Monthly Archives: August 2013

The debt dragon: A monster is rearing its ugly head in China and it is called debt. Whether government, corporate, or even household, it is all on the rise, shooting up from 130 per cent of economic output in 2008, to 200 per cent today.

What would you like to know about China’s debt addiction and its implications for the country and world economy? How did it get so big? Who are the culprits? How much worse could it get? The FT will tackle the Chinese credit habit in a three-part series starting on Tuesday. If you have questions on the subject, simply post them in the comment box below – along with your ft.com name or pseudonym – and I will ask a selection of them to the author of the series Simon Rabinovitch, China correspondent, in a podcast on Wednesday.

Robin Harding

For the last three years, there has been no breakfast for journalists on the opening day of Jackson Hole, while we write up a dramatic, market-moving speech by Ben Bernanke. It’s a more sedate start this year with a thoroughly wonkish paper by Stanford’s Robert Hall.

There is not much new in it on policy. It starts with a fairly straightforward rundown on why the economy got into such a mess when interest rates hit zero after the financial crisis, and it ends by agreeing with last year’s paper by Michael Woodford on what to do with monetary policy (QE doesn’t work, you need commitments about future policy, not just guidance).

The meat of Mr Hall’s paper is about why inflation did not fall much after the crisis despite high levels of unemployment. This has been a surprise during the last few years: unemployment has not driven down wages in a way that led to deflation. Read more >>

Claire Jones

Not Bernanke

Jackson Hole, the nearest thing on the central banking calendar to Davos, is upon us again, with some of the world’s most senior monetary officials set to head out to the upmarket Wyoming resort over the next few days.

Unlike the annual bash in the Swiss Alps, however, Jackson Hole, which kicks off on Thursday evening and closes on Saturday night, is usually a bit more than a talking shop. Of late, it has been the venue of choice for Fed chair Ben Bernanke to offer clues on where policy is heading.

But, while tapering looks like it is almost upon us, those hoping for more detail on the pace at which the US central bank will slow its asset purchases will not get it from Bernanke this weekend. Read more >>

Michael Steen

Not the ECB (Getty)

The Bundesbank has weighed in on what forward guidance means for the European Central Bank and if you want the short version it boils down to: we have not forgotten about inflation.

The ECB pledged in July to keep interest rates at or below current levels “for an extended period of time,” which, as we’ve noted before has caused some confusion as to what precisely it means.

According to Germany’s central bank, that promise does not actually mean that interest rates cannot rise or that they will necessarily remain low for a long time. As it writes in its latest monthly report:

The decisive point in correctly interpreting this statement is that it is conditional on the unchanged obligation of the Eurosystem [the ECB and the eurozone’s 17 national central banks] towards its mandate of maintaining price stability (which means, operationally, medium term inflation that is below, but close to 2 per cent)… It follows that the ECB’s governing council has not bound itself. If higher price pressures become apparent in future compared to those expected now, forward guidance in no way rules out a rise in interest rates.

 Read more >>

By James Politi in Washington

In his final press conference before heading to Martha’s Vineyard, an island off the coast of Massachusetts, for summer holidays, president Barack Obama was asked about his looming pick to succeed Ben Bernanke as Federal Reserve chairman.

We’ll try to parse his words, like a Fed statement.

On timing – Mr Obama repeated that he would make the decision in the autumn, which technically begins September 22. But some speculate that a choice could come sooner. Mr Obama might take the time over the holiday to ruminate and, perhaps inspired by the Atlantic ocean breeze, even make up his mind one way or the other.

On names – Mr Obama confirmed that Janet Yellen, the vice-chair, and Larry Summers, the former Treasury secretary and a top White House economic adviser in 2009 and 2010, are the leading candidates, mentioning them by name and calling them “terrific people”. Interestingly, he left out Don Kohn, a former Fed vice-chair who he had mentioned as a possibility in meetings with congressional Democrats last week. But he did say there were a “couple of other candidates” too. Read more >>

Sandra Pianalto, who has served as president of the Federal Reserve Bank of Cleveland, announced she will be retiring early next year after being in the job for a decade.

Ms Pianalto’s departure may not mean too much for monetary policy. She is known for being a centrist, predictable official on the Federal Open Market Committee, backing the chairman’s view without offering positions that are either too dovish or too hawkish. Read more >>

Not a milestone to rejoice in. Japan’s debt has tipped into the “quadrillion” zone for the first time. That is, as of the end of June, central government debt, looked like this: Y1,008,628,100,000,000, or $10.4tn.

It surely could not be a clearer message to Japanese Prime Minister Shinzo Abe that shilly-shallying over fiscal consolidation is no longer an option? Second-quarter economic output figures due on Monday are key to Abe’s decision about whether to raise consumption tax from 5 per cent to 10 per cent by 2015. Back in June in a speech in London, he pinned any decision to raise the tax – one he must make by October – on the strength of the economy in the second quarter. Read more >>

John Aglionby

The Bank of England has promised to keep interest rates at record lows until the unemployment rate falls to 7 per cent, a radical change of monetary policy in the world’s sixth largest economy.

Mark Carney, the BoE’s new governor, unveiled the policy on Wednesday, alongside forecasts that show the central bank does not expect the unemployment rate to reach that level until at least mid-2016.

The policy, which is similar to the one adopted by the US Federal Reserve, is aimed at reassuring markets and the public that monetary policy will not tighten any time soon.

But the Bank of England said it would reconsider if inflation was set to be 2.5 per cent or higher in the medium-term, if inflation expectations were becoming out of control, or if the policy was threatening financial stability

“The message is that the MPC is going to maintain the exceptional monetary stimulus until unemployment reaches 7 per cent and then we will reconsider,” Mr Carney told his first press conference since he took on the top job last month. “We will do this while maintaining price and financial stability.”

There was a muted response from investors. The FTSE 100 fell 0.8 per cent, yields on 10-year government bonds climbed 3 basis points and sterling rose 0.5 per cent against the dollar.

Mr Carney said the economy was recovering, but remained far too weak. “This remains the slowest recovery in output on record,” he said. “We’re not at escape velocity right now.”
He stressed the 7 per cent unemployment rate was not a target, but a “way-station” on the path to full recovery.

By Sarah O’Connor, John Aglionby and Catherine Contiguglia. All times are London time

 

Claire Jones

(Getty)

1. Wednesday’s inflation report press conference has been billed as a massive day for the MPC, in particular the new governor Mark Carney. Why?

The Bank of England is set to unveil a framework for what is known in central bank parlance as forward guidance. That involves telling markets -and the public – that central bank cash will remain ultra-cheap until the economy returns to rude health.

It would be one of the most substantial changes to the UK’s monetary policy framework since the rate-setting Monetary Policy Committee became independent in 1997.

It is also Carney’s big idea to lift the UK economy out of the doldrums and into what he has termed “escape velocity”. Others interpret this as a self-sustaining recovery.

However, while Carney is a fan of guidance, the rest of the MPC might take some convincing. Four of its current members, including deputy governor Charlie Bean and chief economist Spencer Dale, have spoken out against forward guidance in the past. Read more >>

By James Politi in Washington

Richard Fisher, president of the Federal Reserve Bank of Dallas, is about as outspoken as it gets when it comes to officials at the US central bank. And in Portland, Oregon on Monday — as he spoke to a conference of state retirement administrators — he waded into the heated battle to succeed Ben Bernanke as the next Fed chairman.

His main message seemed to be that the Fed did not need a “prima donna” at its helm – which naturally led to speculation about whether he was referring to Larry Summers, the former treasury secretary, or Janet Yellen, the current vice-chair, who are the two leading candidates for the post. Read more >>