Monday, 29 December 2014

Let’s get fiscal

Their central banks are being forced to keep interest rates close to zero.

“We are experiencing not only an economic crisis but also a crisis in economics,” he writes. “Most economists failed to predict the current crisis and the economics profession itself has fallen into a state of complete disarray in its attempt to answer the question of what should be done.”

balance-sheet recession: This occurs when the private sector has borrowed heavily to invest in assets (particularly property); when asset prices decline, the nominal value of the debt remains. Cutting interest rates helps a bit (by reducing the cost of servicing the debt) but it does not persuade people to borrow more money, because they are still trying to repair their balance-sheets.

Private sectors in most countries in the West today are minimising debt or maximising savings in spite of zero interest rates, behaviour that is at total odds with traditional theory.

The policy of quantitative easing (QE), the creation of money to buy assets, succeeded in expanding the balance-sheets of central banks but did not push up bank lending or boost the amount of money circulating among companies and consumers.

There was a burst of stimulus in 2009 but, alarmed by the size of their deficits, governments started to cut back too quickly. They should have paid attention to the examples of Japan in 1997 (or America in 1937) when premature fiscal tightening derailed recoveries.

A side-effect of QE is that asset prices have risen sharply in value; that should have repaired corporate and personal balance-sheets but the private sector is still not borrowing. Why not? And he probably does not take the arguments for secular stagnation seriously enough: deteriorating demographics and sluggish productivity growth are important. 

No comments:

Post a Comment