Showing posts from tagged with: Mark Carney

Global money round-up in mid-2016

Posted by Tim Congdon in News Archive | 0 comments

The victory for the Leave campaign in the UK’s referendum on EU membership has dominated financial news since 23rd June. It is of course a major event, not least because numerous forecasts of a mini-recession in the UK are now to be tested. The evidence so far is mixed, with the latest survey from the Confederation of British Industry (published a few days before 23rd June) reporting a rise in the balance of companies planning to expand output in the next three months. Elsewhere the main features are, first, in the developed countries continued growth of broad money at the almost ideal annual rate of 4%, and, second, in China and India signs of a slowdown in broad money growth. The slowdown in both China and India has come about suddenly, and may soon disappear from the data and not prove  meaningful.  On  the  other  hand,  the  slowdown  could  last  a  few months, perhaps even more. Once a money slowdown/acceleration persists for six months or longer, it starts to matter to the cyclical prospect. My overall assessment is – despite the Brexit shenanigans – the global monetary background remains consistent with steady growth in world demand and output in late 2016 and into 2017. Far too much fuss is being made about Brexit. The UK’s share of world output (when output is measured on a so-called “purchasing power parity” basis) is modest, less than 2½ per cent.   The credit downgrades faced by British banks have created possible funding strain for them, recalling the crisis of late 2008. The problem needs to be countered by the provision of long-term refinancing facilities from the Bank of England, just as Draghi handled a similar challenge in the Eurozone in December 2011  

The Leave campaign has been about the recovery of British control over British business etc

Posted by Alec Tritton in News Archive | 0 comments

Brexit-lite and Brexit proper

Post-Brexit discussion suffers from a serious vacuum. Although the British people have voted by a narrow margin to leave the European Union, the next prime minister has not been appointed, and no one knows exactly how he/she and his/her team will organize the negotiations. Two main options (both with many potential variants) are emerging,
  • Brexit-lite (“the Norwegian/Swiss option, plus or minus”. The government gives priority to maintaining access to the EU’s Single Market, although seeking  (like Norway and Switzerland) to restore parliamentary sovereignty and judiicial supremacy (i.e., that the highest court in the UK is its own Supreme Court, not the European Court of Justice in Luxembourg). Control over new regulations would be with the UK Parliament, but EU regulation would have to be respected in much of the economy and not just on exports to the EU. The UK would pay some money (“danegeld”) to the EU. Given the politics of the situation, the UK would want significant concessions on “freedom of movement”, so that it did indeed control its borders, but something like “freedom of movement for workers only” night be devised.
  • Brexit proper. The government says that access to the Single Market is not essential, as the UK can trade satisfactorily with the EU under World Trade Organization rules. It says this, even if UK exports would be subject to the “common external tariff”. Of course the UK restores parliamentary sovereignty and judicial supremacy. It also oversees all new business regulation, although exports to the EU must anyhow comply with EU regulation. The UK pays no money to the EU and recovers full control of its borders.
It would over-simplify matters to say that Brexit-lite is the preferred option for the Eurosceptic Tories, while Brexit proper is the approach favoured by UKIP. But an over-simplification of that sort would not be outright misleading. My surmise is that the prime minister will be Boris Johnson and that the outcome will be Brexit-lite. If the prime minister is Theresa May, the outcome will be Brexit-extremely-lite. UKIP will protest that the British people have again been betrayed and deceived, but its vote share in the 2020 general election is very difficult to conjecture. The size of the danegeld will be a sensitive issue. (My further surmise is that, with the EU’s economic importance [and hence its share of UK exports] declining Brexit-lite may become Brexit proper in due course, perhaps after another decade or two. But who knows? Questions are being raised about the EU’s own internal cohesion.)  

Is UK monetary policy on the right lines? 1 3/4.

Posted by Tim Congdon in News Archive | 0 comments

The following note is work-in-progress. It is part of an attempt to bring to an end the great mass of confusions that have cluttered discussion of ‘quantitative easing’ in the UK’s monetary policy debate and indeed the monetary policy debates of many nations, in the last few years. Work on the note will resume next week…and perhaps in the following weeks.  

Will the Draghi bazooka boost Eurozone M3 growth?

Posted by Tim Congdon in Article Archive | 0 comments

Mario Draghi became president of the European Central Bank on 1st November, 2011, at a critical moment for the euro. Banks – particularly banks in the Club Med countries (i.e., Italy, Spain, Greece) – were having difficulty rolling over their inter-bank lines. As the lines matured with little prospect of renewal, the banks were being forced to sell liquid assets. As these included bonds issued by Club Med countries, the price of the bonds fell and their yield increased. A surge in Italian and Spanish government bond yields was taken to constitute “the  Eurozone  sovereign  debt  crisis”.  The  media  were  full  of  talk  of  “a bazooka” of some sort to bring the crisis to an end. In October last year such talk usually focussed on the expansion of the European Financial Stability Facility,  a  back-up  fund with  resources  provided  by all  Eurozone  member states and able to extend credit to particularly hard-pressed governments. A widely-held view was that the EFSF might need to exceed 900b. euros, or even 2,500b. euros, if it were to have the fire-power to meet the crisis. In the event, negotiations for the EFSF have not got far enough, while its credibility in financial markets has been undermined by the credit rating agencies’ downgrading of several member states. But Draghi has found a big, powerful bazooka and aimed it with precision. Between 4th November 2011 and 20th January 2012 the ECB’s lending to banks has jumped from 580.0b. euros to 831.7b. euros, or by over 43%. The new lending has taken the form mostly of three-year facilities at 1%, which – on the face of it – are extraordinarily privileged loan arrangements for the banks. Further large expansion of such lending  is  to  be  envisaged.  The  banks  have  stopped  selling  government bonds, the yields on Italian and Spanish bonds have fallen, and the sovereign debt crisis is over, at least for the time being. This weekly e-mail analyses the effect of the Draghi bazooka on Eurozone M3 growth, because of the importance of money to macroeconomic outcomes more generally.  

Global money round-up at the start of 2012

Posted by Tim Congdon in News Archive | 0 comments

This weekly e-mail – which follows the same lines as that sent out on 24th January 2011 – reviews money growth trends in the leading “advanced countries”   (i.e.,   those   that   belong   to   the   Organization   of   Economic Cooperation and Development)  in order  to draw  conclusions  about  2012’s macroeconomic prospect. The analysis a year ago was cautious to the point of being pessimistic. It argued that banks would continue to restrict bank balance sheet growth, in response to regulatory pressure from – for example – the Basle III rules, and the resulting very low broad money growth would constrain demand and output. That prognosis has been reasonably accurate. The current exercise is more sanguine. Sure enough, the regulatory attack on the banks is still very much in effect. However, money growth appears to be reviving in the USA despite that attack, while the inflation outlook is much better than in 2011. Moreover, everywhere in the advanced countries short- term interest rates are very low or even at zero. The verdict for this year might be “relaxed to the point of being optimistic”. The  main worry remains  the  dysfunctional  character  of  the  strange  multi- government monetary union that is the Eurozone. In 2011 the large and widening divergences between Eurozone governments’ bond yields partly reflected banks’ difficulties in borrowing from the international inter-bank market and hence their inability to retain all their assets (i.e., including the supposedly very safe government bonds). In his first major policy decision Mario Draghi, the ECB’s third president, dealt with this problem by extending cheap three-year loans to Eurozone banks. When push comes to shove, even the ECB realized that action had to be taken to mitigate the recession risks that arose from the banking system’s problems.  

Is the Independent Banking Commission on top of the facts?

Posted by Tim Congdon in News Archive | 0 comments

Numerous commentators have been persuaded by what might be called the “consensus narrative” and the “conventional wisdom” about the Great Financial Crisis which began in 2007. (The GFC continues, although – like an old soldier – it may be fading away.) According to this “narrative” and “wisdom”, the banking system in 2007 and 2008 was at risk of not being able to repay depositors with cash. It was therefore “bust”. So it caused the GFC, and  needs to be both comprehensively repaired and more heavily regulated. The  repair  is  to  involve  banks  holding  more  capital,  cash  and  liquidity  – relative  to  balance  sheet  totals   –  than  before.  The  advocates  of  the conventional wisdom also assert that banks benefit from an alleged “implicit government guarantee” on their deposits. To compensate for the benefits supposedly derived from the guarantee, the banks are deemed liable for extra taxes and levies. The consensus narrative and conventional wisdom have been particularly influential in the UK. Some voices of dissent have been heard. One of their key points has been that – even if the consensus narrative and conventional wisdom were correct – the UK has enjoyed considerable advantages from the location of wholesale financial activities in the City of London, and onerous taxes  and  regulations  could  cause  these  activities  to  leave  the  UK.  In  its Interim Report the Independent Banking Commission pooh-poohs the dissenters’ claims. It says that the various reforms it recommends “would affect a relatively small proportion of the international financial services industry  based  in  the  UK”  and,  anyhow,  these  services  should  value  the greater macroeconomic stability implied by a well-capitalized banking system. The purpose of this note is to show that – whether the Independent Banking Commission is right or wrong in its contentions – a remarkably large flight of risk capital from UK international financial services has occurred in recent months.  

To QE or not to QE: an analysis of the UK economy

Posted by Tim Congdon in News Archive | 0 comments

To QE or not to QE, that is the question. The focus in this note is on the UK economy.  In  contrast  with  the  Fed  in  the  USA,  the  Bank  of  England  has decided – at least for the moment – that another round of asset purchases is unnecessary. The underlying assumption of the analysis here is that the equilibrium  levels  of  national  income  and  wealth  in  nominal  terms  are  a function of the quantity of money (broadly defined). A key issue in macroeconomic prognosis is therefore the likely behaviour of the quantity of money at current interest rates, levels of bank capital, etc. The main conclusions are that

  1. the M4 money aggregate will grow only slowly, if at all, in the next three to six months, and
  2. ii. macroeconomic conditions are likely to be satisfactory, with perhaps trend growth, because at current interest rates interest-bearing deposits are an unattractive asset to hold and agents want to hold less money relative to their incomes and wealth.
To  say that  macroeconomic  conditions  are  likely to  be  satisfactory,  “with perhaps  trend  growth”,  may not  sound  like  a  ringing  endorsement  of  the current policy stance. Well, it is not meant to be an endorsement. Output is heavily beneath its trend level, perhaps by 3% - 4%, and wage inflation – which has fallen in recent quarters – is negligible. In current circumstances a bias in monetary policy-making towards ease, and the conscious promotion of above- trend growth, would be reasonable. That is why moderate QE – intended to ensure that M4 growth is positive at about ½% a month – would be better than policy inactivity. Of course, inflation will be a disappointing in 2011, as the continuing effects of the pound’s late 2008 devaluation and the VAT increase work their way through the economy. Anyhow UK macroeconomic outcomes in 2012 and 2013 should be good or possibly very good.  

Inflation vs. deflation: some basic principles

Posted by Tim Congdon in News Archive | 0 comments

Since  the  Great  Financial  Crisis  began  in  mid-2007  several  pundits  have warned about the supposed inflationary threat from “printing money”. By “the printing of money”, they understand the expansion of the central bank balance sheet arising from so-called “quantitative easing”. At the most extreme, the pundits appear to believe that parallels can be drawn between quantitative easing and such episodes as the Weimar hyperinflation of 1922 and 1923. In the UK the most prominent of the alarmist pundits is Liam Halligan in his Sunday Telegraph column, but similar sentiments are found in many places. They appear to be even more common in the USA. Much of this commentary arises from a plausible, but mistaken form of monetary conservatism, which I will call “base-ism” here. Base-ism is false. The truth is that inflation occurs when the quantity of money – meaning a broadly-defined  money  measure  –  expands  significantly  faster  than  the quantity of goods and services. The naive conservative pundits are subject to (at least) two misapprehensions. The first is  to  believe  that  the  quality  of money – that is, its nearness to commodity form – is relevant to the value of money. The second is to confuse the monetary base (i.e., in modern circumstances, the legal-tender liabilities of the central bank) with the quantity of money (which is in fact dominated by the deposit liabilities of commercial banks). Associated with this second fallacy is a third one, that the critical variable  is  determining  macroeconomic  outcomes  is  bank  lending  to  the private sector (i.e., the assets side of banks’ balance sheet) rather than the quantity of money as usually defined (i.e., an aggregate dominated by banks’ deposit liabilities). I have already written extensively about this fallacy – the fallacy of creditism – which has been particularly influential in the current cycle. Of course, the apparently theoretical discussion here is fundamental to the “inflation vs. deflation debate” and crucial to investment decisions.  

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