Monetary policy

Roger Altman of Evercore partners is a friend of mine, a distinguished public servant and a respected financial expert. But his column “Blame bond markets, not politicians, for austerity” is, in my view, gravely mistaken. Read more

I wrote a column on November 24 2011 entitled “Why cutting fiscal deficits is an assault on profits”. My point was summarised as follows: “If the government wishes to cut its deficits, other sectors must save less. The questions are ‘which ones’ and ‘how’. What the government has not admitted is that the only actors able to save less now are corporations. The government’s – not surprisingly, unstated – policy is to demolish corporate profits.”

This column was based on data for the sectoral financial balances in the UK and US. In this comment, I wish to elaborate on this theme, in three ways: first, I would like to show the charts from which my comments were drawn; second, I wish to describe the argument of a note by David Bowers of London’s Absolute Strategy Research (The Fiscal Risks to Corporate Free Cash Flow, November 17 2011), who has elaborated interestingly on this theme; and, finally, I want to consider the broader relevance of this way of thinking about macroeconomic adjustment. Read more

Iceland was the first country devastated by the financial crisis. Lehman Brothers failed on September 15 2008. By October 9, its three big banks – Glitnir, Landesbanki and Kaupthing – had collapsed. The UK government seized Landesbanki UK under anti-terror laws, while Gordon Brown, the prime minister, threatened to seize Icelandic assets in the UK. On October 24, Iceland agreed a deal with the International Monetary Fund.

On October 27 2011, I attended a conference jointly organised by the IMF and the government of Iceland to celebrate Iceland’s graduation from the programme and evaluate the outcome of the rescue. I also moderated the final panel.

The programme remains controversial. Jón Daníelsson of the London School of Economics presented a critique during the conference. Others presented critiques from outside.

What happened to Iceland is clear: its banks ran amuck. Read more

This is Martin Wolf’s response* to Andrew G Haldane’s “Control rights (and wrongs)” Wincott Annual Memorial Lecture, on October 24, 2011

In this lecture, Andy Haldane, executive director for financial stability at the Bank of England, provides a compelling account of the development of western – above all British banking – over the past two centuries. He demonstrates the consequences of a progressive divorce between who controls the banks – shareholders and managers – and who bears most of the risks – society at large and, in particular, taxpayers.

Mr Haldane shows that each step along this road to ruin seemed reasonable, even inescapable. Yet the journey has ended up with over-leveraged behemoths that are too big to fail and, increasingly, too big to save.

Between one and a half and two centuries ago, it was common for equity to account for half of a bank’s funding and liquid securities to account for as much as 30 per cent of its assets. Financial sector assets accounted for less than 50 per cent of UK gross domestic product and the largest banks had assets of less than 5 per cent of GDP. Read more

The conservative economic counter-revolution associated with the names of Ronald Reagan and Margaret Thatcher began some three decades ago. The Great Recession almost certainly marks its end. What follows will be something different, though how different it will is still unclear. This is a good opportunity to assess the broad economic consequences of that revolution.

For the sake of simplicity, I focus on gross domestic product per head in the six biggest high-income economies: the US; Japan; Germany; the UK; France; and Italy. (I also use the Conference Board database. These data are in purchasing power parity (Elteto-Koves-Szulc (EKS) method).)

There is much more to performance than GDP per head. These data ignore the distribution of income, which is of crucial importance, especially for the US, where a very large proportion of additional income seems to have accrued to the wealthiest. The data also ignore the underlying causes of changes in GDP per head: changes in output per hour, in hours per worker and in employment. Even so, they are revealing.

The single most important point from the chart on relative GDP per head is that the US remains where it has been for over a century: the most productive large economy in the world. At its peak, in 1991, Japan’s GDP per head reached 89 per cent of US levels. It then fell substantially in the 1990s. United Germany, France and Italy also experienced substantial relative declines in GDP per head over this period. The UK was the only one of these five countries to have achieved rising GDP per head, relative to the US, since 1990. This surely suggests that reforms led by American and British policymakers did bear some fruit.

The chart on growth of GDP per head elaborates this picture somewhat. The UK and US had the highest trend growth of GDP per head between 1980 and 2009. (All-German data are unavailable for the entire period.) But there are other interesting events: first, there is a progressive deceleration in trend growth: only Japan achieved faster trend growth in GDP per head between 2000-07 (that is, before the recent deep recession) than it did in the 1990s; second, the US growth deceleration in the most recent periods is marked, with growth in GDP per head only at the same rate as Japan between 2000 and 2007 – so much for the magic of the Bush-era tax cuts – and also between 2000 and 2009; third, GDP per head grew at less than 1 per cent a year in Germany, France and Italy in the most recent decade.

At first glance, then, the conservative revolution seems to have achieved some improvements in the previously lagging US and UK economies. But the magic potion started to lose effectiveness in the 2000s, particularly in the US.

The more interesting question, however, is how far this improved performance of the US and UK will turn out to have been a blip. There are two reasons for believing this. Read more

People with a free-market orientation believe that the economy has a strong tendency towards equilibrium. Over the long term money is “neutral”: a rise in the money supply merely raises the price level. In the short term, however, monetary policy may have a big impact on the economy. A big question, however, is over how to measure the impact of monetary policy in an environment such as the present one, when short-term interest rates are close to zero and the credit system is damaged.

The difficulty arises because of the huge divergence between what is happening to the monetary base (the monetary liabilities of the government, including the central bank) and what is happening to broader measures of money (principally the liabilities of the banking system). The former has exploded. But the growth rate of the latter is extremely low. (Look at the chart that accompanied my column, “Why it is right for central banks to keep printing”)

People worried that governments are “printing money” point to the balance sheets of central banks with horror and insist this is bound to be inflationary. Inside the eurozone, Germans are particularly concerned about the willingness of the European Central Bank to buy the debt of governments. Yet the growth of broad money (M3) in the eurozone over the past twelve months has been close to zero. That would suggest there is no inflationary pressure whatsoever.

So which measure is relevant? My responses would be as follows: Read more