Daily Archives: October 27, 2010

James Politi

Peter Orszag is certainly not worried about ruffling feathers in Washington. Last month, the former budget director under Barack Obama surprised the White House by taking a public stand in favour of a temporary extension of Bush-era tax cuts for wealthy Americans, which the administration opposes.

And today, Mr Orszag, now at the Council on Foreign Relations, offered a critical view of the Federal Reserve’s plans for a second round of quantitative easing in a blog post for the New York Times.

Mr Orszag’s view is that QE2 may “create more problems than it solves”, based on the notion that the effect of the Fed’s fresh round of monetary easing will be similar to “having the Treasury sell short-term T-bills and using the proceeds to buy back 10-year bonds”. 

Five times as many five pound notes will be dispensed by ATMs by Easter next year, according to Bank of England governor Mervyn King. That still won’t be many relative to ten- and twenty- pound notes: just 0.2 per cent of all bank notes dispensed are currently the five pound denomination.

Since 70 per cent of banknotes reach the public via cash machines, the absense of five pound notes from ATMs has constrained their circulation even though the Bank has 300 million of the notes ready. Opinion surveys show there is a particular demand for five pound notes. 

Rates have been held today by Poland’s central bank, but some additional liquidity will be drained from the system by the decision to increase the amount of capital banks have to keep with the central bank. The reserve ratio will be increased from 3 to 3.5 per cent, the bank said, via Google translate.

No further information was given as the press conference hasn’t happened yet.

Norway expects to hold its key rate at 2 per cent for several quarters, barring any shocks, the central bank said today. Reduced growth forecasts for the US and a world recovery “still shrouded in uncertainty” are dampening inflationary pressures. It’s becoming a familiar refrain among former rate-raisers: a moderate recovery domestically offset by continuing fears for trading partners.

Key rates are close to zero in many countries and the expected upward shift in interest rates has been deferred further ahead. Long-term interest rates are very low. The level of activity among Norway’s trading partners will probably be below normal for several years. This will contribute to holding down inflation abroad. 

Chris Giles

Charlie Bean, deputy governor of the Bank of England, has just given a speech, which explains the current dilemmas of monetary and fiscal policy rather better than any I have read recently.

It is difficult to do it justice on the Blackberry, but well worth a read if you want an honest account of the difficulties both of forecasting the recession and of understanding the current circumstances.

Most important is that Bean is completely free of ‘structural deficits disease’ – the affliction under which policy makers behave as though they know how fast the economy can recover before inflation emerges or know the size of the fiscal hole that needs to be filled.

Instead, Bean says: “While judging the margin of spare capacity is always a problem for policy makers, it is particularly difficult at the current juncture because a banking crisis accompanied by a deep recession is likely to lead to some impairment of the economy’s supply capacity. Moreover, different approaches presently suggest very different degrees of supply impairment”. Quite. 

Still fresh after his performance as the lone dissenting dove on the UK’s Monetary Policy Committee, Adam Posen has now used the expertise for which he is perhaps best known — Japan’s lost decade(s) — to argue in a speech that easy monetary policy doesn’t lead to asset bubbles. Not inevitably, anyway.

Posen’s targets in the speech are the world’s surplus countries, which he believes should embrace more accomodative monetary policy to stimulate domestic demand.

We’ll give you his conclusion first, and then work back through some the argument:

In particular, I want to argue that accommodative monetary policy does not cause asset price bubbles. This argument is based on the empirically supported premise that it is private capital flows and differences in productivity that determine current accounts (and asset prices) for the most part. Barring the self-destructive subjugation of all macroeconomic goals to a fixed exchange rate, the instruments available to central banks of short-term interest rates and bank reserves are of little lasting impact on current accounts …