Is the eurozone beginning to wake up to reality?
Mark Sadowski sent me some interesting links from the WSJ:
Speaking to journalists late Wednesday in Frankfurt, Deutsche Bank chief economist David Folkerts-Landau said that at some point the ECB will likely have to revert to “genuine QE,” amid very weak inflation and stagnant economic activity.
Pressure on the ECB will intensify if gross domestic product growth fails to accelerate above 1% and toward 2%, he said, and if annual inflation remains stuck in the 0.5% to 1% range. Annual consumer price growth was 0.7% in the euro zone in October, and 0.9% in November.
Euro-zone GDP grew 0.4%, at an annualized rate, during the third quarter. The ECB expects GDP to increase 1.1% in 2014 and 1.5% in 2015.
Mr. Folkerts-Landau said he expects growth in the euro zone to be low “pretty much as far as the eye can see,” given the need of debt-holders to deleverage and with the bank-lending channel still broken.
If the Germans are recognizing that eurozone NGDP growth is too slow, that’s a very positive sign. On the other hand it’s frustrating to see people continue to get causality backwards. I wish that last paragraph had read:
Mr. Folkerts-Landau said he expects to see debt-holders continue to deleverage and the bank-lending channel continue to be broken, as slow growth caused by tight money continues to put pressure on borrowers.
Here’s another hopeful link:
The International Monetary Fund wants the European Central Bank to get tough on (low) inflation, and the first thing it could do is to start making European banks pay to store their excess cash with the central bank.
“Nowadays inflation is below 1%. This is not satisfactory,” José Viñals, financial counselor and director for the international organization, said in an interview Wednesday with The Wall Street Journal during a visit to Frankfurt to promote a new book on financial integration in Europe.
“The ECB will have to continue doing as much as it can in order to support price stability,” he added, echoing comments from his boss IMF Managing DirectorChristine Lagarde on Tuesday.
Amid weak economic growth, high unemployment and inflation in the euro zone well below the ECB’s mandate of just under 2%, the ECB has assured the monetary bloc that it has all the tools necessary to further stimulate the economy if needed.
These include setting a negative rate on deposits from commercial banks, large scale asset purchases known as quantitative easing and another long-term bank loan tied to lending in the real economy. But so far the ECB has been reluctant to act on any of these measures.
That last sentence pretty much sums up the past 5 years for the entire developed world.
PS. I may have been the first to publish the negative IOR idea, but am not certain.
Update: I like this comment from Ryan Avent:
The most straightforward story for a place like America is that various factors, from inequality to foreign reserve accumulation to demand for safe assets, have depressed nominal interest rates in America. And too many officials have interpreted low interest rates as reflecting sufficiently stimulative”””ultra-loose” is the common phrasing”””monetary policy. But you can’t judge a monetary policy by nominal interest rates; you can’t, you can’t, you can’t. So while it’s interesting to talk about the potential causes of secular stagnation, such talk shouldn’t be driving policy in places not called Germany.
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13. December 2013 at 09:12
Mr. Folkerts-Landau said he expects growth in the euro zone to be low “pretty much as far as the eye can see,” given the need of debt-holders to deleverage and with the bank-lending channel still broken.
vs.
Mr. Folkerts-Landau said he expects to see debt-holders continue to deleverage and the bank-lending channel continue to be broken, as slow growth caused by tight money continues to put pressure on borrowers.
Looking back, knowing now that earlier relief being screamed for by economists here, was not going to come…
Isn’t the lesson that Economists should have been screaming at the souther euro states to BEND?
13. December 2013 at 09:22
If you have negative IOR, you better start printing physical currency or have currency controls in place: it’s wealth confiscation, pure and simple. A genteel slow boiling of the Cypriot.
And to quote Tropic Thunder, the IMF appears to be going full retard with imputed 71% US tax rates alongside this negative IOR. Page 36.
http://www.imf.org/external/pubs/ft/fm/2013/02/pdf/fm1302.pdf
I still would like to know whether negative IOR constitutes “takings” under the 5th amendment: you can pay interest voluntarily, but you may not take wealth involuntarily. Would negative IOR be private property taken for public use, without just compensation?
Anyway, just what are the problems that require such drastic wealth- and income- confiscation solutions?
And, it’s ironic that US headline CPI is only one-tenth of one percent higher than Europe. Is this also unacceptable to the IMF?
13. December 2013 at 10:46
You should print your graph of NGDP growth in the US vs EU and nail them to the door of whichever building the ECB’s operates from, along with some church in Wittemberg.
13. December 2013 at 11:39
Prof. Sumner,
You still haven’t said anything about this……
Lars Christensen: “There is no bubble in the US stock market”
http://marketmonetarist.com/2013/12/10/there-is-no-bubble-in-the-us-stock-market
“The model is quite simple. I used only three explanatory variables – A corporate Aaa-rate long-term bond yield to capture funding costs and/or an alternative investment to stocks. I used the nominal Personal Consumption Expenditure to capture demand in the US economy. It is also a proxy for earnings growth and finally I used the ISM New Orders index as a proxy for growth expectations. All variables have the expected signs and are statistically significant.
Yes, it is a simple model, but it seems to work quite well in terms of fitting the actual level on the S&P500 over the years.
If anything stocks are still cheap (and monetary policy too tight)”
13. December 2013 at 12:25
Ssumner,
Regarding the reverse causality: “Mr. Folkerts-Landau said he expects to see debt-holders continue to deleverage and the bank-lending channel continue to be broken, as slow growth caused by tight money continues to put pressure on borrowers.”
Certainly slow growth today puts pressure on borrowers, but at the outset of 2007 high leverage put pressure on borrowers (and lenders when the first waves of mortgage defaults arrived). Household debt servicing as % of income peaked after ~33% growth from 1995 lvls. So my question, isn’t it the case that folks were unsustainably over-extended in 2007? And ditto with financial institutions?
I ask that due to a misunderstanding of the running commentary of the causes of the crisis. In other words, I find it quite agreeable to state that a problem in the economy (excess leverage) was turned into a crisis as a result of bad monetary policy. Sometimes I feel like I understand the monetarist argument follow that tight money instigated the problem, rather than exacerbating the problem; such a position would be difficult for me to understand. I mean, I think tight money could cause A problem, but I don’t see how it caused THE problem of ’07 ish
In conclusion, I am of the belief that the current state of deleveraging has overcompensated past excess borrowing due to too-tight monetary policy that led to slower growth (indeed crisis).
Btw: how do you prefer to be addressed?? Scott, ssumner, Prof, … ?? I’ve seen it all over the place, but I’d like to get it right. After-all, perhaps that’s the only thing I’ll get right when discussing these affairs 🙂
13. December 2013 at 12:42
Morgan, No, easier money is the easy way. And the right way.
jnarr, The easy way is to eliminate IOR. Then the FDIC fees make the interest rate on reserves effectively negative.
Thanks Bob.
TravisV, I agree no bubble. Maybe it’s a brain freeze on my part, but isn’t the increase on stock prices on that graph too small, even with a log scale?
Dustin, I agree they were overextended in 2007, and that monetary policy was not to blame for that problem. Here I’m talking about the current deleveraging, which I think is caused by tight money. I presume the deleveraging necessary to address 2007 problems was completed long ago.
Dustin, “Scott” is fine. Some of my students email me “Yo Prof. I missed class yesterday. Anything important?” So I guess “Yo prof” is also now considered acceptable.
13. December 2013 at 13:08
Jknarr,
I don’t follow your theme… The discussion about negative IOR is really IOER, banks can voluntarily draw down excess reserves. I’m not aware of any argument for negative rates for required reserves.
13. December 2013 at 13:08
Inequality causes low interest now too? Apparently almost no one has heard of the Fisher/Friedman concept of slowly-evolving inflation expectations having something to do with nominal interest rates. Good finish though.
13. December 2013 at 13:14
Dustin:
http://www.ft.com/cms/s/0/b1d409d0-5399-11e3-b425-00144feabdc0.html#ixzz2nOLVvYgu
(US banks warn Fed interest cut could force them to charge depositors)
13. December 2013 at 14:09
Scott, did you see this?
http://www.eurointelligence.com/news-details/article/imf-admits-it-underestimated-the-fiscal-multiplier.html
13. December 2013 at 17:25
“On the other hand it’s frustrating to see people continue to get causality backwards.”
Speaking of getting causality backwards, Sumner mistakenly believes that inflation drives output, rather than output driving inflation in a price inflation targeting regime.
Sigh…
13. December 2013 at 17:30
“That last sentence pretty much sums up the past 5 years for the entire developed world.”
Since inflation actually hinders viable long term economic progress, there seems, to the inflationist, insufficient inflation.
Pick a number for NGDP that is higher than the current rate, and the escape clause “They’re not inflating as much as I want” can be satisfied, and then any alleged lack of real growth can be blamed on insufficient inflation.
13. December 2013 at 18:00
Curtis the currency crisis advocate approves of Sumner’s message.
Broad money growth in nominal and real terms tends to rise sharply in the two years leading up to a currency crisis, peaking around 18 months before a crisis hits.
Hopefully the ECB, if they’re smart, can bring about a currency crisis in 18 months time.
13. December 2013 at 20:05
Tight money is when banks are not lending easily.
Usually interest rates are a good measure of this, but not since 2008. Both a measure and decision variable, with the Fed setting its Fed rate.
What is needed is some other measure of tight money or loose money. And possibly other variables under the Fed control.
Scott, you seem to be arguing for NGDP as the variable to measure, with tight money being defined as too little NGDP.
Like now.
And then, any and all ways to increase bank lending should be the decision variables.
Charging interest on Excess Reserves held seems like a pretty
good direct way to push banks to make other decisions with that money, like lending more of it out to potentially productive entrepreneurs.
I’d prefer to measure the amount of bank lending directly and call money loose or tight based on the amount lent.
13. December 2013 at 21:05
Did you take a look at this Scott? http://www.amazon.com/The-Alchemists-Three-Central-Bankers-ebook/dp/B008EKOGKS
and here is a WSJ review: http://online.wsj.com/news/articles/SB10001424127887323309604578431063010980422
13. December 2013 at 21:06
Tom, you should take a look at what happened to the price level in 1932… and what the state of bank lending was at the time…
13. December 2013 at 21:07
*1933*
14. December 2013 at 03:03
So apparently Harvard students won the Fed Challenge this year…
14. December 2013 at 05:30
Scott,
Off topic, but I was wondering if you saw the Greenspan vs Taylor debate on the Kudlow show the other day and had any comment on it.
http://www.cnbc.com/id/101264422
14. December 2013 at 05:46
I should add that the topic of the debate is whether Greenspan is to blame for the housing bubble. I assume you’d side with Greenspan on this one.
14. December 2013 at 06:50
Aidan, Of course for Greece there is no monetary offset, so the multiplier may well be 1.7 at the local level.
Tom, I think it’s a mistake to confuse money and credit. Better to simply focus on the supply and demand for base money.
Saturos, I had the impression the book thought Trichet did a good job. Is that right?
Negation, Didn’t see that. Monetary policy certainly did not cause the housing bubble, although the Fed may have made some mistakes in the regulatory area. On the other hand Congress (both parties) would have been outraged if they had had tighter regulations on housing loans.
14. December 2013 at 07:54
Small correction:
… is wrong. Obviously you can, as people do it all the time, endlessly.
It ought to read, “you should not, should not, should not.”
This not mere pedantry. Telling people they can’t do something they are happily doing is telling them they are wrong — that never goes well, they turn you off right there and that is the end of it. Nothing changes.
Telling them they should not do something gets them to ask ‘why?’, then you get a chance to explain while they listen. Works much better in my experience.
14. December 2013 at 09:09
Jknarr,
I agree with your criticisms of negative IOR. Effectively it’s the government / central bank saying to the private sector, “Spend your money else we’ll confiscate some of it”.
It would be much simpler to give the private sector an amount of money such that the private sector is induced to spend (via the hot potato effect) at a rate that brings full employment.
14. December 2013 at 12:15
Yes, Ralph, but that would mean a weaker USD, and fewer of the oligarchical privileges that go with that.
So they find wealth confiscation the better option. Not for you and I, of course.
14. December 2013 at 12:30
Jknarr,
Thanks for the link: I read to be simply referring to reduction in IOR to something like 0>=IOR>25bp, not negative. In this case, no longer giving a bank something the bank never earned is hardly confiscation of wealth.
As to the negative rate in your original post, I suppose I still prefer the distinction between the required and excess varieties of reserves. Certainly a negative rate for required reserves would be a confiscation as you described, though I am not convinced as to the appropriateness of this term to describe negative rates for excess reserves.
14. December 2013 at 12:31
whoops ^ reverse signs for the above: 0 <= IOR < 25bp
14. December 2013 at 20:34
Scott, yes, it seems to be entirely the mainstream narrative.
15. December 2013 at 05:59
Saturos, How about this:
Sumner’s Law: As long as a central bank chief does what the VSPs suggest he should be doing, he will be praised for his work, no matter how disastrous the outcome.
Jim Glass. Fair point.