Blowing bubbles

The trials and tribulations of Central Bankers Central Bankers have been poor at generating growth and employment and in the past they were equally poor at containing inflation - the thing they do really well is creating financial bubbles  Winning the productivity race 21st November 2014 The Great Recession is a consequence of this deleverage: people, businesses, banks and governments have all been learning to live within their means and this has decimated aggregate demand.  This austerity has had three important impacts on the real world economy, it has driven up unemployment, it has caused a drop in real incomes and it has devastated investment.  The fall in employment and wages is terrible for those concerned, the scars will be deep but we know they can be healed.  But the really worry is the lost investment and the resulting decline in productivity --------------------------------------- Time Up for QE - October 30th 2014    10 things we now know about QE and a few things we know will happen next. --------------------------------------------------- Solving Secular Stagnation October 15th 2014 Central bankers have tried to resolve issues of stagnation with very loose monetary policy and Fiscal stimulus - neither have work. Time to try something new? ----------------------------------------- Janet Yellen - barking up the wrong tree (August 26th 2014) In the immediate aftermath of the credit crunch Central Banks applied the necessary liquidity into markets to save us from depression but they did not fix the problem of broken banks and sky high asset prices.  The follow-on policies of QE, negative real interest rates and bank reform (Dodd Frank and Basel 3) have had the combined effect of: • Leaving un-addressed the mountain of distressed debts – almost any business can service loans at today’s interest rates • Squeezing liquidity out of the market for investment capital – Banks sit tight on over-priced assets and have no slack (due capital adequacy rules) for new loans • Which in turn reduces investment in new technology driving up employment but suppressing wages The bath time habits of central bankers ----------------------------------------------------------------------------------------------------- Central Bankers - from heroes to zeros (7th August 2014) The Bank for International Settlements (BIS), the only institution to call the financial crisis in 2007, has weighed back into the macro economic debate in the last few days in its annual report.  The report sets out a significant criticism on the current crop of central bankers, in essence the BIS lays the blames Yellen and Co for the falling: growth, demand and employment.  The expansion of national balance sheets and negative real interest rates are now the problem not the solution. Central Bankers - from heroes to zeros

The morning after the night before   Posted 16th January 2014 The after effects of the “mother of all parties” are not uniformly felt.  The Eurozone has a humdinger whereas in the UK we have seen a bounce this year as enormous flows of foreign Direct Investment have landed on our shores (a kind of bubble).  These in-flows have given us the “pick-me-up” we needed, which then triggered some consumer demand, which in turn has triggered and up-tick in investment and business activity.  But the proponents of the secular stagnation believe, and they may well be right, that this is just a bubble, which will fade and die.   ‘Secular Stagnation’ and some useful remedies The world economy is off balance   Posted 18th November 2013 With interest rate equilibrium a thing of the past.  Many stagnant developed economies are pinched up against the lower bound of interest rates we need to find new options and interventions that can support negative real interest.  Quantitative Easing proved effective in the initial stages of recovery but more targeted support is now required.  Without interventions to easy credit and expand the money supply the world faces ‘Secular Stagnation’

Where have all the bubbles gone  Posted on 25th November 2013 Larry Summers re-coined the term secular stagnation to characterise the economic landscape and went on to float the idea that the West has grown on the back of asset bubbles for the last 20 years (Property, DotCom, Emerging markets, Sub-prime, commodities etc) and that any return to pre-2008 levels of growth will demand some new bubble to help us along.  Larry Summers suggests the level of real interest rates required to generate full employment might be, say, -2 or -3 per cent.  More practically bankers in both the Fed and the ECB are now contemplating negative interest rates on short term money they hold over-night as a way of stimulating demand.  So why have all the bubbles burst and can we expect another one anytime soon?

Sans Gaz  Posted on 4th December 2013 Without a stream of future bubbles the developed world may not be able to grow at a rate that improves the standard of living.  Human being are well adapted to bubble recognition  (it occurs when the capital gain an investor ‘realistically’ expects over time is much greater than the potential return on interest rates in that same time period) and once one person has spotted a bubble we all dive in! But the thing is are bubbles really a bad thing or are they the new normal? SOME LINKS ON BUBBLES The Economist - Not Fully Inflated 7th Dec 2013 The NYT - Krugman on Larry Summers