catch-up.html" target="_blank">the government has adapted in the past</a> to stay on top of problems before things get out of hand.<span style="background: lime; mso-highlight: lime;"><o:p></o:p></span></span></div>
<br />
<div class="MsoNormal">
<span lang="EN-GB"><br /></span></div>
<div class="MsoNormal">
<span lang="EN-GB">The fear of market turmoil spilling over to
society at large will continue to keep the Chinese on a cautious path to freeing
up financial markets. Over this time, China
will continue to be plagued by a jumpy stock market as its investors grow used
to the ups and downs of share prices.
Considering that even Western investors have not fully mastered this,
the trials and tribulations of Chinese share prices will likely to be hitting
headlines again many times in the future. But, with government policy helping to stem
the spread of any losses, it is not something that needs to cause too much
worry yet.<o:p></o:p></span></div>
</div>
Your Neighbourhood Economisthttp://www.blogger.com/profile/00096015895608337029noreply@blogger.com0tag:blogger.com,1999:blog-7314520695799326639.post-1772913731267149382015-07-03T14:53:00.002+01:002015-07-22T15:34:52.245+01:00Central Banks – juggling interest rates and inflation<div dir="ltr" style="text-align: left;" trbidi="on">
<div class="MsoNormal">
<b><span lang="EN-GB">Low
inflation is dampening the effects of low interest rates and central banks are
happy to let this happen</span></b></div>
<div class="MsoNormal">
<span lang="EN-GB"><br /></span></div>
<div class="MsoNormal">
<span lang="EN-GB">As guardians of the economic recovery and a
bulwark against inflation, central banks have a tough juggling act to
maintain. This is made even more
difficult as priorities shift from getting the economy moving again to keeping
an eye out for inflation. The
consequences of this can be seen in central banks’ tolerance towards low
inflation with low interest rates proving less helpful as prices remain
depressed. Central banks are letting
this happen due to inflation being one ball that central banks dare not come
close to dropping. <o:p></o:p></span></div>
<div class="MsoNormal">
<b><span lang="EN-GB"><br /></span></b></div>
<div class="MsoNormal">
<b><span lang="EN-GB">Too
many balls in the air<o:p></o:p></span></b></div>
<div class="MsoNormal">
<span lang="EN-GB"><br /></span></div>
<div class="MsoNormal">
<span lang="EN-GB">Central banks have a lot of balls in the
air to watch with their remit including managing the price level as well as
ensuring stability in the financial markets (and maintaining employment levels
in the US). The number of balls has
increased as monetary policy has become the main way to bolster the economy
with <span style="background-attachment: initial; background-clip: initial; background-color: white; background-image: initial; background-origin: initial; background-position: initial; background-repeat: initial; background-size: initial;"><a href="http://yourneighbourhoodeconomist.blogspot.co.uk/2015/01/fiscal-policy-not-fighting-back.html" target="_blank">governments in many countries refusing to use fiscal policy</a></span>.
But it is inflation that typically remains the main focus of central
banks. <o:p></o:p></span></div>
<div class="MsoNormal">
<span lang="EN-GB"><br /></span></div>
<div class="MsoNormal">
<span lang="EN-GB">The aversion to inflation was put to one
side amid the turmoil of the global financial crisis. Efforts to prop up the money supply through quantitative
easing would have normally also lifted prices but this did not stop central
banks taking bold action. As the threat
of crisis has receded, so have measures by some central banks to help out with
the economy. This shift has been made
more pronounced due to low inflation as depressed prices strip away some of the
positive effects of low interest. <o:p></o:p></span></div>
<div class="MsoNormal">
<b><span lang="EN-GB"><br /></span></b></div>
<div class="MsoNormal">
<b><span lang="EN-GB">Juggling
priorities <o:p></o:p></span></b></div>
<div class="MsoNormal">
<span lang="EN-GB"><br /></span></div>
<div class="MsoNormal">
<span lang="EN-GB">The rate at which prices are rising affects
decisions made by companies on whether to borrow money. Higher inflation makes low interest rates more
attractive to businesses as any products purchased today will be worth more in
the future making it easier to pay off debts.
The opposite is also true and flat prices will prompt some business
putting off plans to borrow and invest. The
harm done by low inflation is even more pervasive if it is a <span style="background-attachment: initial; background-clip: initial; background-color: white; background-image: initial; background-origin: initial; background-position: initial; background-repeat: initial; background-size: initial;"><a href="http://yourneighbourhoodeconomist.blogspot.com/2015/06/interest-rates-low-but-not-low-enough.html" target="_blank">reflection of a weak economy which seems likely</a></span>. <o:p></o:p></span></div>
<div class="MsoNormal">
<span lang="EN-GB"><br /></span></div>
<div class="MsoNormal">
<span lang="EN-GB">By not doing more to keep prices ticking
upwards, central banks are consenting with some of the potential effects of low
interest rates being taken away. It is
like a hike in interest rates without interest rates actually having to
rise. It is a sign of how much central
banks worry about prices rising too fast that this is happening despite the
economic recovery still lacking momentum and inflation close to zero.<o:p></o:p></span></div>
<div class="MsoNormal">
<span lang="EN-GB"><br /></span></div>
<div class="MsoNormal">
<b><span lang="EN-GB">Don’t
douse the economic recovery<o:p></o:p></span></b></div>
<div class="MsoNormal">
<span lang="EN-GB"><br /></span></div>
<div class="MsoNormal">
<span lang="EN-GB">The various roles of the central bank can
make it seem as if they are required to juggle fire and water at the same
time. Much has been left to central
banks in the aftermath of the global financial crisis which has often resulted
in <span style="background-attachment: initial; background-clip: initial; background-color: white; background-image: initial; background-origin: initial; background-position: initial; background-repeat: initial; background-size: initial;"><a href="http://yourneighbourhoodeconomist.blogspot.co.uk/2014/06/monetary-policy-losing-its-power.html" target="_blank">monetary policy being pushed too far</a></span>. Central banks
were never meant to take such an active role in managing the economy. A return to their less controversial role of
keeping a lid on inflation will come as a welcome relief. It is, after all, their record on inflation that
central banks will often be judged. <o:p></o:p></span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span lang="EN-GB">However, it is still too soon to move
against the potential threat of a jump in prices. There is still scope to <span style="background-attachment: initial; background-clip: initial; background-color: white; background-image: initial; background-origin: initial; background-position: initial; background-repeat: initial; background-size: initial;"><a href="http://yourneighbourhoodeconomist.blogspot.co.uk/2015/06/interest-rates-low-but-not-low-enough.html" target="_blank">leave interest rates at their current low levels</a></span> with other measures such as <span style="background-attachment: initial; background-clip: initial; background-color: white; background-image: initial; background-origin: initial; background-position: initial; background-repeat: initial; background-size: initial;"><a href="http://yourneighbourhoodeconomist.blogspot.co.uk/2014/06/monetary-policy-surgery-needed.html" target="_blank">macroprudential policies</a></span> available for
sectors, such as the residential property market, where lending is getting out
of hand. There is a point in every juggler’s
routine where everything seems set to come crashing down – let’s hope that this
does not happen due to a premature hike in interest rates.<o:p></o:p></span></div>
</div>
Your Neighbourhood Economisthttp://www.blogger.com/profile/00096015895608337029noreply@blogger.com0tag:blogger.com,1999:blog-7314520695799326639.post-76333674677795540042015-06-25T13:40:00.000+01:002016-02-16T17:36:09.502+00:00Interest Rates – low but not low enough<div dir="ltr" style="text-align: left;" trbidi="on">
<div class="MsoNormal">
<b><span lang="EN-GB">Interest
rates may not be low enough to get us on the road to recovery but falling
prices should help</span></b></div>
<div class="MsoNormal">
<b><span lang="EN-GB"><br /></span></b></div>
<div class="MsoNormal">
<span lang="EN-GB">Something strange is afoot in the
economy. With interest rates at record
lows in many countries, borrowing should be booming and saving on the decline
but the opposite is true. This suggests
that the economy remains out of kilter without interest rates being able to set
the right balance between savings and investment. Instead, the shortfall in demand due to limited
investment and weak spending may be dragging down prices as a means to put the
economy back to health. <o:p></o:p></span></div>
<div class="MsoNormal">
<span lang="EN-GB"><br /></span></div>
<div class="MsoNormal">
<b><span lang="EN-GB">Not
so free market<o:p></o:p></span></b></div>
<div class="MsoNormal">
<b><span lang="EN-GB"><br /></span></b></div>
<div class="MsoNormal">
<span lang="EN-GB">The self-healing ability of any economy is
one of the central tenants of economic theory.
Prices adjust as a means for the economy adapting to any changes. For example, an increase in the supply of bananas
will trigger a fall in prices and more people eating bananas. A rise in companies looking for software
experts would drive up their wages (the price for labour) and the number of
people wanting to learn more about computers.
Through changes in these prices, the economy moves toward an equilibrium
where everything is at appropriate levels.<o:p></o:p></span></div>
<div class="MsoNormal">
<span lang="EN-GB"><br /></span></div>
<div class="MsoNormal">
<span lang="EN-GB">Interest rates act in the same way acting
as the “<span style="background-attachment: initial; background-clip: initial; background-color: white; background-image: initial; background-origin: initial; background-position: initial; background-repeat: initial; background-size: initial;"><a href="http://yourneighbourhoodeconomist.blogspot.com/2012/10/the-demand-and-supply-of-money.html" target="_blank">price of money</a></span>”
to make sure that there is neither too much nor too little savings or
investment. Lower interest rates are
used to make borrowing cheaper and savings less worthwhile. This was the course of action taken by
central banks in order to stimulate the economy by attempting to boost
investment (funded by lending) and spur on more consumption (due to lower
savings). Quantitative easing adds to
this by giving banks more money to lend and less need to entice people to leave
money in the bank.<o:p></o:p></span></div>
<div class="MsoNormal">
<span lang="EN-GB"><br /></span></div>
<div class="MsoNormal">
<b><span lang="EN-GB">Still
waiting</span></b></div>
<div class="MsoNormal">
<span lang="EN-GB"><br /></span></div>
<div class="MsoNormal">
<span lang="EN-GB">The continued wait for a robust recovery
suggests that something remains amiss.
The lack of appetite among companies to expand their operations by
borrowing is both a cause of and caused by weak demand in the overall economy. Spending by consumers is also faltering with people
happy to let money mount up in the bank despite the low returns on
savings. The high levels of household debt
that still persist are another reason for consumers to hold back from spending.<o:p></o:p></span></div>
<div class="MsoNormal">
<span lang="EN-GB"><br /></span></div>
<div class="MsoNormal">
<span lang="EN-GB">The persistence of the state of low
investment and high savings suggests that <span style="background-attachment: initial; background-clip: initial; background-color: white; background-image: initial; background-origin: initial; background-position: initial; background-repeat: initial; background-size: initial;"><a href="http://yourneighbourhoodeconomist.blogspot.com/2014/06/monetary-policy-losing-its-power.html" target="_blank">monetary policy has not been enough to get the economy back on the right track</a></span> (although it has helped to prevent a financial
collapse). A further loosening of
monetary policy is not on the books for most central banks. Interest rates cannot be lowered much further
considering that negative interest rates are difficult to implement. <span style="background-attachment: initial; background-clip: initial; background-color: white; background-image: initial; background-origin: initial; background-position: initial; background-repeat: initial; background-size: initial;"><a href="http://yourneighbourhoodeconomist.blogspot.co.uk/2015/04/monetary-policy-where-has-magic-gone.html" target="_blank">Quantitative easing also seems to have run its course</a></span> while<span style="background-attachment: initial; background-clip: initial; background-color: white; background-image: initial; background-origin: initial; background-position: initial; background-repeat: initial; background-size: initial;"> <a href="http://yourneighbourhoodeconomist.blogspot.com/2015/05/emerging-markets-caught-in-crossfire.html" target="_blank">increasing creating negative side effects</a></span>. <o:p></o:p></span></div>
<div class="MsoNormal">
<b><span lang="EN-GB"><br /></span></b></div>
<div class="MsoNormal">
<b><span lang="EN-GB">Where
to next?<o:p></o:p></span></b></div>
<div class="MsoNormal">
<span lang="EN-GB"><br /></span></div>
<div class="MsoNormal">
<span lang="EN-GB">The inability of interest rates to adjust is
hampering a return to economic growth.
With interest rates not able to go any lower, it may be the case that it
is prices which are instead moving to get the economy back to equilibrium. That is, rather than interest rates falling
to balance out weak lending and growing savings, prices are being depressed by
the lacklustre economy. The hopes for
economic recovery rely on cheaper prices spurring on more spending thanks to
consumers felling richer. Further
impetus would result from the extra spending helping to push up investment and lift
the economy to better match the current level of interest rates.<o:p></o:p></span></div>
<br />
<div class="MsoNormal">
<span lang="EN-GB">This route back to recovery may take time
considering that any decline in prices will be limited and wage gains have yet
to take off. There are ways to push this
along of which easiest way would be for <span style="background-attachment: initial; background-clip: initial; background-color: white; background-image: initial; background-origin: initial; background-position: initial; background-repeat: initial; background-size: initial;"><a href="http://yourneighbourhoodeconomist.blogspot.com/2015/01/fiscal-policy-not-fighting-back.html" target="_blank">governments to temporarily increase spending</a></span>. Money used for investments in infrastructure
or training and R&D in new technologies would be worthwhile at a time of
low interest rates. Another alternative
would be for <span style="background-attachment: initial; background-clip: initial; background-color: white; background-image: initial; background-origin: initial; background-position: initial; background-repeat: initial; background-size: initial;"><a href="http://yourneighbourhoodeconomist.blogspot.co.uk/2014/03/quantitative-easing-get-to-chopper.html" target="_blank">central banks to use their money-printing capabilities to transfer cash to consumers</a></span>. This more radical option would provide a
short-term boost to spending. Sometimes
we all need a little bit extra to get us back on track and the economy is no
different.<o:p></o:p></span></div>
</div>
Your Neighbourhood Economisthttp://www.blogger.com/profile/00096015895608337029noreply@blogger.com2tag:blogger.com,1999:blog-7314520695799326639.post-46843485366131800562015-06-16T14:45:00.000+01:002015-06-16T14:45:49.642+01:00Property Market – nowhere to call home<div dir="ltr" style="text-align: left;" trbidi="on">
<div class="MsoNormal">
<b><span lang="EN-GB">House
prices are distorted by demand from investors and governments are making the
situation worse</span></b></div>
<div class="MsoNormal">
<b><span lang="EN-GB"><br /></span></b></div>
<div class="MsoNormal">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhpDmc_2MJ1wZ1YHuciAPbatAv05TGdM0rlsQoupiEih6j7zkmR50MlCGLcKNOIht-LhpTuaS1rhjT9tqMHjwNJqX5855pQ4BPDZ_WHBTc8qJDL7BSyVgyv9hgNcrv3Uy9OXWekTk5i_Js/s1600/Monopoly.jpg" imageanchor="1" style="clear: right; float: right; margin-bottom: 1em; margin-left: 1em;"><img border="0" height="240" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhpDmc_2MJ1wZ1YHuciAPbatAv05TGdM0rlsQoupiEih6j7zkmR50MlCGLcKNOIht-LhpTuaS1rhjT9tqMHjwNJqX5855pQ4BPDZ_WHBTc8qJDL7BSyVgyv9hgNcrv3Uy9OXWekTk5i_Js/s320/Monopoly.jpg" width="320" /></a><span lang="EN-GB">Houses have become so much more than homes
and many of us are missing out as a result.
More than just a place to live, houses have become the investment option
of choice during turbulent times. The
popularity of investment properties means that buyers looking for a home are
being crowded out of the market. Rather
than correcting this distortion, government policies typically make things
worse and leave the dream of their own home beyond the hopes of many.<o:p></o:p></span></div>
<div class="MsoNormal">
<span lang="EN-GB"><br /></span></div>
<div class="MsoNormal">
<b><span lang="EN-GB">No
home sweet home<o:p></o:p></span></b></div>
<div class="MsoNormal">
<span lang="EN-GB"><br /></span></div>
<div class="MsoNormal">
<span lang="EN-GB">The property market is never far from any
topic of conversation. Since everybody
needs a place to live, it affects us all.
The substantial price tag that comes with buying a house would be enough
to weigh on anyone’s mind. But property
purchases take on even greater significance as real estate also counts as a
form of saving for the future. The money
tied up in property is the biggest investment that many of us make. This means that the ups and downs of the housing
market shape the financial well-being of many families. <o:p></o:p></span></div>
<div class="MsoNormal">
<span lang="EN-GB"><br /></span></div>
<div class="MsoNormal">
<span lang="EN-GB">The predominance of property investment is
further accentuated as buy-to-lets become increasingly popular as a means of
putting ones wealth to work. The
abstract nature of shares and bonds along with the shenanigans in the financial
markets makes property seem like the safe-as-houses option. Yet this extra source of demand for real
estate inflates house prices beyond their value as a mere place to live. Investment in real estate brings benefits,
such as providing rental accommodation and improvements to neglected
properties, but the costs also mount as investment in property increases.<o:p></o:p></span></div>
<div class="MsoNormal">
<span lang="EN-GB"><br /></span></div>
<div class="MsoNormal">
<span lang="EN-GB">With a relatively fixed amount of housing
in large cities, one person’s buy-to-let gets in the way of a house becoming a
permanent home. Along with the benefits
to home owners, neighbourhoods also have a greater sense of community with
stable residents. The higher house
prices due to property investment results in home ownership being coupled with
a larger amount of mortgage debt. This
makes the property ladder more tenuous for debt-laden buyers who could easily
be caught out by any economic hardship.<o:p></o:p></span></div>
<div class="MsoNormal">
<b><span lang="EN-GB"><br /></span></b></div>
<div class="MsoNormal">
<b><span lang="EN-GB">Need
to make room for more<o:p></o:p></span></b></div>
<div class="MsoNormal">
<span lang="EN-GB"><br /></span></div>
<div class="MsoNormal">
<span lang="EN-GB">Governments, which could work to limit
these negative consequences, tend to only exacerbate the problem. Policies targeting the real estate market
differ across countries – tax breaks for mortgage debt, low levels of capital
gains tax, easier access to loans. But
the common thread is that it is all too tempting for governments to please better
off voters by bolstering the property market.
The <span style="background-attachment: initial; background-clip: initial; background-color: white; background-image: initial; background-origin: initial; background-position: initial; background-repeat: initial; background-size: initial;"><a href="http://yourneighbourhoodeconomist.blogspot.co.uk/2014/05/central-banks-false-illusion-of-power.html" target="_blank">predominance of monetary policy as the main tool for managing the economy</a></span> makes this
even worse by stoking up borrowing (and the property market) when the economy
is weak. <o:p></o:p></span></div>
<div class="MsoNormal">
<span lang="EN-GB"><br /></span></div>
<div class="MsoNormal">
<span lang="EN-GB">While pushing up demand, governments do too
little to boost supply. It is more
housing that is often cited by politicians as the solution to buoyant property
prices but government regulations and zoning rules are not reflective of the
growing need for new houses. Houses take
too long to build while elections are never far off even though more building
would make for good economic policy at a time when <span style="background-attachment: initial; background-clip: initial; background-color: white; background-image: initial; background-origin: initial; background-position: initial; background-repeat: initial; background-size: initial;"><a href="http://yourneighbourhoodeconomist.blogspot.co.uk/2015/01/fiscal-policy-not-fighting-back.html" target="_blank">the economy is still suffering from a shortfall in demand</a></span>. <o:p></o:p></span></div>
<br />
<div class="MsoNormal">
<span lang="EN-GB"><br /></span></div>
<div class="MsoNormal">
<span lang="EN-GB">Financial markets are awash with other
places to invest. <span style="background-attachment: initial; background-clip: initial; background-color: white; background-image: initial; background-origin: initial; background-position: initial; background-repeat: initial; background-size: initial;"><a href="http://yourneighbourhoodeconomist.blogspot.co.uk/2014/04/animal-spirits-caging-our-wild-side.html" target="_blank">Our animal spirits should be limited</a></span>
to parts of the economy where the ups and downs can be absorbed without wider
consequences for the rest of us. Housing
is too important to get caught up in such investment games.<o:p></o:p></span></div>
</div>
Your Neighbourhood Economisthttp://www.blogger.com/profile/00096015895608337029noreply@blogger.com0tag:blogger.com,1999:blog-7314520695799326639.post-13576374314376730362015-05-14T08:46:00.000+01:002015-06-13T12:06:33.811+01:00Emerging Markets – Caught in the Crossfire <div dir="ltr" style="text-align: left;" trbidi="on">
<div class="MsoNormal">
<b><span lang="EN-GB">US
monetary policy has missed its mark and it is a handful of emerging markets that
look set to pay the price <o:p></o:p></span></b></div>
<div class="MsoNormal">
<b><span lang="EN-GB"><br /></span></b></div>
<div class="MsoNormal">
<span lang="EN-GB">The big guns of monetary policy used to
combat sluggish economic growth are about to be put away but the real damage
may be just about to kick in. The
Federal Reserve adopted loose monetary policy to get the US economy moving
again but it is elsewhere where the effects have been felt the most. Having benefited more from the loose monetary
policy than the intended target, some emerging markets look set to suffer as a policy
reversal prompts US investors to stage a destructive retreat back home.<o:p></o:p></span></div>
<div class="MsoNormal">
<span lang="EN-GB"><br /></span></div>
<div class="MsoNormal">
<b><span lang="EN-GB">Danger
zone<o:p></o:p></span></b></div>
<div class="MsoNormal">
<b><span lang="EN-GB"><br /></span></b></div>
<div class="MsoNormal">
<span lang="EN-GB">The proverbial printing presses at central
banks are like the heavy artillery of monetary policy. Central banks such as the Federal Reserve had
been pumping out cash to buy bonds as part of quantitative easing. Yet, the US economy had failed to fire up
with companies unwilling to invest while spending remains weak. Investors with cash in hand turned their
sights overseas and targeted emerging markets where economic growth was still
perky. <o:p></o:p></span></div>
<div class="MsoNormal">
<span lang="EN-GB"><br /></span></div>
<div class="MsoNormal">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhIA-KApm7DZMp8LmvOhzckTlig55fGZfhR4bll9_o8CrWjVnpnRnEcI6BAGqYG9CdSiXru1fDsrmwkgSvteSghM7N_uqgMCK9a7_HEHLlZ7ru6QzaoOoPXF8b_PZ61iLXCNzdfnbY7mY0/s1600/USD.jpg" imageanchor="1" style="clear: right; float: right; margin-bottom: 1em; margin-left: 1em;"><img border="0" height="240" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEhIA-KApm7DZMp8LmvOhzckTlig55fGZfhR4bll9_o8CrWjVnpnRnEcI6BAGqYG9CdSiXru1fDsrmwkgSvteSghM7N_uqgMCK9a7_HEHLlZ7ru6QzaoOoPXF8b_PZ61iLXCNzdfnbY7mY0/s320/USD.jpg" width="320" /></a><span lang="EN-GB">The surplus US dollars helped to lower
interest rates for borrowers in many countries which had not gotten caught up
in the global financial crisis. The
reduced borrowing costs pushed up lending elsewhere despite not having the same
effects in the US economy. The muted
effects of monetary policy in the domestic economy prompted the Federal Reserve
to unleash even more firepower. Money,
like some things, is fine in moderation but the bombardment of US dollars
inadvertently created its own minefield.
<o:p></o:p></span></div>
<div class="MsoNormal">
<span lang="EN-GB"><br /></span></div>
<div class="MsoNormal">
<span lang="EN-GB">Borrowers in emerging market were only
given access to cheap cash by borrowing in US dollars for a short period of
time. This was fine as long as the prospects
for the US economy were poor and US dollars were readily available. But any significant improvement in the US
economy would see investors shift their money back. A stronger US economy would also push up the
value of the US dollar and make it tougher for overseas borrowers to pay off
any debts in US dollars. <o:p></o:p></span></div>
<div class="MsoNormal">
<span lang="EN-GB"><br /></span></div>
<div class="MsoNormal">
<b><span lang="EN-GB">Collateral
damage <o:p></o:p></span></b></div>
<div class="MsoNormal">
<b><span lang="EN-GB"><br /></span></b></div>
<div class="MsoNormal">
<span lang="EN-GB">Like solider stationed in a hostile region,
investors were set up to bail when the opportunity arose. Just the mere mention by the Federal Reserve
in May 2013 that quantitative easing might be coming to an end was enough to
trigger <span style="background-attachment: initial; background-clip: initial; background-color: white; background-image: initial; background-origin: initial; background-position: initial; background-repeat: initial; background-size: initial;"><a href="http://yourneighbourhoodeconomist.blogspot.com/2014/02/no-need-to-fear-for-fragile-five.html" target="_blank">a rush by investors to get their money out</a></span>. Six
months of market volatility followed even though quantitative easing did not
actually end until October 2014. With
the Federal Reserve now mulling lifting interest rates up from their low
levels, more upheaval seems likely.<o:p></o:p></span></div>
<div class="MsoNormal">
<span lang="EN-GB"><br /></span></div>
<div class="MsoNormal">
<span lang="EN-GB">This is because money often does more
damage on the way out compared to the gains when it is initially welcomed. Yet, <span style="background-attachment: initial; background-clip: initial; background-color: white; background-image: initial; background-origin: initial; background-position: initial; background-repeat: initial; background-size: initial;"><a href="http://yourneighbourhoodeconomist.blogspot.com/2014/04/animal-spirits-caging-our-wild-side.html" target="_blank">the lure of cheap cash is too much to ignore</a></span>. Even the financial sectors in richer countries
have shown themselves to be <span style="background-attachment: initial; background-clip: initial; background-color: white; background-image: initial; background-origin: initial; background-position: initial; background-repeat: initial; background-size: initial;"><a href="http://yourneighbourhoodeconomist.blogspot.com/2014/05/no-mystery-behind-banks-behaving-badly.html" target="_blank">unable to cope when too much money is on offer</a></span>.
Less developed banking systems in emerging markets are often even worse
at putting any cash to good use. This
increases the likelihood that many borrowers will struggle when US dollars are
harder to come by. <span style="background: lime; mso-highlight: lime;"><o:p></o:p></span></span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span lang="EN-GB">As the aftermath of the global financial
crisis has made painfully clear, a swift end to a lending boom is not something
easy to get over. In its attempts to deal
with an US economy sagging under the weight of excess debt, the Federal Reserve
has inflicted the same woes on others who are less able to deal with the consequences.
Like any form of warfare, it is the innocent victims that suffer the
most.<o:p></o:p></span></div>
</div>
Your Neighbourhood Economisthttp://www.blogger.com/profile/00096015895608337029noreply@blogger.com0tag:blogger.com,1999:blog-7314520695799326639.post-88054573343195313272015-05-06T11:20:00.000+01:002015-05-06T11:20:35.397+01:00Quantitative Easing – Getting less from more<div dir="ltr" style="text-align: left;" trbidi="on">
<div class="MsoNormal">
<b><span lang="EN-GB">The
European Central Bank has been late to try quantitative easing and may find
that additional euros cannot buy much relief<o:p></o:p></span></b></div>
<div class="MsoNormal">
<b><span lang="EN-GB"><br /></span></b></div>
<div class="MsoNormal">
<span lang="EN-GB">We all have the tendency to rely on the
tried and true tricks we have found helpful in the past even when their
usefulness has faded. This also seems
true of central banks who have come to rely on quantitative easing even though
its effects show signs of fading. Even
the initial boost provided by the first attempts at quantitative easing was
limited and the situation has deteriorated amid its continued application. As the last major central bank to give it a
go, the European Central Bank will not get much return from any extra cash. <o:p></o:p></span></div>
<div class="MsoNormal">
<span lang="EN-GB"><br /></span></div>
<div class="MsoNormal">
<b><span lang="EN-GB">Why
more is not always more<o:p></o:p></span></b></div>
<div class="MsoNormal">
<b><span lang="EN-GB"><br /></span></b></div>
<div class="MsoNormal">
<span lang="EN-GB">Economist should know that repeating the
same policies does not always work considering a well-used idea in economic
theory known as diminishing returns.
This concept refers to the way in which more of the same often comes
with fewer additional benefits.
Economists use this to describe why the second plate of ice cream does
not taste as good as the first or why one more cook in a crowded kitchen
doesn’t necessarily improve the food. <o:p></o:p></span></div>
<div class="MsoNormal">
<span lang="EN-GB"><br /></span></div>
<div class="MsoNormal">
<span lang="EN-GB">Printing more money, which is the basis for
quantitative easing, sounds like a sure-fire way to generate economic growth
but any economy can only handle so much money.
<span style="background-attachment: initial; background-clip: initial; background-color: white; background-image: initial; background-origin: initial; background-position: initial; background-repeat: initial; background-size: initial;">The world is
already awash with cash</span> even before central banks started with
quantitative easing. This means that every
additional dollar, euro, or pound printed as part of quantitative easing is
being added to an already substantial pile of cash. With money already being hoarded by many
companies and governments not wanting to spend more cash, <span style="background-attachment: initial; background-clip: initial; background-color: white; background-image: initial; background-origin: initial; background-position: initial; background-repeat: initial; background-size: initial;"><a href="http://yourneighbourhoodeconomist.blogspot.com/2014/06/monetary-policy-losing-its-power.html" target="_blank">there is not much use for any more</a></span>.</span></div>
<div class="MsoNormal">
<span lang="EN-GB"><br /></span></div>
<div class="MsoNormal">
<span lang="EN-GB"><o:p></o:p></span><b><span lang="EN-GB">No
need for more<o:p></o:p></span></b></div>
<div class="MsoNormal">
<b><span lang="EN-GB"><br /></span></b></div>
<div class="MsoNormal">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEikLa25ChOdSqZIoTckuTuzWPc119DAddyBtRw0U6km0VS5kFu1TsOPNzuXw_WA9TebsCRjRmkgStjqR36CcTQUlk81KLORyG8idKN-u2S31SDKO9aISgp6vZ0sKi8Fn5mK_ftgzebG5CI/s1600/icecream.jpg" imageanchor="1" style="clear: right; float: right; margin-bottom: 1em; margin-left: 1em;"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEikLa25ChOdSqZIoTckuTuzWPc119DAddyBtRw0U6km0VS5kFu1TsOPNzuXw_WA9TebsCRjRmkgStjqR36CcTQUlk81KLORyG8idKN-u2S31SDKO9aISgp6vZ0sKi8Fn5mK_ftgzebG5CI/s1600/icecream.jpg" height="240" width="320" /></a><span lang="EN-GB">With the meagre effects of quantitative
easing on the wane, it was the earlier versions that would have generated the most
bang for each additional buck. It was
the Federal Reserve and the Bank of England that tried out the first rounds of
quantitative easing – the goal was to push investors away from government bonds
to more risky investments such as corporate bonds or stocks. The hope was that this would help provide
companies with easier access to cash and to perk up investors by boosting share
prices. <o:p></o:p></span></div>
<div class="MsoNormal">
<span lang="EN-GB"><br /></span></div>
<div class="MsoNormal">
<span lang="EN-GB">Not all of the extra dollars and pounds
would have stayed local but also headed overseas to find places to earn more
money. This meant that the effects of
quantitative easing would have been felt far beyond the countries where the
cash was originally coming from. It has
been helpful in places such as Portugal and Spain with overseas investors
buying bonds issued by the Portuguese and Spanish governments as worries about
Europe eased. <o:p></o:p></span></div>
<div class="MsoNormal">
<span lang="EN-GB"><br /></span></div>
<br />
<div class="MsoNormal">
<span lang="EN-GB">With the effects of quantitative easing
having already spilled across international borders, there is not much more to
be gained from even more cash. As such,
the additional euros coming out of the European Central Bank following the recent
launch of quantitative easing in Europe may not amount to much. Any further action may also be limited as the
saga over whether or not to implement quantitative easing has highlighted how <span style="background-attachment: initial; background-clip: initial; background-color: white; background-image: initial; background-origin: initial; background-position: initial; background-repeat: initial; background-size: initial;"><a href="http://yourneighbourhoodeconomist.blogspot.com/2015/04/monetary-policy-where-has-magic-gone.html" target="_blank">the European Central Bank only has limited room for manoeuvre</a></span> when running in opposition to Germany. Now, more than ever, it is time to try
something new.<o:p></o:p></span></div>
</div>
Your Neighbourhood Economisthttp://www.blogger.com/profile/00096015895608337029noreply@blogger.com2tag:blogger.com,1999:blog-7314520695799326639.post-60545396619948317412015-04-28T09:05:00.000+01:002015-07-22T15:24:54.975+01:00China – Playing Catch Up<div dir="ltr" style="text-align: left;" trbidi="on">
<div class="MsoNormal">
<b><span lang="EN-GB">Many
expect the Chinese economy to misbehave but it is more likely that China will grow
out itself out of trouble <o:p></o:p></span></b></div>
<div class="MsoNormal">
<b><span lang="EN-GB"><br /></span></b></div>
<div class="MsoNormal">
<span lang="EN-GB">China is growing up in front of our eyes
and there is an expectation that, like any adolescent, it will get into trouble
before fulfilling its promise. Naysayers
predict that China’s growth spurt has left it with a number of issues that must
be worked through before it can get any bigger.
Yet, China has a good head on its shoulders in the form of the Communist
Party which will do all it can to keep the economy buoyant. While the years of stellar growth are likely
over, it need not mean that the Chinese economy will be held back.<o:p></o:p></span></div>
<div class="MsoNormal">
<span lang="EN-GB"><br /></span></div>
<div class="MsoNormal">
<b><span lang="EN-GB">Big
trouble in (not so) little China?<o:p></o:p></span></b></div>
<div class="MsoNormal">
<b><span lang="EN-GB"><br /></span></b></div>
<div class="MsoNormal">
<span lang="EN-GB">The spectacular rate of growth achieved by
China over the past decade could never continue forever. Quite the opposite, the rapid expansion would
have been harmful if it had been maintained and <span style="background-attachment: initial; background-clip: initial; background-color: white; background-image: initial; background-origin: initial; background-position: initial; background-repeat: initial; background-size: initial;">a <a href="http://yourneighbourhoodeconomist.blogspot.com/2014/04/china-and-its-growing-pains.html" target="_blank">slower pace of growth is actually a preferable outcome</a></span>. This is because much of the economic growth
had been fuelled by investment – construction of new factories to sell cheap
goods overseas along with the expansion of megacities in China to accommodate
an influx of workers from the countryside. Normally, investment accounts for around
10% to 15% of GDP in most developed countries but reached 50% of GDP in China. <o:p></o:p></span></div>
<div class="MsoNormal">
<span lang="EN-GB"><br /></span></div>
<div class="MsoNormal">
<span lang="EN-GB">This building frenzy could not continue especially
when it is becoming more difficult to make money and some investments would be
wasted on pointless projects. It is the examples
of this, empty apartment blocks and overly lavish public spending, that pessimists
point to as evidence that China has gone too far. With large amounts of bad debt expected to
result from these poor investments, the financial sector is expected to take a
big hit and drag the whole economy down with it. The argument is basically that China has
gotten too big for its boots and will need to shrink.<o:p></o:p></span></div>
<div class="MsoNormal">
<span lang="EN-GB"><br /></span></div>
<div class="MsoNormal">
<b><span lang="EN-GB">Growing
up is never easy<o:p></o:p></span></b></div>
<div class="MsoNormal">
<b><span lang="EN-GB"><br /></span></b></div>
<div class="MsoNormal">
<span lang="EN-GB">Your Neighbourhood Economist would instead argue
that China has a similar problem to what he had when he was growing up. His mother would buy Your Neighbourhood
Economist clothes that were too big for him in the knowledge that he would grow
into them. It is ungainly to be sporting
oversized gear and this seems to be similar to the phase China is going
through. This is partly because China had
been expanding so quickly that any investment needs to be put up in a
hurry. There is also the added
complication of spending getting out of hand as regional politicians try to
impress their bosses in the Communist Party.<o:p></o:p></span></div>
<div class="MsoNormal">
<span lang="EN-GB"><br /></span></div>
<div class="MsoNormal">
<span lang="EN-GB">Yet, China, like a much younger version of
Your Neighbourhood Economist, still has a lot of growing to do. Some of the ill-fitting parts of the Chinese
economy may be put to better use as its citizen will continue to migrate toward
the cities in search of work. China has
also learnt lessons from its investment binge with the central government
shifting emphasis from economic growth to other benefits of greater wealth such
as a cleaner environment and a more efficient bureaucracy. Local officials are being brought into line
through a crackdown on corruption and concentration of power within the
Communist Party.<o:p></o:p></span></div>
<div class="MsoNormal">
<span lang="EN-GB"><br /></span></div>
<div class="MsoNormal">
<span lang="EN-GB">Along with changes to policy, the Chinese
government also has the resources to deal with any past mistakes. With both domestic savings and government reserves
at high levels, there is plenty of money around if needed. And, with an eye firmly fixed on keeping the
economy growing, the Communist Party would not be as timid compared to Western
governments in terms of stepping in and shoring up the banking sector if
needed. China is also <span style="background-attachment: initial; background-clip: initial; background-color: white; background-image: initial; background-origin: initial; background-position: initial; background-repeat: initial; background-size: initial;"><a href="http://yourneighbourhoodeconomist.blogspot.com/2014/05/growth-in-china-steel-vs-butter.html" target="_blank">moving away from investment as the driver of its economic growth</a></span> and consumption is expected to pick up
the slack (albeit with growth at a slower pace).<o:p></o:p></span></div>
<div class="MsoNormal">
<span lang="EN-GB"><br /></span></div>
<div class="MsoNormal">
<b><span lang="EN-GB">Growing
while you watch<o:p></o:p></span></b></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjlMHYm36v2_WeZ8n8YrToJ60OkMnoB2IVaXh1516ABoBY4E5I38VAf85F_owrf9-4CGrg6aD4Exmbz7THn9OjqE3_rrTDXByhErI8ozJ6Bpv_NiQLI74QyptM7kEpUQYjhcMGQx40Nx14/s1600/Pudong.jpg" imageanchor="1" style="clear: right; float: right; margin-bottom: 1em; margin-left: 1em;"><img border="0" height="194" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjlMHYm36v2_WeZ8n8YrToJ60OkMnoB2IVaXh1516ABoBY4E5I38VAf85F_owrf9-4CGrg6aD4Exmbz7THn9OjqE3_rrTDXByhErI8ozJ6Bpv_NiQLI74QyptM7kEpUQYjhcMGQx40Nx14/s1600/Pudong.jpg" width="320" /></a></div>
<span lang="EN-GB">Your Neighbourhood Economist has seen the
change in China with his own eyes. In a
visit 15 years ago, the Pudong area across the river in Shanghai seemed like a ghost
town but one that had been freshly built with a scattering of skyscrapers. Now, Pudong is anything but quiet and the pace
at which new buildings continue to go up is testament to China’s growth. It also shows that it you build it (in China
at least), they will (still) come.<o:p></o:p></span></div>
</div>
Your Neighbourhood Economisthttp://www.blogger.com/profile/00096015895608337029noreply@blogger.com2tag:blogger.com,1999:blog-7314520695799326639.post-75891698228734769272015-04-16T09:25:00.000+01:002015-06-25T13:32:52.683+01:00Monetary Policy – where has the magic gone?<div dir="ltr" style="text-align: left;" trbidi="on">
<div class="MsoNormal">
<b><span lang="EN-GB">The
European Central Bank tries to cast another spell to save the Eurozone but its
magic has been stolen<o:p></o:p></span></b></div>
<div class="MsoNormal">
<b><span lang="EN-GB"><br /></span></b></div>
<div class="MsoNormal">
<span lang="EN-GB">Monetary policy is like magic – you have to
use tricks to get people into believing what you want them to believe. Both magicians and central banks apply
various devices to convince their audience that they can pull off amazing
feats. A bit of showmanship can be
crucial in creating an aura of the fantastical when your powers are actually
rather limited. Central banks have
pulled this off in the past but quantitative easing by the European Central
Bank is more likely to show that it does not have any rabbits left to pull out
of the hat.<o:p></o:p></span></div>
<div class="MsoNormal">
<span lang="EN-GB"><br /></span></div>
<div class="MsoNormal">
<b><span lang="EN-GB">Trying
to work magic<o:p></o:p></span></b></div>
<div class="MsoNormal">
<b><span lang="EN-GB"><br /></span></b></div>
<div class="MsoNormal">
<span lang="EN-GB">Your Neighbourhood Economist likes to look
back fondly to an era when central banks had the financial market enthralled
with their mastery of all things economic.
This admiration was won the hard way in the 1980s by bringing
double-digit inflation back to more manageable levels and ushering in an era
where the booms and busts seemed to have past.
But <span style="background-attachment: initial; background-clip: initial; background-color: white; background-image: initial; background-origin: initial; background-position: initial; background-repeat: initial; background-size: initial;"><a href="http://yourneighbourhoodeconomist.blogspot.com/2014/07/central-bank-emperors-new-clothes.html" target="_blank">central banks have been taken down a notch</a></span> by their inability to revive the economy
after the global financial crisis. <o:p></o:p></span></div>
<div class="MsoNormal">
<span lang="EN-GB" style="background: yellow; mso-highlight: yellow;"><br /></span></div>
<div class="MsoNormal">
<span lang="EN-GB" style="background-attachment: initial; background-clip: initial; background-color: white; background-image: initial; background-origin: initial; background-position: initial; background-repeat: initial; background-size: initial;"><a href="http://yourneighbourhoodeconomist.blogspot.com/2014/07/question-interest-rates.html" target="_blank">Slashing of interest rates has not worked</a></span><span lang="EN-GB"> as high
levels of debt meant that no one wanted to borrow. Upping the ante, central
banks tried pumping money into the financial system through quantitative
easing. The <span style="background-attachment: initial; background-clip: initial; background-color: white; background-image: initial; background-origin: initial; background-position: initial; background-repeat: initial; background-size: initial;"><a href="http://yourneighbourhoodeconomist.blogspot.com/2014/06/monetary-policy-losing-its-power.html" target="_blank">effect on the actual economy due to quantitative easing also looks to be limited</a></span> at a time when there is already a lot of
spare cash in the financial system.
Financial markets were buoyed by quantitative easing but a side effect
has been the <a href="http://yourneighbourhoodeconomist.blogspot.com/2014/05/us-monetary-policy-investors-face.html" target="_blank">potential for heightened volatility in the financial markets</a>. <o:p></o:p></span></div>
<div class="MsoNormal">
<span lang="EN-GB"><br /></span></div>
<div class="MsoNormal">
<span lang="EN-GB">With few other options seen as viable,
quantitative easing has gone from an unconventional measure to the mainstay
policy for central banks despite questions over its usefulness. The European Central Bank has been slow to
try its hand at quantitative easing even though the Eurozone economy was
struggling more than most. This was
because Germany (who had initially done well despite its neighbours being in
crisis) was firmly against the central bank in Europe printing cash to buy
government bonds. It was only after a <span style="background-attachment: initial; background-clip: initial; background-color: white; background-image: initial; background-origin: initial; background-position: initial; background-repeat: initial; background-size: initial;"><a href="http://yourneighbourhoodeconomist.blogspot.com/2014/09/quantitative-easing-waiting-while.html" target="_blank">further considerable deterioration in the prospects for the Eurozone</a></span> (as well as that of Germany itself)
that the European Central Bank to override this opposition. <o:p></o:p></span></div>
<div class="MsoNormal">
<span lang="EN-GB"><br /></span></div>
<div class="MsoNormal">
<b><span lang="EN-GB">No
more magic left<o:p></o:p></span></b></div>
<div class="MsoNormal">
<b><span lang="EN-GB"><br /></span></b></div>
<div class="MsoNormal">
<span lang="EN-GB">The European Central Bank has been put at a
disadvantage considering that the other big central banks have already tried to
work their magic through quantitative easing.
Investors are becoming harder to impress having already seen central
banks pull off similar tricks. To
maintain the wow factor, quantitative easing has needed to get bigger and
bigger. The central bank in Japan
pledged to <span style="background-attachment: initial; background-clip: initial; background-color: white; background-image: initial; background-origin: initial; background-position: initial; background-repeat: initial; background-size: initial;"><a href="http://yourneighbourhoodeconomist.blogspot.com/2013/08/japan-dont-hold-your-breath.html" target="_blank">double the money supply within two years</a></span> but had to offer up even more cash when
its initial plans proved to be lacking. <o:p></o:p></span></div>
<div class="MsoNormal">
<span lang="EN-GB"><br /></span></div>
<div class="MsoNormal">
<span lang="EN-GB">The European Central Bank cannot compete on
scale as it has to perform magic with one hand behind its back due to the
political constraints within the Eurozone.
Any extra boost using the element of surprise was also dented by the
protracted process as the European Central Bank and Germany squabbled publicly
over quantitative easing in the months before the policy was launched. <o:p></o:p></span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span lang="EN-GB">The fractious politics in Europe has sapped
power from the central bank who had previously been the main shining light in
saving the Eurozone. Political squabbles
have highlighted the limited power at the disposal of the European Central
Bank. It is like a magician who is being
sabotaged by their own assistant – it will take more than magic to escape this
spell.<o:p></o:p></span></div>
</div>
Your Neighbourhood Economisthttp://www.blogger.com/profile/00096015895608337029noreply@blogger.com0tag:blogger.com,1999:blog-7314520695799326639.post-10401698660082444992015-01-23T10:01:00.001+00:002015-06-24T10:44:14.517+01:00Productivity – cutting both ways<div dir="ltr" style="text-align: left;" trbidi="on">
<div class="MsoNormal">
<b>Far from being a
cure-all, productivity gains are instead cutting into the number of jobs<o:p></o:p></b></div>
<div class="MsoNormal">
<b><br /></b></div>
<div class="MsoNormal">
Higher productivity seems like the answer to all of our
economic woes but being more productive is not all good. Doing more with less is a way of making us
wealthier by getting more out of the limited resources available. Improvements in productivity often thus
translate into more profits or lower prices (or both). But there is also a nasty side in that one of
the resources that can be done away with is workers. Trends such as greater globalization and
improvements to technology have resulted in many (well paying) jobs being put
to the chop and we should not be expecting any respite soon.<o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<b>Doing more with less<o:p></o:p></b></div>
<div class="MsoNormal">
<b><br /></b></div>
<div class="MsoNormal">
Economics is a discipline which is based on the notion of
scarce resources. It is no surprise then
that economists rave about how improvements to productivity are the key to prosperity. Any business that can produce the same
products using fewer inputs is bound to do well. Being more productive as a worker is also
opens up the way for the opportunity to demand higher wages. Any gains from higher productivity are split
between companies, employees, and consumers but it is not always the case that
everyone gets a share.<o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
My favourite example of productivity gains where everyone
got their cut was Henry Ford and the motorcar.
Ford did not invent the automobile or the assembly line but he did
figure out a way of manufacturing cars cheaply.
The continued existence of the Ford Motor Company is testament to how
much he and his family have thrived. On
top of this, workers at the firm also benefited from the new jobs that were
created as well as the higher wages on offer.
Cars also became available to many more people thanks to the mass
production of the Model T resulting in a lower price tag.<o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<b>Suffering from cut
backs<o:p></o:p></b></div>
<div class="MsoNormal">
<b><br /></b></div>
<div class="MsoNormal">
The example of Henry Ford and the Model T shows how more can
be produced cheaply using more workers.
But this is only a viable way of making money when there is a rapidly
expanding consumer market and an appetite for more and more goods. This seemingly came to an end in the richer
countries when most households became wealthy enough to buy the basics such as a
car, a fridge, and a TV. Without being
able to tap into economies of scale by producing more and more, the emphasis
has since shifted to producing goods at the lowest cost. <o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
One of the main avenues for cutting costs has been
outsourcing manufacturing and some services to countries where wages are
lower. Computers and the Internet have
also helped companies save money by better optimising their operations and
reducing the need for some clerical work.
Companies have obviously benefited from this and we have as consumers (due
to lower prices) but not as workers. There
is no modern-day version of the Model T that might provide a new source of
lucrative job opportunities. Instead we
spend our money on services (eating out or going away on holiday) or goods
where much of the value is in design rather than the goods themselves (such as clothing
or electronic gadgets).<o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<b>Cut yourself free<o:p></o:p></b></div>
<div class="MsoNormal">
<b><br /></b></div>
<div class="MsoNormal">
The challenge for developed countries is to create more high
paying jobs for its educated workforce.
Instead, the opposite seems to be happening and the economic recovery
after the global financial crisis has been characterized by a proliferation of jobs
with low pay. Higher unemployment
allowed companies to hire workers on the cheap and this has dulled incentives
for business investment. It is easier to
get things done using cheap labour than spending money on making your current
workers more productive. <o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
Unemployment in countries such as the US and the UK has
fallen but this has yet to translate into significantly higher wages. Neither is a rapid improvement likely as
companies are still timid about investing due to the weak momentum of the
economic recovery. Government policy is
also a hindrance due to the focus on austerity measures rather than <span style="background-attachment: initial; background-clip: initial; background-color: white; background-image: initial; background-origin: initial; background-position: initial; background-repeat: initial; background-size: initial;"><a href="http://yourneighbourhoodeconomist.blogspot.com/2015/01/fiscal-policy-not-fighting-back.html" target="_blank">taking advantage of low interest rates to invest</a></span>. </div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
The only way out
for beleaguered workers seems to be setting up their own business which has
become increasingly more popular. The
jump in entrepreneurship may be one of the few silver linings as people cut themselves
free to become their own boss and to have productivity gains there for the taking.<o:p></o:p></div>
</div>
Your Neighbourhood Economisthttp://www.blogger.com/profile/00096015895608337029noreply@blogger.com2tag:blogger.com,1999:blog-7314520695799326639.post-27010015919473215972015-01-16T10:54:00.001+00:002015-05-14T02:22:28.805+01:00Low Oil Prices – Feeding the Addiction<div dir="ltr" style="text-align: left;" trbidi="on">
<div class="MsoNormal">
<b>Cheaper oil will
bring about much cheer but it will help keep key oil producers happy in years to come<o:p></o:p></b></div>
<div class="MsoNormal">
<b><br /></b></div>
<div class="MsoNormal">
Oil is like a drug that the world economy cannot do without
and we are in the midst of a turf war over who will call the shots. A few dealers have had a stranglehold over
the market for oil and have been able to set prices as they please. The arrival of new kids on the block (with
the rise of fracking in the US) has triggered a fight for control of the oil
market. The result has been a plunge in
oil prices which is a blessing for the global economy but is part of a bigger
strategy to keep us all addicted to oil for years to come.<o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEi5BLxFLRdZRWS09znKqGGVi3RwpVTKwSpJXxL6plfmrFq6KulmWidchMBeSLJH727SDPI5lUKz6giwAMMLwav2BSagrd7VKBpEzQFs-Cy-4ZtsYdGQBkna0YFQwv8CRKCVYXOaAfUA_7w/s1600/Oil+as+drug.png" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" height="304" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEi5BLxFLRdZRWS09znKqGGVi3RwpVTKwSpJXxL6plfmrFq6KulmWidchMBeSLJH727SDPI5lUKz6giwAMMLwav2BSagrd7VKBpEzQFs-Cy-4ZtsYdGQBkna0YFQwv8CRKCVYXOaAfUA_7w/s1600/Oil+as+drug.png" width="320" /></a></div>
<b>Not a buyers’ market<o:p></o:p></b></div>
<div class="MsoNormal">
<b><br /></b></div>
<div class="MsoNormal">
The sharp drop in oil prices will provide a welcome boost to
the economic recovery in many countries.
Oil is like a drug in that it is always in demand and buying continued despite
high prices in the aftermath of the global financial crisis. Prices for oil have only recently eased off (<span style="background-attachment: initial; background-clip: initial; background-color: white; background-image: initial; background-origin: initial; background-position: initial; background-repeat: initial; background-size: initial;"><a href="http://yourneighbourhoodeconomist.blogspot.com/2015/01/inflation-hard-to-ignore-again.html" target="_blank">playing havoc with inflation</a></span>)
as demand from energy-hungry China has weakened while supply from the US has
expanded. Oil is also plagued by a
further similarity to drugs in that the suppliers of oil tend to be some ugly
characters such as Russia, Iran, and Venezuela (as well as some nice ones such
as Canada and Norway). But the kingpin
of the oil market is Saudi Arabia due to the size of its reserves of oil and
its willingness to adjust its output to market conditions. <o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
Saudi Arabia is the top dog of a club called OPEC where some
of the major producers of oil banded together to wrestle control of the oil
market away from Western energy firms.
OPEC came to prominence in the 1970s when the countries cut oil output
as a protest against Israel. Along with
the devastation wrought due to the resulting surge in oil prices, efforts to
conserve energy also acted to weaken the need for oil. Once oil prices returned to normal, OPEC has looked
to set its output so as to make the most money while also suppressing
incentives to cut back on oil consumption.
<o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
Sticking to the optimal level of output was always going to
be tricky when cheating would bring in extra cash. This meant that not all members of OPEC stuck
to their quotas set to manage the supply of oil and it was left to Saudi Arabia
to shoulder the burden of larger cuts to production when required. Saudi Arabia could pull this off due to its
revenues from oil being more than enough to fund its government spending. In contrast, governments in countries such as
Venezuela and Iran spend big to support their anti-Western antics which tend to
max out the cash from their energy sectors.<o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<b>Trying to stay on top<o:p></o:p></b></div>
<div class="MsoNormal">
<b><br /></b></div>
<div class="MsoNormal">
The arrangements behind this oil cartel have been bust wide
open due to the surge in oil output coming out from the US. New fracking technology has unlocked previously
inaccessible oil reserves and turned the US into a big player in the oil
market. Faced with a choice of cutting
its output or suffer falling prices, OPEC chose the latter. The Saudis, in particular, were not willing
to take a hit and lose out in terms of market share. As Saudi oil is typically cheap to get out of
the ground, their hope is that a lower price for oil will drive others out of
business. A drop in oil prices will also
scare away any investment in oil fields that would boost output in the future.<o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
It pays for Saudi Arabia to take a long term view of the market
seeing that it has so much oil still underground. An abundance of new sources of oil or new
technologies that eliminate the need for oil would take a big chunk out of the
value of its underground stash. Saudi
Arabia is in a strong enough position to sacrifice short-term gain to lock in future
control over the oil market. Be thankful
that the Saudis want oil to be cheap for now and keep us all addicted but don’t
expect it to last (<span style="background-attachment: initial; background-clip: initial; background-color: white; background-image: initial; background-origin: initial; background-position: initial; background-repeat: initial; background-size: initial;"><a href="http://yourneighbourhoodeconomist.blogspot.com/2014/11/commodity-prices-swings-and-roundabouts.html" target="_blank">much more than a few years</a>)</span>.<o:p></o:p></div>
</div>
Your Neighbourhood Economisthttp://www.blogger.com/profile/00096015895608337029noreply@blogger.com2tag:blogger.com,1999:blog-7314520695799326639.post-69372374334677195962015-01-12T11:13:00.001+00:002015-04-28T02:40:20.194+01:00Fiscal Policy – Not fighting back<div dir="ltr" style="text-align: left;" trbidi="on">
<div class="MsoNormal">
<b>The government has
been subdued in the fight to revive the economy despite a change in strategy
being long overdue <o:p></o:p></b></div>
<div class="MsoNormal">
<b><br /></b></div>
<div class="MsoNormal">
Considering the trouble we are having fighting back against
the aftermath of the financial crisis, it seems strange that the government is
not using its full arsenal. Central
banks have come out all guns blazing with their monetary policy but governments
have held back from firing up fiscal policy.
Worries about their levels of debt were behind this tepid response by
governments but such concerns have eased while the economic recovery struggles
to pick up momentum. Why should be
suffer further losses while saving our ammunition?<o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<b>Hit and miss<o:p></o:p></b></div>
<div class="MsoNormal">
<b><br /></b></div>
<div class="MsoNormal">
Central banks launched themselves into the front line while
governments remained in the background due to self-inflicted wounds. Monetary policy had been enough to deal with
past recessions and resulted in a <span style="background-attachment: initial; background-clip: initial; background-color: white; background-image: initial; background-origin: initial; background-position: initial; background-repeat: initial; background-size: initial;"><a href="http://yourneighbourhoodeconomist.blogspot.com/2014/06/monetary-policy-losing-its-power.html" target="_blank">belief that central banks were infallible</a></span> in this regard. High levels of debt along with a banking
sector under attack meant that low interest rates had little effect and
quantitative easing was not much better.
Along with not making much headway, monetary policy also caused <span style="background-attachment: initial; background-clip: initial; background-color: white; background-image: initial; background-origin: initial; background-position: initial; background-repeat: initial; background-size: initial;"><a href="http://yourneighbourhoodeconomist.blogspot.com/2014/02/the-true-cost-of-quantitative-easing.html" target="_blank">considerable collateral damage in the form of financial instability</a></span>.
This was a sign that <span style="background-attachment: initial; background-clip: initial; background-color: white; background-image: initial; background-origin: initial; background-position: initial; background-repeat: initial; background-size: initial;"><a href="http://yourneighbourhoodeconomist.blogspot.com/2014/05/central-banks-false-illusion-of-power.html" target="_blank">central banks were being asked to do too much</a></span> in the face of a once-in-a
generation economic slump.<o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
Most governments were happy to sit back having mismanaged
their finances resulting in high levels of government debt prior to the
crisis. The Eurozone crisis prompted
governments to further retreat amid worries that investors would shun any
government with too much debt. This
pushed governments off on a trajectory of austerity which continued even though
fears about government debt abated within several months. The economic recovery has been muted due to
weak demand with companies not willing to invest despite low interest rates and
consumers hurting due to large debts and stagnating wages.<o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<b>Time for a new battle
plan<o:p></o:p></b></div>
<div class="MsoNormal">
<b><br /></b></div>
<div class="MsoNormal">
Monetary policy was always likely to struggle to make much
ground while there is little impetus to spend, let alone borrow. This shortfall could be overcome by the
government which fixes problems, from crime to pollution, that are caused by
others. Keeping the economy ticking over
when spending would otherwise be weak would prevent more damage being done to
the economy. Otherwise, the economy
becomes less productive as firms stop investing in new technologies and the
skills of people out of work deteriorate.<o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
It seems an even more obvious solution at a time when there
is so much that the government could spend its money on such as improving
Internet access, accelerating the uptake of renewable energy, and updating transport
infrastructure. The low interest rates
provide the perfect opportunity to invest for the future especially when
companies are not up to doing so.
Investment projects could be set up to boost output in the economy for a
few years until spending from other picks up the slack. <o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<b>A winning strategy<o:p></o:p></b></div>
<div class="MsoNormal">
<b><br /></b></div>
<div class="MsoNormal">
Despite the still faltering economic recovery, governments
loathe changing direction and austerity continues to reign in Europe and the UK
(as well as US to a lesser extent). Moves
to fix government finances made sense following the jump in interest rates on
government debt in the Eurozone but this turmoil in the financial markets has
long passed. Weak overall spending and
the threat of deflation setting in is now the dominant problem facing many
countries. <o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
Higher spending by the government that lifted the
productivity of the economy could be funded through borrowing at low interest
rates and repaid through higher taxes that a more efficient economy would
generate. This is the opposite of what
is happening in the UK where austerity is hurting the economy and efforts to
reduce the government deficit are being thwarted due to a fall in money from
taxes. <o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
There is still time for a change of strategy to have an
impact in the fight for an economy recovery that improves the lives of us all. Even if it is too late, investing for the
future when interest rates are at record lows seems like a no brainer. A change is due as this is a battle that no
one wants to lose.<o:p></o:p></div>
</div>
Your Neighbourhood Economisthttp://www.blogger.com/profile/00096015895608337029noreply@blogger.com0tag:blogger.com,1999:blog-7314520695799326639.post-90061484981072336142015-01-05T09:58:00.000+00:002015-07-22T15:36:02.434+01:00Inflation – Hard to ignore again<div dir="ltr" style="text-align: left;" trbidi="on">
<div class="MsoNormal">
<b>Low inflation is a nuisance
for central banks looking to increase interest rates but they would be wrong to
dismiss it<o:p></o:p></b></div>
<div class="MsoNormal">
<b><br /></b></div>
<div class="MsoNormal">
Family get-togethers over Christmas often involve naughty
children but it is inflation that is making trouble for central banks. Inflation unexpectedly shot up in the
aftermath of the global financial crisis but is now surprisingly falling
despite a burgeoning economic recovery.
Central banks ignored the jump in inflation in 2011 and are now stuck
figuring out how to deal with persistently low inflation. The antics of inflation will be difficult to disregard
a second time around considering that the causes for static prices are not all
external.<o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjpGC348WQCgURUHpB7iEte4UVL97Fg3xvG8FbfbIixmpnSgHpYOz-r88srX6AygsyaCnHFJ4sDHuIohs6kMgspA8ef6mb1d4dLQ0JhoDUshqwojUGQFPYlaF7_lvcKzmmEmvnIJ0b7a6s/s1600/Mischief4.jpg" imageanchor="1" style="clear: right; float: right; margin-bottom: 1em; margin-left: 1em;"><img border="0" height="262" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjpGC348WQCgURUHpB7iEte4UVL97Fg3xvG8FbfbIixmpnSgHpYOz-r88srX6AygsyaCnHFJ4sDHuIohs6kMgspA8ef6mb1d4dLQ0JhoDUshqwojUGQFPYlaF7_lvcKzmmEmvnIJ0b7a6s/s1600/Mischief4.jpg" width="320" /></a><b>Inflation acting up<o:p></o:p></b></div>
<div class="MsoNormal">
<b><br /></b></div>
<div class="MsoNormal">
The level of inflation is used as <span style="background-attachment: initial; background-clip: initial; background-color: white; background-image: initial; background-origin: initial; background-position: initial; background-repeat: initial; background-size: initial;"><a href="http://yourneighbourhoodeconomist.blogspot.com/2014/11/interest-rates-looking-for-right.html" target="_blank">a measure to check whether all is well with the economy</a></span>. There should neither be too much inflation
(suggesting an overheating economy) nor too little (which is a sign of weak
overall demand). With countries
increasing sourcing goods from overseas, <span style="background-attachment: initial; background-clip: initial; background-color: white; background-image: initial; background-origin: initial; background-position: initial; background-repeat: initial; background-size: initial;"><a href="http://yourneighbourhoodeconomist.blogspot.com/2013/10/inflation-then-and-now.html" target="_blank">prices levels in any country can be influenced by prices of commodities on global markets</a></span>.
This can push inflation in a different direction to the particular circumstances
of any economy.<o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
The best recent example of this was a plague of high
inflation in 2011 when the economies of many countries were still in the
doldrums. The Chinese economy was still
humming along despite financial turmoil elsewhere and China continued to buy up
commodities on the global markets. The result
higher prices were most prominent in the UK where inflation topped five percent
in 2011. This bout of inflation was not
just a brief spike with prices rising by more than four percent for over a year. Despite inflation being well above its target
of two percent, the Bank of England maintained its loose monetary policy to
support the weak economy. The argument behind
this was that the inflation was temporary and not related to the underlying
economy. <o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<b>Behaving badly again<o:p></o:p></b></div>
<div class="MsoNormal">
<b><br /></b></div>
<div class="MsoNormal">
Inflation is currently misbehaving in a different way and is
causing concern due to being too low.
Prices are not rising by much due to lower commodity prices with the
spurt of growth in emerging countries having run its course. While this is a positive for consumers who
benefit from a boost in spending power, low inflation is a source of anxiety
for central banks. The Federal Reserve
and the Bank of England are getting set to increase interest rates to more
normal levels. Even the prospect of the
economic recovery gaining further momentum would not provide central banks with
enough of a reason for higher interest rates when inflation is around one percent. <o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
This irritation is not likely to go away anytime soon if the
high inflation in 2011 is any guide.
Inflation is likely to slip even lower in 2015 as the effects of the
plunging price for oil feeds through into the economy. On top of this, <span style="background-attachment: initial; background-clip: initial; background-color: white; background-image: initial; background-origin: initial; background-position: initial; background-repeat: initial; background-size: initial;"><a href="http://yourneighbourhoodeconomist.blogspot.com/2014/11/commodity-prices-swings-and-roundabouts.html" target="_blank">swings in commodity prices tend to last for a few years</a></span> so that inflation is unlikely to pick up
for the next couple of years. This would
suggest that inflation will be below target for 2015 and 2016 which is the
two-year time frame that central banks look at when deciding interest
rates. <o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<b>Ignoring inflation
would be naughty <o:p></o:p></b></div>
<div class="separator" style="clear: both; text-align: center;">
</div>
<div class="MsoNormal">
<b><br /></b></div>
<div class="separator" style="clear: both; text-align: center;">
</div>
<div class="MsoNormal">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEheaZrgzVXvT-lamvsFjrpitHA5Npxkdewgbv_QEd5tIWUcgBJVfleXUj4ZD1DtfXA3lRpnQwuZqWZR-4yVKm5eMoL-qin9F75UgPITwI_hyH8McWHGFmvHAAnslce8JCyoEM4IFScU0p8/s1600/Mischief3.jpg" imageanchor="1" style="clear: left; float: left; margin-bottom: 1em; margin-right: 1em;"><img border="0" height="320" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEheaZrgzVXvT-lamvsFjrpitHA5Npxkdewgbv_QEd5tIWUcgBJVfleXUj4ZD1DtfXA3lRpnQwuZqWZR-4yVKm5eMoL-qin9F75UgPITwI_hyH8McWHGFmvHAAnslce8JCyoEM4IFScU0p8/s1600/Mischief3.jpg" width="210" /></a>Low inflation should imply low interest rates but central
banks could choose to ignore this and raise interest rates away. This is because the same argument as in 2011
could be applied – disregarding trends in inflation that are attributed to outside
sources. It is a convenient strategy for
central banks worried about the economic recovery triggering a jump in inflation
due to the potential for wages to rise as unemployment falls. Such an outcome does seem optimistic
considering that wages are not budging by much even as the economy picks up
steam.<o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
A further problem with turning a blind eye to inflation is
that it is tough to gauge what the inflation level would be without the fall in
commodity prices. It is not as if
consumers have money to spurge having been stuck with stagnating wages and
considerable debts from the pre-financial crisis spend-up. Sluggish prices are harder to dismiss
considering that low inflation is also caused by weak domestic demand. With inflation likely to continue to play up
for a while yet, central banks will need to be patient and bide their time before
raising interest rates or else it will be the central banks that may be the
ones getting into trouble.<o:p></o:p></div>
</div>
Your Neighbourhood Economisthttp://www.blogger.com/profile/00096015895608337029noreply@blogger.com0tag:blogger.com,1999:blog-7314520695799326639.post-8068827358269237462014-12-30T08:16:00.000+00:002015-04-16T23:16:46.711+01:00Bargain Low Interest Rates to Continue in 2015<div dir="ltr" style="text-align: left;" trbidi="on">
<div class="MsoNormal">
<b>Borrowing is likely
to stay cheap in 2015 as a drop in inflation puts pay to talk of higher interest
rates<o:p></o:p></b></div>
<div class="MsoNormal">
<b><br /></b></div>
<div class="MsoNormal">
Christmas is usually followed by a rush off to the sales but
borrowers need not hurry as cut-price loans are likely to remain for most, if
not all, of 2015. Acting like retailers
with surplus stock to sell after Christmas, central banks slashed interest
rates after the global financial crisis.
Six years later, there are growing calls for this to be reversed in countries
such as the US and the UK due to as a strengthening economic recovery backed by
more people finding jobs. Yet, plans for
higher interest rates have been way laid with falling inflation suggesting that
all is not well with the economy. With
unemployment and inflation likely to fall further in 2015, there seems to be
few reasons for any changes to be made to interest rates over the next 12
months.<o:p></o:p></div>
<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEieXIAYY6BDIlhW0TrQOj6pToZu9GkQpKooxcHzNZ-uKEzdqk01zfPx0DTu9NelnmEZXNzTiFyxN9rDjdxJatgKPpB1fj2OyiBrnsz8o7G6py1VpZAvB6xXr76YamKXmPoRDh47lIYrTYw/s1600/Sales.jpg" imageanchor="1" style="clear: right; float: right; margin-bottom: 1em; margin-left: 1em;"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEieXIAYY6BDIlhW0TrQOj6pToZu9GkQpKooxcHzNZ-uKEzdqk01zfPx0DTu9NelnmEZXNzTiFyxN9rDjdxJatgKPpB1fj2OyiBrnsz8o7G6py1VpZAvB6xXr76YamKXmPoRDh47lIYrTYw/s1600/Sales.jpg" height="320" width="240" /></a></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<b>Shopping around<o:p></o:p></b></div>
<div class="MsoNormal">
<b><br /></b></div>
<div class="MsoNormal">
The Federal Reserve and the Bank of England are in the midst
of a dilemma – like a shopper not sure of where to head first to snap up some
bargains after Christmas. Unemployment data
suggests that the economic recovery is becoming more entrenched with the
proportion of Americans and Brits without jobs now below 6%. Yet, despite more workers being hired,
companies are still holding back from investing to expand output. Aggregate demand is also suffering due to
cuts to government spending resulting in an economic recovery that is still
patchy.<o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
If the stuttering economy is giving central banks reason to
worry, it is inflation that is the real sticking point getting in the way of
higher interest rates. The extent at
which prices are rising (or falling) has been adopted by central banks as a <span style="background-attachment: initial; background-clip: initial; background-color: white; background-image: initial; background-origin: initial; background-position: initial; background-repeat: initial; background-size: initial;"><a href="http://yourneighbourhoodeconomist.blogspot.com/2014/04/interest-rates-how-not-to-manage-money.html" target="_blank">gauge for the health of the economy</a></span>. It is thus a point of
frustration that inflation is heading downward as other signs, such as lower
unemployment, suggest that the economy is picking up. These mixed signals from the economy mean
that Federal Reserve and the Bank of England are caught in two minds in terms
of <a href="http://yourneighbourhoodeconomist.blogspot.com/2014/11/interest-rates-looking-for-right.html" target="_blank">what do to with interest rates</a>.<o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<b>Best to stay put<o:p></o:p></b></div>
<div class="MsoNormal">
<b><br /></b></div>
<div class="MsoNormal">
Things are not likely to get any easier for central banks
considering that the trends in unemployment and inflation are not likely to
change any time soon. With companies not
yet willing to spend big on new equipment, it makes sense to employ more
workers (who are relatively cheap) to get things done. Lower commodity prices is the main cause
behind falling inflation and a rebound in commodity markets is not likely as <span style="background-attachment: initial; background-clip: initial; background-color: white; background-image: initial; background-origin: initial; background-position: initial; background-repeat: initial; background-size: initial;"><a href="http://yourneighbourhoodeconomist.blogspot.com/2014/11/commodity-prices-swings-and-roundabouts.html" target="_blank">shifts in demand and supply of commodities taking years to change</a></span>.
Neither are consumers in any mood for higher prices considering that
wages have not kept up with inflation over the past few years. <o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
All this suggests that 2015 will be more of the same and
interest rates are also unlikely to change.
Some will argue that interest rates need to rise to give <span style="background-attachment: initial; background-clip: initial; background-color: white; background-image: initial; background-origin: initial; background-position: initial; background-repeat: initial; background-size: initial;"><a href="http://yourneighbourhoodeconomist.blogspot.com/2014/09/monetary-policy-who-to-save.html" target="_blank">central banks leeway to act</a></span>
in case of other threats to the economy.
Others will claim that the economic recovery means that <a href="http://yourneighbourhoodeconomist.blogspot.com/2015/01/inflation-hard-to-ignore-again.html" target="_blank">inflation will be just around the corner</a> and central banks need to pre-empt any jumps in
prices. But these are risky strategies
considering that a bit of inflation in the future will do less damage to the
economy than a premature hike in interest rates. <o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
A still fragile recovery means that, like any shopper out
after Christmas, the economy could also do with a bargain (in the form of low
interest rates).<o:p></o:p></div>
</div>
Your Neighbourhood Economisthttp://www.blogger.com/profile/00096015895608337029noreply@blogger.com0tag:blogger.com,1999:blog-7314520695799326639.post-76157368836099562302014-12-23T10:13:00.000+00:002015-01-07T09:17:13.952+00:00Let's not (Christmas) party like it's 2007<div dir="ltr" style="text-align: left;" trbidi="on">
<div class="MsoNormal">
<b>The heady days
leading to the global financial crisis were never meant to last so there is no
point in expecting to turn back the clock<o:p></o:p></b></div>
<div class="MsoNormal">
<b><br /></b></div>
<div class="MsoNormal">
It is the time for great merriment but Christmas office parties across London still leave many wishfully thinking back to the good old
days. Despite much talk of an economic
recovery, it can still be tough to find reasons to be cheerful about and less
cash being spent by companies on seasonal festivities is another reminder of
this. But we should not be asking Santa
for a return to the days of lavish Christmas dos with workmates and big
entertainment budgets (if they ever did exist).
The economy of old which allowed such excesses could only bring in a few
good years of partying before the good times inevitably turned bad. <o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<b>Living the high life
on borrowed time<o:p></o:p></b></div>
<div class="MsoNormal">
<b><br /></b></div>
<div class="MsoNormal">
The boom times that were still in swing a decade ago seem a
long way off. It was a time when all
seemed good with the economy and nothing much would go wrong. This spirit seemed best exemplified by the exuberance
among economists who (mistakenly) thought that <span style="background-attachment: initial; background-clip: initial; background-color: white; background-image: initial; background-origin: initial; background-position: initial; background-repeat: initial; background-size: initial;"><a href="http://yourneighbourhoodeconomist.blogspot.com/2014/07/economists-crash-but-dont-burn.html" target="_blank">their ideas had conquered the ups and downs of the economy</a></span>. The great evil of past
decades, inflation, had been kept in check and the recession following the dotcom bust passed without much strife. </div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
This new stable economic environment seemed to benefit the
finance sector most of all. Banks came
up with new ways of making lots of money with bankers themselves reaping much
of the rewards. Even some among the rest
of us got to enjoy a sprinkling of the good life with many companies splashing
out the odd treat on their workers (especially around Christmas time) even if
this generosity was not reflected in wages.<o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
The enthusiasm was infectious and we all wanted our share. The result was loads of new debt as our
spending reflected these new aspirations even if our income was lagging
behind. Even the governments in many
countries spent beyond their means and got their finances in a mess. Since inflation remained subdued despite the
elevated spending, <span style="background-attachment: initial; background-clip: initial; background-color: white; background-image: initial; background-origin: initial; background-position: initial; background-repeat: initial; background-size: initial;"><a href="http://yourneighbourhoodeconomist.blogspot.com/2014/04/interest-rates-how-not-to-manage-money.html" target="_blank">interest rates never rose by much</a></span> enabling the debt levels to soar beyond what
was prudent. And banks were only too
happy to lend since new financial products, such as mortgage-backed securities,
allowed them to pass on increasingly dubious loans to others.<o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<b>Not banking on trouble</b><o:p></o:p></div>
<div class="MsoNormal">
<b><br /></b></div>
<div class="MsoNormal">
This was one party that could not go on for ever. An increase in debt is good for spurring the
economy along but this can only go so far until lending becomes more reckless. The final straw was mortgage lending in the
United States where new rules encouraged housing loans to individuals who were
never likely to be able to afford repayments (so-called sub-prime
mortgages). The many who lost their jobs
(including Your Neighbourhood Economist) and even their homes in the ensuing
financial turmoil ended up with little to show from the good years. Yet, on the other hand, the exorbitant pay
packets received by many bank employees left them sitting pretty whatever was
to happen.<o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
We should all feel repentant like Christmas drinks where we get
carried away and make a fool of ourselves.
One way of stopping ourselves getting into trouble is to <span style="background-attachment: initial; background-clip: initial; background-color: white; background-image: initial; background-origin: initial; background-position: initial; background-repeat: initial; background-size: initial;"><a href="http://yourneighbourhoodeconomist.blogspot.com/2014/05/banking-back-to-basics.html" target="_blank">rein in the banking sector</a></span>. This does not mean the equivalent of
alcohol-free Christmas festivities but just stricter rules to make sure that <span style="background-attachment: initial; background-clip: initial; background-color: white; background-image: initial; background-origin: initial; background-position: initial; background-repeat: initial; background-size: initial;"><a href="http://yourneighbourhoodeconomist.blogspot.com/2014/04/animal-spirits-caging-our-wild-side.html" target="_blank">things don’t get out of hand</a></span>. The
perils of too much debt should have always been obvious but it is inability of
the banking sector and the financial markets to suitably regulate lending that
is perhaps the biggest lesson that we need to address.<o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<b>Time to sober up</b><o:p></o:p></div>
<div class="MsoNormal">
<b><br /></b></div>
<div class="MsoNormal">
Any economic growth does not count for much if we have to
give back most of the gains after a few good years. Yet, giving up on this easy way of making
ourselves richer also means that we cannot expect the economy to grow like in
the past. It will take hard work and
sensible policies rather than financial wizardry to make genuine improvements
in our standard of living. The trade-off
being that we can create a world where our jobs and what we make for ourselves
is more secure.<o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<span style="background-attachment: initial; background-clip: initial; background-color: white; background-image: initial; background-origin: initial; background-position: initial; background-repeat: initial; background-size: initial;"><a href="http://yourneighbourhoodeconomist.blogspot.com/2014/07/time-to-rethink-role-of-government.html" target="_blank">The government could have a big role to play in this</a></span> especially since companies are not
investing as much as they used to. Greater
spending on infrastructure and education as well as lower medical costs would
be a good start to help increase productivity (and wages) as well as going some
way to propping up spending. The
solution sounds simple enough but politics is never easy especially at a time
when <span style="background-attachment: initial; background-clip: initial; background-color: white; background-image: initial; background-origin: initial; background-position: initial; background-repeat: initial; background-size: initial;"><a href="http://yourneighbourhoodeconomist.blogspot.com/2014/05/the-economics-behind-populist-parties.html" target="_blank">the easy option is for politicians to offer up false promises</a></span>. It is voters most of all that need to be
realistic in terms of what is achievable.
No party is worth a hangover on the scale of the global financial
crisis.<o:p></o:p></div>
</div>
Your Neighbourhood Economisthttp://www.blogger.com/profile/00096015895608337029noreply@blogger.com0tag:blogger.com,1999:blog-7314520695799326639.post-66137695993179944302014-12-11T12:31:00.001+00:002015-01-09T22:22:27.271+00:00Getting more from Monetary Policy<div dir="ltr" style="text-align: left;" trbidi="on">
<div class="MsoNormal">
<b>Japan has made lots
of mistakes and it is time that Europe learnt from them<o:p></o:p></b></div>
<div class="MsoNormal">
<b><br /></b></div>
<div class="MsoNormal">
We can all learn from watching others make mistakes and the
experiences of Japan continue to provide valuable lessons. Japan has stumbled into another recession
following a hike in taxes to fix the government’s finances. The other key policy doing the rounds in
Japan, using expansive monetary policy to put an end to deflation, also seems
to be flagging. It is Europe that has
most to learn from the unfortunate trials and tribulations in Japan since many
of the same problems are shared by both.
What should Europe do to avoid making the same mistakes and decades of
stagnation?<o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<b>Following in the same
footsteps <o:p></o:p></b></div>
<div class="MsoNormal">
<b><br /></b></div>
<div class="MsoNormal">
Japan has been hit first with many of the same problems that
are increasingly expected to plague Europe and other Western countries. For starters, new-borns in Japan are increasingly
outnumbered by pensioners which have pushed the population into decline in
recent years with an aversion to immigration further accentuating this trend. This translates to fewer workers to provide
the taxes needed for the rising costs involved with taking care of old people. The situation is made worse by government
debt which is already more than double GDP due to years of <span style="background-attachment: initial; background-clip: initial; background-color: white; background-image: initial; background-origin: initial; background-position: initial; background-repeat: initial; background-size: initial;"><a href="http://yourneighbourhoodeconomist.blogspot.com/2013/01/when-keynesian-policies-wont-work.html" target="_blank">inefficient government spending</a></span>.<o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
Japanese consumer prices have been falling for years as a
reflection of the weak demand. There are
few opportunities to profit from in Japan due to the falling population and
even Japanese firms are looking elsewhere to invest. Weak global demand means that even one of
Japan’s strengths, exporting, offers only limited respite even with a <span style="background-attachment: initial; background-clip: initial; background-color: white; background-image: initial; background-origin: initial; background-position: initial; background-repeat: initial; background-size: initial;">weaker yen due to its loose
monetary policy</span>. All of this
means that the Japanese economy itself is like a tottery pensioner - even a
small rise of sales tax from 5% to 8% was enough to push Japan back into
recession. This does not bode well for
Europe where the economy is sputtering along due to many of the same problems
while the governments there are also trying to get a grip on their finances.<o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<b>Trying different
directions<o:p></o:p></b></div>
<div class="MsoNormal">
<b><br /></b></div>
<div class="MsoNormal">
Having been stuck with these problems for longer, policy
makers in Japan are increasingly more aggressive in coming up with
solutions. The current prime minister,
Shinzo Abe, launched a raft of new measures dominated by a massive expansion of
the money supply to target falling prices.
This new aggressive approach to monetary policy was facilitated by the
government installing a new governor to the Bank of Japan who was willing to
give up its independence and toe the line.<o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
This is the complete opposite to the situation in
Europe. The head of the European Central
Bank is eager to do more with monetary policy but is prevented from doing so by
the German government. German politicians
want to reforms to come first due to an expectation that their neighbours will not
implement the necessary policies. Whereas, in Japan, the aim was to use the
loose monetary policy to help build momentum that will allow the government to
implement reforms. <o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
Yet, the Abe government has been disappointing in its reform
efforts (as <span style="background-attachment: initial; background-clip: initial; background-color: white; background-image: initial; background-origin: initial; background-position: initial; background-repeat: initial; background-size: initial;"><a href="http://yourneighbourhoodeconomist.blogspot.com/2013/08/japan-dont-hold-your-breath.html" target="_blank">Your Neighbourhood Economist predicted</a></span>) and this will bolster the stance
taken by Germany. With the Bank of Japan
finding it tough to generate sufficient inflation despite a rapidly expanding money
supply through quantitative easing, many will question about the reasons behind
using a similar policy in Europe. <span style="background-attachment: initial; background-clip: initial; background-color: white; background-image: initial; background-origin: initial; background-position: initial; background-repeat: initial; background-size: initial;"><a href="http://yourneighbourhoodeconomist.blogspot.com/2014/06/monetary-policy-losing-its-power.html" target="_blank">Central banks are struggling to have much influence</a></span> in a world that is already awash with surplus cash. <o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<b>Time for Plan C<o:p></o:p></b></div>
<div class="MsoNormal">
<b><br /></b></div>
<div class="MsoNormal">
It seems like the key lesson from Japan is that monetary
policy cannot do much by itself. Japan
still languishes despite the best efforts of the central bank as the <span style="background-attachment: initial; background-clip: initial; background-color: white; background-image: initial; background-origin: initial; background-position: initial; background-repeat: initial; background-size: initial;"><a href="http://yourneighbourhoodeconomist.blogspot.com/2014/04/tax-hike-in-japan-to-test-fight-against.html" target="_blank">Abe government shirks the much needed measures to free up the economy</a></span>.
Yet, bullying countries in Europe to reform by <span style="background-attachment: initial; background-clip: initial; background-color: white; background-image: initial; background-origin: initial; background-position: initial; background-repeat: initial; background-size: initial;"><a href="http://yourneighbourhoodeconomist.blogspot.com/2014/09/quantitative-easing-waiting-while.html" target="_blank">withholding the full extent of monetary policy</a></span>
is not helpful either. A grand bargain
marrying reforms with looser monetary policy, as was supposed to be the case in
Japan, seems the obvious solution. <o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
This takes more political willpower when the many countries
of Europe are involved but is not something beyond the realms of
possibility. Ironically, the <span style="background-attachment: initial; background-clip: initial; background-color: white; background-image: initial; background-origin: initial; background-position: initial; background-repeat: initial; background-size: initial;"><a href="http://yourneighbourhoodeconomist.blogspot.com/2014/10/monetary-policy-germany-to-feel-pinch.html" target="_blank">chances for such a deal may be improving</a></span> as deflation becomes more of a concerns and the economic
stagnation in Europe also spreads to Germany.
Japan has already paid the price for years of economic mismanagement –
there is no reason for Europe to do the same.<o:p></o:p></div>
</div>
Your Neighbourhood Economisthttp://www.blogger.com/profile/00096015895608337029noreply@blogger.com0tag:blogger.com,1999:blog-7314520695799326639.post-20051346196962781732014-11-28T10:05:00.000+00:002015-01-13T09:27:59.741+00:00Commodity Prices – Swings and Roundabouts<div dir="ltr" style="text-align: left;" trbidi="on">
<div class="MsoNormal">
<b>Commodity markets had
gone off in their own direction but are now back on track to help out with the
global economy<o:p></o:p></b></div>
<div class="MsoNormal">
<b><br /></b></div>
<div class="MsoNormal">
The global economy has suffered more downs than ups over the
past few years but lower commodity prices will provide some long needed cheer. Long after the onset of the global financial
crisis, prices for everything from copper to vegetable oil continued to rise stoked
by demand from places such as China.
Weaken global demand has finally taken affect and relief in on the way
for consumers everywhere. It is likely
to provide a bigger boost than just a bit of extra cash.<o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<b>A guide to the road
ahead<o:p></o:p></b></div>
<div class="MsoNormal">
<b><br /></b></div>
<div class="MsoNormal">
Commodity markets often follow their own roadmap. Demand for different materials can rise and
fall depending on changes in technology or consumption patterns. The rising wealth of China and India has
pushed up prices for everything from gold to milk powder. New fracking technology has lowered the price
of oil while corn became more expensive due to its use in producing ethanol in
the United States. <o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
Supply further complicates matters as rising demand for any commodity
will prompt companies to increase output but this often takes time. There is a lag of a year or so for farmers to
shift from growing one crop to another and even longer for a new mine or source
of oil to be developed. The changing
demand and the delayed response on the supply side means that twists and turns
in the commodity markets are often accentuated.<o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<b>Back on the map<o:p></o:p></b></div>
<div class="MsoNormal">
<b><br /></b></div>
<div class="MsoNormal">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEioZwAqx7X8QcTeku4wo44REOUUdHnatWOxp1eT989Plt6MA25jFbItbItbH7N23kXeeqJInYbo3i8tyRzaKfPP4mb9Hw5oJm63rl1zs7zoKhbkfnetKs9YCPnm95b1lhc5Mtgrl-BF8fQ/s1600/Map.jpg" imageanchor="1" style="clear: right; float: right; margin-bottom: 1em; margin-left: 1em;"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEioZwAqx7X8QcTeku4wo44REOUUdHnatWOxp1eT989Plt6MA25jFbItbItbH7N23kXeeqJInYbo3i8tyRzaKfPP4mb9Hw5oJm63rl1zs7zoKhbkfnetKs9YCPnm95b1lhc5Mtgrl-BF8fQ/s1600/Map.jpg" height="240" width="320" /></a>Prices in the commodity markets had long been out of kilter
with the slump in global demand but this seems to be over. The price of oil, which has been making news
recently, is indicative of this new trend.
Increased output in the US coupled with a tailing off of demand from
energy-hungry China has resulted in a sharp turnaround in prices. High prices for commodities such as oil often
do not last as more money gets spend on both finding more oil as well as on increasing
energy efficiency to lower money spent on oil.
Both of these factors act to stop the price of oil getting out of
hand. <o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
Market correcting forces move in both directions and also
work to prevent excessive falls in prices.
Investments in producing commodities are put on hold if prices drop back
and low supply tempers a decline in prices.
Lower prices also mean that interest in using resource more efficiently
tends to fade. This is why commodity
prices tend to fluctuate in big swings of boom and bust. With the world economy have just endured a
period of high prices, the commodity market seems to be swinging in the
opposite direction. Considering the big
swings in commodity prices, this trend is not likely to be reversed any time
soon. <o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<b>Heading in the right
direction<o:p></o:p></b></div>
<div class="MsoNormal">
<b><br /></b></div>
<div class="MsoNormal">
The benefits of lower commodity prices extend beyond the
obvious effects of cheaper prices at the petrol pump, on our gas and power
bills, and when stocking up at the supermarket.
Less money will go to places such as Saudi Arabia and Russia, where high
oil prices only add to the riches of already wealthy individuals, and consumers
across the globe will instead have more money in their pockets. As such, the global economy will benefit as
this extra cash will likely to spent rather than piling up in the bank accounts
of rich Saudis or Russians. <o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
A further benefit of lower commodity prices is that cheaper
commodities mean lower inflation and lower inflation allows more scope for
looser monetary policy. An uptick in
inflation would be <a href="http://yourneighbourhoodeconomist.blogspot.com/2014/07/interest-rate-hike-easy-on-brakes.html" target="_blank">one excuse that <span style="background-attachment: initial; background-clip: initial; background-color: white; background-image: initial; background-origin: initial; background-position: initial; background-repeat: initial; background-size: initial;">central banks would use to raise interest rates</span></a>. But with inflation likely to be subdued (and
deflation becoming more of a concern), interest rates are more likely to <span style="background-attachment: initial; background-clip: initial; background-color: white; background-image: initial; background-origin: initial; background-position: initial; background-repeat: initial; background-size: initial;"><a href="http://yourneighbourhoodeconomist.blogspot.com/2014/11/interest-rates-looking-for-right.html" target="_blank">stay at their current low levels</a></span><span style="background-attachment: initial; background-clip: initial; background-color: white; background-image: initial; background-origin: initial; background-position: initial; background-repeat: initial; background-size: initial;"> or </span><span style="background-attachment: initial; background-clip: initial; background-color: white; background-image: initial; background-origin: initial; background-position: initial; background-repeat: initial; background-size: initial;"><a href="http://yourneighbourhoodeconomist.blogspot.com/2014/08/interest-rate-hike-not-expecting-worst.html" target="_blank">hardly rise at all when interest rates are eventually raised</a></span>. The absence of
inflation could even result in a <span style="background-color: white;"><a href="http://yourneighbourhoodeconomist.blogspot.com/2014/07/economists-crash-but-dont-burn.html" target="_blank"><span style="background-attachment: initial; background-clip: initial; background-image: initial; background-origin: initial; background-position: initial; background-repeat: initial; background-size: initial;">long-needed rethink</span> </a></span>of what central banks should be doing in
terms of monetary policy. That may work
out to be even be more valuable than a few extra notes in your pocket.<o:p></o:p></div>
</div>
Your Neighbourhood Economisthttp://www.blogger.com/profile/00096015895608337029noreply@blogger.com0tag:blogger.com,1999:blog-7314520695799326639.post-35679390395058486492014-11-21T08:26:00.000+00:002015-04-13T08:43:40.207+01:00Interest Rates – Looking for the right temperature<div dir="ltr" style="text-align: left;" trbidi="on">
<div class="MsoNormal">
<b>The economic climate
is changing but that may not necessarily mean that interest rates have to
change too</b></div>
<div class="MsoNormal">
<b><br /></b></div>
<div class="MsoNormal">
Setting interest rates can be as frustrating as fiddling with
the heating as the seasons change. We
can rely on the weather forecast as a guide to the outside conditions but it is
harder to get a measure of whether the economy is running hot or cold. This is particularly tricky at a time when
some central banks are switching from policies to warm up the economy to
measures for preventing the economy from overheating. The poor economic outlook suggests that the
current monetary policy measures may be here to stay despite calls for higher
interest rates. <span style="background: yellow; mso-highlight: yellow;"><o:p></o:p></span></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<b>Neither too hot nor
too cold<o:p></o:p></b></div>
<div class="MsoNormal">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgGUZVcDNBfrAlWpYsht77l24qfdKQct8m84X6j4XKn0Xj4fGCa4WTYj3mgStvDg5BKZJB6VX78e8JNhWXMv0kAaQxKQyykmTNWfjmj0bkRbvOzDN4ayIyJzlgHeUiZKYrO0kMD58DDAPE/s1600/Heater.jpg" imageanchor="1" style="clear: right; float: right; margin-bottom: 1em; margin-left: 1em;"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEgGUZVcDNBfrAlWpYsht77l24qfdKQct8m84X6j4XKn0Xj4fGCa4WTYj3mgStvDg5BKZJB6VX78e8JNhWXMv0kAaQxKQyykmTNWfjmj0bkRbvOzDN4ayIyJzlgHeUiZKYrO0kMD58DDAPE/s1600/Heater.jpg" height="320" width="274" /></a><b><br /></b></div>
<div class="MsoNormal">
Interest rates are often raised or lowered to nudge the
economy toward what is seen as an appropriate rate of growth. Once the economy is humming along as it
should (with inflation in check), interest rates are ideally set to a level
that neither helps nor hinders economic growth.
This is the concept of neutral interest rates which should be higher for
fast growing economies and lower for economies with weaker growth. Not only are there differences between
countries but the neutral interest rate for one particular country can change
over time.<o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
The neutral interest rates have been slipping downward for
many countries as their prospects for growth deteriorate. Many consumers as well as governments are
focusing on paying back debt leaving less money to spend. Companies are hoarding cash instead of
investing which takes away another driver of growth. With most developed countries suffering from
the same problems, exports don’t offer much help either. Even economic growth in China, which has been
one of the few bright spots in the global economy, is likely to slow from a
boil to a simmer as <span style="background-attachment: initial; background-clip: initial; background-color: white; background-image: initial; background-origin: initial; background-position: initial; background-repeat: initial; background-size: initial;"><a href="http://yourneighbourhoodeconomist.blogspot.com/2014/05/growth-in-china-steel-vs-butter.html" target="_blank">focus shifts from investment to consumption</a></span>.<o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<b>Turning up the heat<o:p></o:p></b></div>
<div class="MsoNormal">
<b><br /></b></div>
<div class="MsoNormal">
There are signs that the global economy is heating up in
places. The British economy is expected
to expand by around 3.0% in 2014 while around 2.0% growth is forecast for the
US economy. Yet, the effects of this are
not being felt by consumers due to stagnating wages and cuts to government
spending. <span style="background-attachment: initial; background-clip: initial; background-color: white; background-image: initial; background-origin: initial; background-position: initial; background-repeat: initial; background-size: initial;"><a href="http://yourneighbourhoodeconomist.blogspot.com/2014/09/deflation-deja-vu-with-twist.html" target="_blank">Low inflation is a further indication</a></span> that not all
is well even these economic hot spots.
These mixed signals have prompted a cautious approach by the US Federal
Reserve and the Bank of England who have kept interest rates at record lows
close to zero.<o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
The lingering hangover from the global financial crisis
continues to hold back the economic recovery.
Consumers are less willing to take on debt after the disastrous results
of the previous borrowing binge. Any
plans of investment are reigned amid worried about the prospects for the
economy. Proactive policies tend to go
out the window as <span style="background-attachment: initial; background-clip: initial; background-color: white; background-image: initial; background-origin: initial; background-position: initial; background-repeat: initial; background-size: initial;"><a href="http://yourneighbourhoodeconomist.blogspot.com/2014/07/economic-recovery-and-politics-of-slow.html" target="_blank">politics regresses to squabbling over limited government resources</a></span>. The likelihood for these factors to lower
the neutral interest rates means that <span style="background-attachment: initial; background-clip: initial; background-color: white; background-image: initial; background-origin: initial; background-position: initial; background-repeat: initial; background-size: initial;"><a href="http://yourneighbourhoodeconomist.blogspot.com/2014/08/interest-rate-hike-not-expecting-worst.html" target="_blank">interest rates are unlikely to go up by much at all</a></span>. <o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<b>Don’t touch that knob
<o:p></o:p></b></div>
<div class="MsoNormal">
<b><br /></b></div>
<div class="MsoNormal">
Depending on the extent to which the neutral interest rates
have fallen, it could even be argued that interest rates should stay close to
zero until the <span style="background-attachment: initial; background-clip: initial; background-color: white; background-image: initial; background-origin: initial; background-position: initial; background-repeat: initial; background-size: initial;"><a href="http://yourneighbourhoodeconomist.blogspot.com/2014/06/economic-recovery-reasons-to-be.html" target="_blank">medium term prospects improve</a></span>. There is no
immediate reason for interest rates to be raised considering that the main
concern of central banks, inflation, is not a concern. Even looking forward, <span style="background-attachment: initial; background-clip: initial; background-color: white; background-image: initial; background-origin: initial; background-position: initial; background-repeat: initial; background-size: initial;"><a href="http://yourneighbourhoodeconomist.blogspot.com/2014/09/deflation-deja-vu-with-twist.html" target="_blank">inflation is likely to remain subdued</a></span> when
factoring in falling commodity prices and weak wage growth.<o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
Moreover, lending has not gotten out of hand except for in
isolated sectors such as real estate in certain countries (such as the UK). Other worries also include low rates of
return pushing investors to chase after higher pay-outs by putting money into
increasingly riskier investments. Yet,
these issues can be dealt with using <span style="background-attachment: initial; background-clip: initial; background-color: white; background-image: initial; background-origin: initial; background-position: initial; background-repeat: initial; background-size: initial;"><a href="http://yourneighbourhoodeconomist.blogspot.com/2014/06/monetary-policy-surgery-needed.html" target="_blank">targeted policies rather than relying solely on interest rates</a></span>. Higher interest rates are seen as helpful in
that it will give central banks more capacity to respond in the case of another
downturn. But <span style="background-attachment: initial; background-clip: initial; background-color: white; background-image: initial; background-origin: initial; background-position: initial; background-repeat: initial; background-size: initial;"><a href="http://yourneighbourhoodeconomist.blogspot.com/2014/06/monetary-policy-losing-its-power.html" target="_blank">setting interest rates has less of an effect</a></span>
when the financial markets are awash with cash.
<o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
Like a bickering couple arguing whether the heating is set
too high or too low, expect the debate over the right level for interest rates
to drag on. Despite all this, it looks
as if interest rates might be best left where they are for now.<o:p></o:p></div>
</div>
Your Neighbourhood Economisthttp://www.blogger.com/profile/00096015895608337029noreply@blogger.com0tag:blogger.com,1999:blog-7314520695799326639.post-805841910765067522014-11-14T11:02:00.000+00:002015-06-04T08:54:54.586+01:00Question – where next for Japan <div dir="ltr" style="text-align: left;" trbidi="on">
<div class="MsoNormal">
<b>An inquiry from a
reader prompts Your Neighbourhood Economist to look into the prospects for
Japan<o:p></o:p></b></div>
<div class="MsoNormal">
<b><br /></b></div>
<div class="MsoNormal">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiTapRpGrRhetDlhSIXbn8SUxgeA_S6JltrjmZdMk_bL4gjZp1ER1HgQyInGTr-nY5pwJV6D6Y1FnvoF6Ax5HzyzDlSx9tOULrRl5tjCYKnU4N74Y4tHs05bxhft8JqL2_AonmF8OWW0q8/s1600/Knock+Knock.jpg" imageanchor="1" style="clear: right; float: right; margin-bottom: 1em; margin-left: 1em;"><img border="0" height="320" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEiTapRpGrRhetDlhSIXbn8SUxgeA_S6JltrjmZdMk_bL4gjZp1ER1HgQyInGTr-nY5pwJV6D6Y1FnvoF6Ax5HzyzDlSx9tOULrRl5tjCYKnU4N74Y4tHs05bxhft8JqL2_AonmF8OWW0q8/s320/Knock+Knock.jpg" width="240" /></a>There has been another knock at the door of Your
Neighbourhood Economist, with a reader <i>what I thought Japan should be doing in the short and medium term</i>? The question arrived just days before another
big policy development in Japan with the central bank ramping up its monetary
policy. This is the latest attempt by
policy makers in Japan to resurrect an economy that has been languishing for
decades. To get an idea of what Japan
should be doing, we need to start with what went wrong and why Japan has not
made much progress.</div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<b>What is not going right?<o:p></o:p></b></div>
<div class="MsoNormal">
<b><br /></b></div>
<div class="MsoNormal">
Japan got itself into trouble in the 1980s with the
spectacular collapse of a financial bubble from which it has never
recovered. Property prices have fallen almost
every year for two decades while prices for <span style="background-attachment: initial; background-clip: initial; background-color: white; background-image: initial; background-origin: initial; background-position: initial; background-repeat: initial; background-size: initial;"><a href="http://yourneighbourhoodeconomist.blogspot.com/2014/09/deflation-deja-vu-with-twist.html" target="_blank">consumer goods have been inching lower</a></span> for almost
as long. Japan has repeatedly tried to
use fiscal stimulus but higher government spending has been <span style="background-attachment: initial; background-clip: initial; background-color: white; background-image: initial; background-origin: initial; background-position: initial; background-repeat: initial; background-size: initial;"><a href="http://yourneighbourhoodeconomist.blogspot.com/2013/01/when-keynesian-policies-wont-work.html" target="_blank">unable to mask deeper problems with the economy</a></span>. Along with numerous
roads and bridges which are hardly used, the main result of these rescue
attempts has been a ballooning amount of government debt which only adds to
Japan’s woes.<o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
Monetary policy has been adopted recently as the potential
saviour in the fight against what has been deemed as the main problem –
deflation. Falling prices were seen as
prompting consumers to hold off spending and preventing companies from
investing. With this in mind, the
central bank in Japan announced plans to double the money supply in early 2013. But the policy of pumping more money into the
economy was based on the false logic that deflation was a problem rather than
just <span style="background-color: white;"><a href="http://yourneighbourhoodeconomist.blogspot.com/2013/11/good-deflation-better-than-bad-inflation.html" target="_blank">the symptom of a weak economy</a></span>. Instead, it is likely
the case that deflation persists because prices rises had gotten out of hand in
the past and need to fall back to appropriate levels.<o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<b>Fix-up job not
working<o:p></o:p></b></div>
<div class="MsoNormal">
<b><br /></b></div>
<div class="MsoNormal">
The result of this monetary policy has been as Your
Neighbourhood Economist might have expected with just a brief and temporary
boost to inflation. Prices for consumer
goods cannot rise consistently if consumers themselves do not get a similar
rise in pay. Higher wages in Japan seem
unlikely as a declining population hurts aggregate demand and Japanese firms
invest more overseas than domestically.
Yet, rather than change tact, Japan’s central bank has opted for more of
the same. <o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
This involves the Bank of Japan aiming for an even larger
boost to the money supply in Japan with annual purchases of 80 trillion yen (US$720
billion or £450 billion) in government bonds. The timing of the new policy comes as the <span style="background-attachment: initial; background-clip: initial; background-color: white; background-image: initial; background-origin: initial; background-position: initial; background-repeat: initial; background-size: initial;"><a href="http://yourneighbourhoodeconomist.blogspot.com/2014/04/tax-hike-in-japan-to-test-fight-against.html" target="_blank">Japanese economy is faltering under the added weight of a tax hike</a></span> designed to fix the government’s
finances. Japan has gotten itself deeper
and deeper into trouble and seems likely to be an example of what not to do in
terms of fiscal and monetary policy. <o:p></o:p></div>
<div class="MsoNormal">
<b><br /></b></div>
<div class="MsoNormal">
<b>Where to from here <o:p></o:p></b></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
The best option left to the Japanese government is to reform
the economy so as to increase competition and improve efficiency. There is substantial domestic opposition to
reforms <a href="http://yourneighbourhoodeconomist.blogspot.com/2013/08/japan-dont-hold-your-breath.html" target="_blank">even within the current government</a> headed by Prime Minister Shinzo Abe
who included reforms as one of his key policies. An easy way to sidestep domestic politics
would be to jump on-board to plans for the Trans-Pacific Partnership
(TPP). This is a free trade agreement
with the United States, Australia, Mexico, Chile, and other countries around
the Pacific Rim.<o:p></o:p></div>
<br />
<div class="MsoNormal">
Left to themselves, Japan will probably continue to
stagnated due to the stifling effects of its consensus style of politics which
make it tough to come up with reforms that keep everyone happy. As such, Japan has a history of positive change
only coming when imposed from the outside and this free trade agreement looks
likely to follow this trend. Greater
competition from foreigners will help lower costs of business and create
impetus for freeing up businesses in Japan from a host of restricting
rules. Facing up to the outside world
looks like the best way to inject life back into a Japanese economy that has
been slowly decaying for years.<o:p></o:p></div>
</div>
Your Neighbourhood Economisthttp://www.blogger.com/profile/00096015895608337029noreply@blogger.com0tag:blogger.com,1999:blog-7314520695799326639.post-17299932431521846352014-10-22T12:17:00.001+01:002014-10-22T12:17:42.582+01:00Monetary Policy – Germany to feel the pinch<div dir="ltr" style="text-align: left;" trbidi="on">
<div class="MsoNormal">
<b><span style="font-family: inherit;">A taste of its own
medicine may prompt Germany to rethink its tough guy approach to Europe<o:p></o:p></span></b></div>
<div class="MsoNormal">
<span style="font-family: inherit;"><br /></span></div>
<div class="MsoNormal">
<span style="font-family: inherit;">No one like a bully but that seems to be Germany’s role in
Europe. It makes other countries walk
the line in policy terms (for their own good) even amid simmering discontent
among its neighbours. Germany has been
mean in terms of pushing for monetary policy to be less expansive as elsewhere
in spite of struggling countries needing help.
Yet, things may change as the German economy is starting to suffer from
similar problems to those it bullies. Germany
is likely to be stuck with monetary policy that is too harsh for even its own
economy and this may result in it softening up its approach to others in
Europe.<o:p></o:p></span></div>
<div class="MsoNormal">
<b><span style="font-family: inherit;"><br /></span></b></div>
<div class="MsoNormal">
<b><span style="font-family: inherit;">Help wanted<o:p></o:p></span></b></div>
<div class="MsoNormal">
<span style="font-family: inherit;"><br /></span></div>
<div class="MsoNormal">
<span style="font-family: inherit;">It is a given that the economy in Europe could do with a
boost. Weak demand from consumers and
firms means that unemployment remains stubbornly high and inflation for Europe
as a whole is not far off zero. But
Germany continues to push its policy of tough love onto Europe. As with most other developed countries, fiscal
stimulus is not an option as governments deal with high levels of public
debt. Germany has gone further in
cajoling other governments in Europe to sort out their budget deficits despite
the <span style="background-attachment: initial; background-clip: initial; background-color: white; background-image: initial; background-origin: initial; background-position: initial; background-repeat: initial; background-size: initial;">likelihood of adverse
economic effects</span>. <o:p></o:p></span></div>
<div class="MsoNormal">
<span style="font-family: inherit;"><br /></span></div>
<div class="MsoNormal">
<span style="font-family: inherit;">Germany has also not allowed the use of monetary policy as
an alternative means of stimulating the economy. Measures such as quantitative easing have
been utilised with some benefits in the US and in Britain but not in Europe
even though Europe needs a boost more than anywhere else. The reasoning behind this approach by Germany
is that, by offer laggards in Europe an easy way out, the current problems
which are holding them (and Europe as a whole) back will remain in place. As a result, the European Central Bank has
had to be creative and try other measures such as <span style="background-attachment: initial; background-clip: initial; background-color: white; background-image: initial; background-origin: initial; background-position: initial; background-repeat: initial; background-size: initial;"><a href="http://yourneighbourhoodeconomist.blogspot.co.uk/2014/03/another-new-policy-negative-interest.html" target="_blank">negative interest rates</a></span>. But it is difficult for monetary policy to
have much effect when its scope is limited.<o:p></o:p></span></div>
<div class="MsoNormal">
<b><span style="font-family: inherit;"><br /></span></b></div>
<div class="MsoNormal">
<b><span style="font-family: inherit;">Turning the tables<o:p></o:p></span></b></div>
<div class="MsoNormal">
<span style="font-family: inherit;"><br /></span></div>
<div class="MsoNormal">
<span style="font-family: inherit;">Germany may have been able to bully others in Europe but it
may be the Germans turn to feel the pain.
The German economy is beginning to flag amid weakening demand for its
exports from places such as China.
Forecasts for economic growth in Germany are being cut as its prospects
deteriorate while inflation has fallen to below 1%. The normal response to a weakening economy
anywhere else would be for looser monetary policy. But having not allowed other European
countries this option, Germany’s tough stance on others may result it also
being tough on itself. <o:p></o:p></span></div>
<div class="MsoNormal">
<span style="font-family: inherit;"><br /></span></div>
<div class="MsoNormal">
<span style="font-family: inherit;">It is funny to think that the Germans would have likely allowed
itself to have more stimulus via monetary policy if there was just a German
central bank looking after just the German economy. But its own actions in influencing monetary
policy will mean that Germany may have to endure monetary policy that does not reflect
the weak state of its economy (along with most everyone else in Europe). When framed in this way, Germany must rethink
its ideas on economic policy for Europe if just for its own good. <o:p></o:p></span></div>
<div class="MsoNormal">
<span style="font-family: inherit;"><br /></span></div>
<br />
<div class="MsoNormal">
<span style="font-family: inherit;">Continued stubbornness by the Germans would be unconstructive
even in comparison to the often dysfunctional politics in Europe. <span style="background-color: white;"><a href="http://yourneighbourhoodeconomist.blogspot.com/2014/09/europe-finding-way-out.html" target="_blank"><span style="background-attachment: initial; background-clip: initial; background-image: initial; background-origin: initial; background-position: initial; background-repeat: initial; background-size: initial;">Deflation is another concern that will only get worse</span> </a></span>with the
current policy measures. Germany was
never going to go easy on others in Europe while its economy was riding
high. It is only a Germany that has been
laid low that may soften up and be more willing to help itself by helping
others.</span><b><o:p></o:p></b></div>
</div>
Your Neighbourhood Economisthttp://www.blogger.com/profile/00096015895608337029noreply@blogger.com4tag:blogger.com,1999:blog-7314520695799326639.post-63813467658977677092014-09-24T12:26:00.001+01:002014-09-28T20:42:38.585+01:00Euro as the new Deutsche Mark<div dir="ltr" style="text-align: left;" trbidi="on">
<div class="MsoNormal">
<b>Germany practically
controls the euro as if it were its own currency but it would gain more being
less in charge<o:p></o:p></b></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
Being a big fish in a small pond can have its benefits as
Germany is discovering in its dealing with Europe. Its powerhouse economy means that Germany was
one of the few countries left standing after the Eurozone crisis. Germany has used this position of strength to
turn the euro into its own de-facto currency.
It dominates the decisions over monetary policy and has influences
spending decisions by politicians outside of its borders. This level of control is alienating many
others in Europe while still being insufficient to keep Germans happy. As a result, more could be gained by Germany trading
away its power to secure a brighter future for Europe as a whole.</div>
<div class="MsoNormal">
<b><br /></b></div>
<div class="MsoNormal">
<b>Benefits of being the
boss<o:p></o:p></b></div>
<div class="separator" style="clear: both; text-align: center;">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjlAen6Andy8xG0tQFkEP3ENsH2sROXrY-MbOXZGc61IET3JkR_mtkHPdPJ9qSsnyVQymKGQryzJ6YdENAS9yeXwAmE6LfTL4OvVAB9hwKNZ6jOrSFWuGY-DRZ0FFpeAIjb0barS2n-BjY/s1600/Germany.jpg" imageanchor="1" style="clear: right; float: right; margin-bottom: 1em; margin-left: 1em;"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjlAen6Andy8xG0tQFkEP3ENsH2sROXrY-MbOXZGc61IET3JkR_mtkHPdPJ9qSsnyVQymKGQryzJ6YdENAS9yeXwAmE6LfTL4OvVAB9hwKNZ6jOrSFWuGY-DRZ0FFpeAIjb0barS2n-BjY/s1600/Germany.jpg" height="240" width="320" /></a></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
Control over monetary policy is not something that Germany
fought for but it came as a by-product of the Eurozone crisis that hobbled the
other powers in Europe. More prudent
management of government finances meant that the government has less debt and
the economy has been resilient due in part to its exporting prowess. This left its Chancellor, Angela Merkel,
as one of the few politicians who is backed by voters and in a strong position
to dominate European politics.<o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
It has allowed Germany to impose its own policy measures
over the Eurozone. Germany has set the
tone regarding austerity as well as its concerns over inflation limiting the
scope of monetary policy. Countries such
as Spain and Italy would benefit in the short term from more government
spending and looser monetary policy. But
Germany has pushed for a range of policies which are a better fit for its own
economy than others in Europe where the shortfall in demand is more pronounced. The aim is to bring others into line in terms
of implementing reforms which would improve the outlook for Europe in the
future.</div>
<div class="MsoNormal">
<o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
Along with setting policies, being the boss of a widely used
currency comes with a host of benefits.
For starters, investors looking for the safest place to park their euros
will choose Germany over other European countries and this keep down interest
rates in Germany. Worries about a sluggish
economy in Europe are a further boost to Germany by keeping the value of the euro
weak. The euro is both too strong
considering the economic circumstances of many of the countries in Europe but
considerably below what a truly German currency (a new Deutsche Mark) could be
valued at. <o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<b>Getting more from
less<o:p></o:p></b></div>
<div class="MsoNormal">
<b><br /></b></div>
<div class="MsoNormal">
As is often the case, its power has become like a poisoned
chalice. Not only is Germany out of tune
with many of its neighbours but the euro is also increasingly unpopular at
home. The rapid rise of an anti-euro
party in Germany (called the Alternative for Germany party) suggests that there
are many Germans who feel as if they are getting a raw deal from being part
of the Eurozone. This party joins a
growing list of <span style="background-attachment: initial; background-clip: initial; background-color: white; background-image: initial; background-origin: initial; background-position: initial; background-repeat: initial; background-size: initial;"><a href="http://yourneighbourhoodeconomist.blogspot.co.uk/2014/05/the-economics-behind-populist-parties.html" target="_blank">populist parties in Europe</a></span> worried about the level of integration needed to
maintain the euro. <o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<br />
<div class="MsoNormal">
If a position of strength does not come with many rewards,
sometimes more can be gained from giving power away. Germany could soften its strict stance on
fiscal and monetary policy as a trade for more reforms in other countries. This bargain would help deal with the
short-term issues of a weak economy needing stimulus as well as concerns about
the prospects for Europe over the long term.
<span style="background-attachment: initial; background-clip: initial; background-color: white; background-image: initial; background-origin: initial; background-position: initial; background-repeat: initial; background-size: initial;"><a href="http://yourneighbourhoodeconomist.blogspot.co.uk/2014/09/europe-finding-way-out.html" target="_blank">Compromise also seems more likely</a></span> now that deflation is a growing threat and the German
economy itself is flagging. It is time for Germany to cash in now as it may be too late if the situation in
Europe gets worse. <o:p></o:p></div>
</div>
Your Neighbourhood Economisthttp://www.blogger.com/profile/00096015895608337029noreply@blogger.com1tag:blogger.com,1999:blog-7314520695799326639.post-72073827212950812852014-09-19T13:55:00.000+01:002014-10-22T12:11:52.707+01:00Europe – finding a way out<div dir="ltr" style="text-align: left;" trbidi="on">
<div class="MsoNormal">
<b>Europe seems trapped
with a sluggish economy but a way out may be close<o:p></o:p></b></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
Getting out of a hole that you have dug for yourself can be
tough. This is what Europe is struggling
with as the Eurozone crisis seems to have passed only to be replaced with a
slow strangling at the hands of deflation.
Infighting among politicians about the best way to deal with the
economic stagnation in Europe has resulted in few reasons for hope of an
escape. Yet, this may change due to recent
developments such as a flagging German economy and the rise of reform-minded
governments in some countries. Sometimes
things need to get worse before a way out is possible and the situation in
Europe may have finally got bad enough for positive change to occur.<o:p></o:p></div>
<div class="MsoNormal">
<b><br /></b></div>
<div class="MsoNormal">
<b>An economic escape
route…<o:p></o:p></b></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
An economic recovery is typically an automatic progress but may
not always be easy. Companies going bankrupt
and workers losing their jobs cause considerable pain but is actually something
that is good for the overall health of the economy. A cull of weaker businesses provides more
space for more successful firms to grow and prosper. This process has the label of “creative
destruction” in economic theory due to the idea of the old needing to give way
for the new. <o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
In this way, economic growth returns after a recession as
resources such as workers move to more productive uses. The economy can grow faster as a result but a
certain level of economic freedoms are needed to allow this to happen. In this way, there is a trade-off between economic
growth and the potential for instability.
It is not possible to have the former without the latter but any
instability can be limited through controlling economic excesses (<span style="background-attachment: initial; background-clip: initial; background-color: white; background-image: initial; background-origin: initial; background-position: initial; background-repeat: initial; background-size: initial;"><a href="http://yourneighbourhoodeconomist.blogspot.co.uk/2014/04/animal-spirits-caging-our-wild-side.html" target="_blank">which often show up in the financial system</a></span>).<o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
Getting the balance right is not easy. Companies in finance have been given too much
leeway and created havoc as a result.
Yet, in other areas, businesses have been burdened with too many
rules. One example is regulation which
makes it difficult for firms to fire workers.
This may seem like a good way of keeping people in jobs but such
regulation has an adverse effect in that companies will not want to take on new
workers if their employment is almost permanent. <o:p></o:p></div>
<div class="MsoNormal">
<b><br /></b></div>
<div class="MsoNormal">
<b>… and the politics to
make it happen<o:p></o:p></b></div>
<div class="MsoNormal">
<b><br /></b></div>
<div class="MsoNormal">
Many countries in Europe are in desperate need of policies
to free up business from such regulation but implementation is often
tricky. At a time of rapid change, voters
often crave stability of bygone eras that are no longer viable. This does not stop <span style="background-attachment: initial; background-clip: initial; background-color: white; background-image: initial; background-origin: initial; background-position: initial; background-repeat: initial; background-size: initial;"><a href="http://yourneighbourhoodeconomist.blogspot.co.uk/2014/05/the-economics-behind-populist-parties.html" target="_blank">populist parties making false promises</a></span> to
turn back time and dismissing the need for reforms. It is heartening for the outlook in Europe
that some countries such as Spain have made progress with its reforms. Others such as France and Italy also have
governments that are making the right noises in terms of reforms even if not
actually putting new policies in place.<o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
The lack of reforms has been preventing the recovery in
Europe in other ways. Germany, who has a
firm grip on the reins of power in Europe, has stubbornly refused to offer much
help to struggling European countries.
The reasoning behind this is that offering an easy way out would mean
that these countries would not deal with the problems within their own economies. The flip side is that, once reforms begin, Germany
may be more accommodating in providing support.
<o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
This opens up the possibility of a grand bargain, such as
reforms as a trade for looser monetary policy and less focus on austerity. <span style="background-attachment: initial; background-clip: initial; background-color: white; background-image: initial; background-origin: initial; background-position: initial; background-repeat: initial; background-size: initial;"><a href="http://yourneighbourhoodeconomist.blogspot.com/2014/09/quantitative-easing-waiting-while.html" target="_blank">More action from the central bank seems likely</a></span> as the German
economy is beginning to falter and genuine fears about deflation in Europe grow. Its own weak economic growth and low
inflation will highlight to the Germans that the problems are plaguing Europe as
a whole rather than just individual problem countries.</div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
Your Neighbourhood Economist penned this posting with comments
from readers in mind. Europe and the
euro was seen as a lost cause by one reader while others have been annoyed that
this blog always had to be so pessimistic.
Hopefully, this post will hopefully prove them wrong (but in a good
way).<o:p></o:p></div>
</div>
Your Neighbourhood Economisthttp://www.blogger.com/profile/00096015895608337029noreply@blogger.com2tag:blogger.com,1999:blog-7314520695799326639.post-92080604561802834442014-09-15T12:00:00.001+01:002015-07-22T15:37:06.011+01:00Monetary Policy – who to save?<div dir="ltr" style="text-align: left;" trbidi="on">
<div class="MsoNormal">
<b>Central banks have a
host of people needing help in the economy but it may be those not yet in
trouble that get priority<o:p></o:p></b></div>
<div class="MsoNormal">
<b><br /></b></div>
<div class="MsoNormal">
There are still many people struggling in the economy but
the central bank does not know which of the victims to save. Like a lifeguard having to decide which of a
handful of struggling swimmers to save, central banks have some difficult
choices. Unemployment is falling but
many people are still stuck in low paying jobs.
Inflation is low but fears are running high that loose monetary policy
will inevitably see prices start to rise.
There is also potential for financial markets to go haywire considering
all of the loose money around. Yet, it
seems as if central banks will deal with issues that have not yet arisen
despite all of the people still in the water.<o:p></o:p></div>
<div class="MsoNormal">
<b><br /></b></div>
<div class="MsoNormal">
<b>Monetary policy to
the <o:p></o:p>rescue</b></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
The global financial crisis has expanded the role of central
banks. No longer is inflation their sole
concern as other issues such as unemployment or financial stability take on
increasing importance. Fulfilling one
primary objective, keeping prices from rising too much, is much easier than
achieving competing goals. This was not
a problem in the past as a weak economy created an overriding emphasis on
shoring up the economy. The improving
situation in the UK and the US will push the Federal Reserve and the Bank of
England into sorting out their priorities.
<o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
A falling unemployment rate in both countries means that more
people are being put to work. This
suggests that the economy might be close to reaching full capacity and
inflation might follow as a result.
However, at the same time, wages are not rising which is what would be
expected if firms are employing more workers.
Improvements in productivity have also been poor due to low level of
business investment. This is a problem
as firms need to be more productive to pay higher wages and bigger pay packets
are needed to boost consumer spending.<o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
The uncertainty would suggest caution but there is one more
issue worrying central banks – financial instability. Low interest rates and printing of more cash
through quantitative easing has not made much of a mark on the actual economy
but has been a considerable boost to financial markets. The prices of stocks continue to push
relentlessly upward in many countries despite the cloudy economic outlook. The mass of cheap money has also seen a boom
in property prices in some countries.
The continuation of existing loose monetary policies can only <span style="background-attachment: initial; background-clip: initial; background-color: white; background-image: initial; background-origin: initial; background-position: initial; background-repeat: initial; background-size: initial;"><a href="http://yourneighbourhoodeconomist.blogspot.co.uk/2014/02/the-true-cost-of-quantitative-easing.html" target="_blank">result in these problems getting larger</a></span>.<o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<b>Saving us from the phantom menace<o:p></o:p></b></div>
<div class="MsoNormal">
<b><br /></b></div>
<div class="MsoNormal">
Central banks have to keep all of this in mind when setting
policy. Interest rates in particular
should be raised sooner if fears about inflation or financial instability are
given precedence. But a weak economy may
not be able to cope with higher interest rates and the job market might
suffer. Changes to interest rates will
affect all of us in different ways but there will be both good and bad. <o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
We are all consumers so few of us would want to see a jump
in inflation as we could not buy as much.
Most of us have a little bit stashed away in the bank or in our pension
funds so higher interest rates and less volatility in financial markets will be
helpful. But it is the overall health of
the economy that will be felt most keenly.
Economists, with an eye on the bigger picture, are worried about the
threat from inflation and financial instability with many pushing for the
central banks to respond according.<o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
Yet, the concern is that higher interest rates will be used
to deal with problems that exist on paper but not in reality. Central banks will forsake those already in
trouble to save people that are not yet drowning. Some of the worries of economist might on
exist in their theories. <span style="background-color: white;"><span style="background-attachment: initial; background-clip: initial; background-image: initial; background-origin: initial; background-position: initial; background-repeat: initial; background-size: initial;"><a href="http://yourneighbourhoodeconomist.blogspot.co.uk/2014/06/inflation-more-friend-than-foe.html" target="_blank">Inflation is different now than in the past</a></span> </span>and has not caused trouble for decades. There are also other ways of dealing with
issues in finance rather than the <span style="background-attachment: initial; background-clip: initial; background-color: white; background-image: initial; background-origin: initial; background-position: initial; background-repeat: initial; background-size: initial;"><a href="http://yourneighbourhoodeconomist.blogspot.co.uk/2014/06/monetary-policy-surgery-needed.html" target="_blank">blunt instrument of interest rates</a></span>. Better to deal with what actually is than
what might be.<o:p></o:p></div>
</div>
Your Neighbourhood Economisthttp://www.blogger.com/profile/00096015895608337029noreply@blogger.com0tag:blogger.com,1999:blog-7314520695799326639.post-28447936573529427062014-09-09T10:16:00.001+01:002015-01-13T20:45:51.416+00:00Deflation – déjà vu with a twist<div dir="ltr" style="text-align: left;" trbidi="on">
<div class="MsoNormal">
<b>Signs of deflation I
have seen before start showing up in my neighbourhood but falling prices have
been with us for a long time<o:p></o:p></b></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
Your Neighbourhood Economist has been getting a sense of déjà
vu recently – to do with deflation. My
past experiences of falling prices come from years spent living in Japan and I
am seeing the same things again in my neighbourhood in London. Japan and deflation make for a scary
combination considering that Japan is a byword for prolonged economic
stagnation and poor policy choices. But
deflation may have already been lurking around unnoticed for a while. <o:p></o:p></div>
<div class="MsoNormal">
<b><br /></b></div>
<div class="MsoNormal">
<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh5sXYwwHa0aR_qUw994sHItBY4Cz2inrz1loYzugoBvcDYnLSfip9cvsWBo4l-Su1aXVbR_sKQ8pTtlceo8l4pND4Wid7vaUmVjoLEyQD5rCD8pbSd2kziUsPR_TcEhTz2YNLzpDjeqbw/s1600/Deflation.jpg" imageanchor="1" style="clear: right; float: right; margin-bottom: 1em; margin-left: 1em;"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEh5sXYwwHa0aR_qUw994sHItBY4Cz2inrz1loYzugoBvcDYnLSfip9cvsWBo4l-Su1aXVbR_sKQ8pTtlceo8l4pND4Wid7vaUmVjoLEyQD5rCD8pbSd2kziUsPR_TcEhTz2YNLzpDjeqbw/s1600/Deflation.jpg" height="320" width="240" /></a><b>This looks familiar<o:p></o:p></b></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
The symptoms of déjà vu started with the fast food chains
such as McDonald’s and KFC offering cheaper menu options. This first started in London a few years back
but it was a sign that consumers did not have much cash to spend. It is a sorry state of affairs when even the
least expensive places to eat out need to provide food with even lower prices
to attract customers. But it is the same
tact that similar companies had adopted in Japan around a decade ago in the
face of increasing price conscious consumers.<o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
The other memory of deflation in Japan was from buying
groceries at the supermarket. The most
notable place was shopping at my local 100 yen store (which is like a pound
shop or a dollar shop). While the prices
of the products on the shelves did not change (obviously), there was a
noticeable increase in the range of goods that could be brought for 100
yen. The same trend is becoming more
obvious in the UK in the success of discount supermarkets such as Lidl and Aldi. To keep up, the mainstream supermarkets have
been slashing prices but shoppers are still switching to their cheaper rivals. <o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
The only areas in the economy where prices are still rising
are sectors where the pressures of price competition are less fierce. UK companies such as energy providers or
train operators function in imperfect markets where consumers have less choice
and few other options. Spending on
energy or transport often cannot be avoided so companies do not have to try
hard to sell their products. As such, it
is large energy bills and higher transport costs that are increasingly
responsible for inflation. With nowhere
else to go, consumers have increasingly turned to the government to prove an
answer despite there being little that politicians can do.<o:p></o:p></div>
<div class="MsoNormal">
<b><br /></b></div>
<div class="MsoNormal">
<b>We live in
deflationary times<o:p></o:p></b></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
Yet, for good or bad, this may be the new world that we live
in now rather than just a temporary blip amid a slow economic recovery. In a new global era, firms and consumers can
scourge the world for the cheapest places to buy whatever they want. This impacts what we buy off the shelves at
our local store as well as what we can purchase off the internet. Technology further aids this trend by
providing information on what is on offer outside of our neighbourhoods and for
what price. And we are increasingly
consuming services through the internet at cheaper rates than ever before.<o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
This is great for us as consumers but the flipside is that
companies in our local economies face growing pressures and will not be able to
provide the same level of employment opportunities or pay the same wages as
before. This is a problem for
governments who want their national economies to prosper. Jobs are seen as the primary gauge of the health
of the economy but boosting employment is tricky when competing on a global
scale.<o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<b>Here today and here
tomorrow<o:p></o:p></b></div>
<div class="MsoNormal">
<b><br /></b></div>
<div class="MsoNormal">
Deflation is often seen as a problem in itself. The standard economic theory goes that, if
prices are falling, consumers will wait to spend as goods will be cheaper
tomorrow. Yet, globalization and technology
are not something new and we have had downward pressure on prices for a long
time. Inflation has been low for the
past few decades suggesting that deflation may have not been that far away. It is perhaps only the voracious appetite for
raw materials in China and elsewhere that pushed up global commodity prices and
stopped deflation setting in sooner. <o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
If it has been around for so long, deflation by itself may
not be so bad after all. Yet, <span style="background-attachment: initial; background-clip: initial; background-color: white; background-image: initial; background-origin: initial; background-position: initial; background-repeat: initial; background-size: initial;"><a href="http://yourneighbourhoodeconomist.blogspot.com/2013/11/good-deflation-better-than-bad-inflation.html" target="_blank">an overreaction by policy makers</a> </span>might be. The European Central
Bank seems set to ramp up its measures to <span style="background-attachment: initial; background-clip: initial; background-color: white; background-image: initial; background-origin: initial; background-position: initial; background-repeat: initial; background-size: initial;"><a href="http://yourneighbourhoodeconomist.blogspot.com/2014/09/quantitative-easing-waiting-while.html" target="_blank">fight off threats of deflation</a></span> (and a morbid
economy in Europe). The central bank in
Japan has launched a renewed onslaught against falling prices but <span style="background-attachment: initial; background-clip: initial; background-color: white; background-image: initial; background-origin: initial; background-position: initial; background-repeat: initial; background-size: initial;"><a href="http://yourneighbourhoodeconomist.blogspot.com/2014/04/tax-hike-in-japan-to-test-fight-against.html" target="_blank">to little avail</a></span>. Yet, the forces of globalization and technology
cannot be reversed using just monetary policy.
Falling prices are something that may be with us for a while so it is
better to get used to living with the potential for deflation and focus our efforts
on other economic evils.<o:p></o:p></div>
</div>
Your Neighbourhood Economisthttp://www.blogger.com/profile/00096015895608337029noreply@blogger.com9tag:blogger.com,1999:blog-7314520695799326639.post-45432264905621699322014-09-01T10:05:00.001+01:002014-09-01T10:05:23.222+01:00Quantitative Easing – Waiting while Europe Sinks<div dir="ltr" style="text-align: left;" trbidi="on">
<div class="MsoNormal">
<b>As Europe cries out
for more action against deflation, the central bank must wait until the
situation gets even worse<o:p></o:p></b></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
It would be strange to hold off saving people in a sinking
ship until the ship is just about to go under, but this is how monetary policy
works in Europe. The situation in
European grows continues to get worse as economic growth stagnates and
deflation sets in. Yet, the central bank
cannot help, as it is hamstrung by politics, and must hold off until the cost
of inaction is too high. This means that
Europe will have to take on a lot of water until a rescue package can eventually
be put in place. <o:p></o:p></div>
<div class="MsoNormal">
<b><br /></b></div>
<div class="MsoNormal">
<b>Politics muddies the
water <o:p></o:p></b></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
Monetary policy is tough enough in one country, let along for
the 18 countries which use the euro. The
European Central Bank has acted boldly when given the chance. It took a stand in 2012 stating that it was
willing to do “whatever it takes” to save the Eurozone. This was the lifeboat that saved Europe from collapse
at a time when national governments were absorbed riding out wave after waves
of turmoil. But the European Central
Bank was only free to jump in once it seemed as if Greece and other countries
were about to let go of the euro. <o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
Despite a temporary reprieve, the economies of Europe have
been like a listless ship with leaks. Reforms
have been put off in the hope that the worst is over and economic growth would
return without any further encouragement.
Yet it is not a surprise that Europe is close to being sunk again but this
time in slow motion. The problem is the
rules and regulations that get in the way of more efficient ways of doing
business. Economic growth cannot be seen
as a given and government policies must allow resources to move to more
productive uses. <o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
Such reforms tend to be unpopular as the costs are borne
upfront while it takes time for the benefits to show. So politicians in Europe have put off these
measures as <span style="background-attachment: initial; background-clip: initial; background-color: white; background-image: initial; background-origin: initial; background-position: initial; background-repeat: initial; background-size: initial;"><a href="http://yourneighbourhoodeconomist.blogspot.com/2014/05/the-economics-behind-populist-parties.html" target="_blank">pleasing voters is proving tough enough as it is</a></span>.
Instead, it has been easier to blame others and wait in the hope that
economic growth will return. This
wait-and-see approach relies on the central bank to help out with the economy
but this is beyond <span style="background-attachment: initial; background-clip: initial; background-color: white; background-image: initial; background-origin: initial; background-position: initial; background-repeat: initial; background-size: initial;"><a href="http://yourneighbourhoodeconomist.blogspot.com/2014/07/central-bank-emperors-new-clothes.html" target="_blank">what the European Central Bank can achieve</a></span>.</div>
<div class="MsoNormal">
<o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
The politics behind the European Central Bank is made even
more difficult in dealing due to some countries floundering more than
others. Amid all of the concerns about
deflation, it is already a fact of life in some countries such as Greece and
Spain. Yet, even Europe as a whole is
edging closer to deflation which is typically the symptom of a sluggish
economy. The fear is that deflation will
create its own problems if falling prices prompt consumers to hold of spending
in the hope for cheaper goods in the future.<o:p></o:p></div>
<div class="MsoNormal">
<br /></div>
<div class="MsoNormal">
<b>Waiting until things
get worse<o:p></o:p></b></div>
<div class="MsoNormal">
<b><br /></b></div>
<div class="MsoNormal">
The central bank has already responded to the threat of
deflation through a policy <span style="background-attachment: initial; background-clip: initial; background-color: white; background-image: initial; background-origin: initial; background-position: initial; background-repeat: initial; background-size: initial;">of
<a href="http://yourneighbourhoodeconomist.blogspot.com/2014/03/another-new-policy-negative-interest.html" target="_blank">negative interest rates</a></span>.
Quantitative easing, which has already been used (<span style="background-attachment: initial; background-clip: initial; background-color: white; background-image: initial; background-origin: initial; background-position: initial; background-repeat: initial; background-size: initial;"><a href="http://yourneighbourhoodeconomist.blogspot.com/2014/02/the-true-cost-of-quantitative-easing.html" target="_blank">with limited success</a></span>) in
other countries, is the obvious choice to ramp up monetary policy. This option has been kept off the table due
to its potential to cause inflation which raises hackles among Germans. Since any measures by the central bank could
be deemed to be inflationary, Germany has used its influence to restrict the
ability of the central bank to act. <o:p></o:p></div>
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<br /></div>
<br />
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Yet, even the Germans will eventually have to see deflation
as the greater threat. But, at the same
time, it is tough to gauge when too little inflation (or too much deflation) will
be enough for a change of tack. Germany
has stuck to its guns since the outbreak of the Eurozone backed by an economy
which had until recently remained buoyant.
So Europe is likely to get quantitative easing sometime (soon) and
hopefully before the Eurozone is too far under water.<o:p></o:p></div>
</div>
Your Neighbourhood Economisthttp://www.blogger.com/profile/00096015895608337029noreply@blogger.com4tag:blogger.com,1999:blog-7314520695799326639.post-9906278203253112152014-08-08T12:58:00.002+01:002014-10-23T10:04:11.660+01:00Interest Rate Hike – not expecting the worst<div dir="ltr" style="text-align: left;" trbidi="on">
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<b>People tend to fear
the worst but higher interest rates may not mean interest rates that are
actually that high<o:p></o:p></b></div>
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<br /></div>
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<a href="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjn7YAHn2jo0x9U6wPldzIrFYKWtZHK-xhQv358kisekbBGEQV1LSaBVv1R-3tN7gHGj5WlQ2PZUBWguZ1RwVeVmFy2qSGfwF8l8KfMKG3R8NKd1PhlO4uhIUT2DY3VvQvO2HRlDps7az8/s1600/Lollipop.jpg" imageanchor="1" style="clear: right; float: right; margin-bottom: 1em; margin-left: 1em;"><img border="0" src="https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEjn7YAHn2jo0x9U6wPldzIrFYKWtZHK-xhQv358kisekbBGEQV1LSaBVv1R-3tN7gHGj5WlQ2PZUBWguZ1RwVeVmFy2qSGfwF8l8KfMKG3R8NKd1PhlO4uhIUT2DY3VvQvO2HRlDps7az8/s1600/Lollipop.jpg" height="240" width="320" /></a>Some things that people normally dread as not so bad in
reality – such may be the outcome with the upcoming hikes in interest
rates. Interest rates are set to levels
which relate to the strength of the underlying economy (as reflected in the
level of inflation). But the pressure to
push up interest rates is likely to be limited considering that the long-term
prospects for the economy are a bit grim.
On top of this, there is a growing range of policy tools that central
banks can use instead of interest rates to manage the economy. So when higher interest rates do come, like a
visit from the in-laws, it may not be as painful as had been expected.<o:p></o:p></div>
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<b><br /></b></div>
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<b>Inflation not so
scary<o:p></o:p></b></div>
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<br /></div>
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One of the main jobs of central banks is to set interest
rates so as to keep inflation low. This
is because inflation in itself is seen as having a negative influence as well
as being a sign that an economy might be overheating. Inflation comes about as firms increase
prices typically when their costs are rising or when demand is strong. Yet, neither is the case at the moment. Stagnating wages, which is the largest
expense for many firms, mean that higher costs are not likely to translate into
higher prices. Sluggish consumer spending is prompting some firms to cut prices
so as not to lose customers. <o:p></o:p></div>
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<br /></div>
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This is more than just the result of a sluggish economic
recovery as shown by <span style="background-attachment: initial; background-clip: initial; background-color: white; background-image: initial; background-origin: initial; background-position: initial; background-repeat: initial; background-size: initial;"><a href="http://yourneighbourhoodeconomist.blogspot.co.uk/2014/08/economic-recovery-downgraded.html" target="_blank">growing concerns about the long-term prospects for the economy</a></span>. Investment by businesses continues to remain
weak despite record low interest rates.
The expanding operations of companies would help to fuel gains in
productivity which further feed into higher wages. But, with firms not wanting to spend and
consumers not likely to get their hands on much extra cash, economic activity is
expected to remain subdued. Austerity measures
are a further damper on the economy as governments rush to sort out their finances.<o:p></o:p></div>
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<br /></div>
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The most glaring reason to not expect any trouble from inflation
is prices have barely budged despite everything that has happened over the past
decade. Inflation has remained subdued (mostly
5% or (much) lower) despite a surge in bank lending in the lead up to the
crisis or central banks printing billions in new cash in more recent
times. The only time inflation popped up
on the radar of policy makers during the depth of economic recession in 2011
due to high commodity prices (more on that later). <o:p></o:p></div>
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<b><br /></b></div>
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<b>This time is
different<o:p></o:p></b></div>
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<br /></div>
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Not only is inflation expected to remain low but influences
over monetary policy are also likely to act to keep interest rates low. For starters, the potential for a slower pace
of economic growth will make it difficult to justify central banks raising
interest rates. Calls for a hike to
interest rates at the Bank of England (which is likely to go first among the
larger central banks) may be premature considering low inflation and the stuttering
economic recovery. <o:p></o:p></div>
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<br /></div>
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Monetary policy is also developing so that central banks
have more options available to them to deal with inflation and other negative
aspects of a buoyant economy. The most
promising of these are macroprudential measures such as caps on mortgage
lending and other controls on banks.
These will enable central banks to <span style="background-attachment: initial; background-clip: initial; background-color: white; background-image: initial; background-origin: initial; background-position: initial; background-repeat: initial; background-size: initial;"><a href="http://yourneighbourhoodeconomist.blogspot.co.uk/2014/06/monetary-policy-surgery-needed.html" target="_blank">rein in overheating parts of the economy</a></span> without
having to increase interest rates.<o:p></o:p></div>
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<br /></div>
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There have also been changes to inflation itself. As mentioned above, any inflation recently has
tended to come from <span style="background-attachment: initial; background-clip: initial; background-color: white; background-image: initial; background-origin: initial; background-position: initial; background-repeat: initial; background-size: initial;"><a href="http://yourneighbourhoodeconomist.blogspot.co.uk/2013/10/inflation-then-and-now.html" target="_blank">outside sources such as commodity prices rising in global markets</a></span> in line with
growing demand in emerging markets.
Higher interest rates can only have an effect when a rise in prices is
due to factors within the economy itself.
So if inflation is due to external causes, central banks will likely
hold off increasing interest rates.<o:p></o:p></div>
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<br /></div>
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<b>Hope for the best</b></div>
<br />
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So, there is likely to be no rush to increase interest
rates, and when the inevitable does happen, interest rates are not actually
going to rise by that much. This is
welcome news for places where buoyant property prices have push <span style="background-attachment: initial; background-clip: initial; background-color: white; background-image: initial; background-origin: initial; background-position: initial; background-repeat: initial; background-size: initial;"><a href="http://yourneighbourhoodeconomist.blogspot.co.uk/2014/06/drowning-in-debt-need-help.html" target="_blank">new home owners to take on large mortgages</a></span> relative to their income.
Higher interest rates still have the potential to stall an economic recovery
that is still fragile. But if central
banks wait for the right timing, the eventual interest rate hikes may be like
going to the dentist expecting to have some teeth pulled but instead just
getting a clean and a lollipop. <o:p></o:p></div>
</div>
Your Neighbourhood Economisthttp://www.blogger.com/profile/00096015895608337029noreply@blogger.com0