Monday, 31 March 2014

The Chancellor's "full employment" ambition is not quite what it seems

"The UK’s Chancellor of the Exchequer, George Osborne, has announced that his priority is jobs. In his words (from his Twitter account):

"This is more than slightly confused."

Read on here. (Pieria)

The UK's Real Problem

The UK's current account deficit is a matter for some concern, as is its fiscal deficit, because both make it vulnerable to sudden reversal of capital flows. But these aren't its real problem....

More here (Forbes).

Sunday, 30 March 2014

Spain, the ECB and the power of talk

Over at Forbes, more on why the ECB won't do QE despite Spanish inflation having turned negative:
Spain is in a mess. Over a quarter of its adult workforce is unemployed, and according to CIB Natixis it has lost 25% of its production, even more than Greece. Spain’s inflation rate has been falling steadily and has now turned negative: the most recent retail sales figures show a fall of 0.2%. Various people anticipate ECB easing monetary policy because of the growing threat of deflation in Spain.
But this is to misunderstand the role of monetary policy in a currency union. The ECB sets monetary policy for the union as a single unit, not for its individual components. Deflation in Spain is a driver of ECB decisions only to the extent that it depresses Euro zone CPI. And I’m sorry if this sounds brutal, but Spanish unemployment is of no consequence, since the ECB does not have a mandate to target unemployment even at the Euro zone level, let alone in an individual country. The ECB can no more set policy to tackle deflation or unemployment in Spain than it can set policy to meet the desire of German savers for better returns. Its mandate is to maintain inflation close to 2% across the Euro zone economy AS A WHOLE.....
Read on here

Saturday, 29 March 2014

Rediscovering IS-LM

At Pieria, I attempt to show how Paul Krugman's favourite economic model can give important insights in an endogenous money framework:
"This post was sparked by recent conversations with people who have opposing views of how money creation works. Some people think that classical models such as IS-LM don't work with endogenous money theory, therefore the models need to be discarded: others think that there's nothing wrong with the model and the problem is endogenous money theory. Personally I think that simple models like IS-LM can be powerful tools to explain aspects of the working of a market economy, and it behooves us therefore to find ways of adapting them to work with an endogenous fiat money system.So this is my attempt..... "
Read on here.

Friday, 28 March 2014

Why the ECB won't do QE

Or anything else, for that matter. (But they might talk about it.)

With forecasts like these, who needs action?

H/t Frederick Ducrozet (@fwred on Twitter)

Sunday, 23 March 2014

Interest rates and deflation

Scott Sumner argues that when the monetary base is fixed, low interest rates are deflationary. I've emphasised the fixed monetary base because it is an important condition. If the monetary base is NOT fixed then the relationship between low interest rates and deflation is much less clear.

Logically, this makes sense. If the supply of base money is fixed, then falling interest rates indicate* rising demand for base money, increasing its value and therefore causing prices to fall. Aficionados of a classical gold standard will recognise this as "benign" deflation. Falling interest rates when the monetary base is fixed can be an indicator of healthy growth.

Unfortunately the period that Sumner chooses as his example of falling interest rates and a fixed monetary base was anything but healthy. It was August 2007 to May 2008, which was the height of the subprime crisis and encompassed the failure of Bear Sterns.

Strictly speaking, the monetary base was not "fixed" at this time - as this graph shows, it roughly tracked M1 with a lag:

However, it did not grow overall, hence Sumner's description of this as a period when the monetary base was fixed.

But this simply won't do. The variation in the monetary base during this period DOES matter, because of what it tells us about Fed policy at the time. The Fed was not holding the monetary base fixed and allowing the interest rate to fall, which is what Sumner implies. It was actively supporting the Fed Funds rate.

The Fed Funds rate is not simply a market interest rate. At the time, it was the primary monetary policy tool, though these days - because of the presence of excess reserves in the system - it has been superseded by the interest on reserves (IOR) rate. Pre-QE, the Fed targeted a particular Fed Funds rate by adjusting the quantity of the monetary base using open market operations. You can see clearly from the graph that at times the monetary base actually shrank, which would have been caused by the Fed draining reserves.

The Fed Funds rate fell throughout this period:

But without the Fed's intervention to drain reserves, the rate would have fallen even further.

Sumner seems to think that the Fed should not have supported the rate by draining reserves. On he contrary, he explicitly blames the Fed's failure to expand the monetary base at this time for the subsequent collapse of NGDP:
Between August 2007 and May 2008 there was no change in the monetary base, and yet interest rates fell sharply.  Not surprisingly NGDP growth slowed and we tipped into recession.
But the problem was inflation:

Expansionary monetary policy when inflation was already so far above target would have seemed like madness. Even since the crisis, it takes a brave central bank to hold its nerve and its expansionary policy when inflation is a long way above target, as the Bank of England has discovered.

Nor would NGDPLT targeting necessarily have made much difference to Fed policy. We now know, with the benefit of hindsight, that NGDP was going to fall off a cliff in September 2008. But at the time, NGDP didn't show much sign of such a dramatic collapse:

In short, if you look ONLY at monetary aggregates and inflation, it is hard to argue that the Fed's policy during this period was too tight. With hindsight we can see that the falling interest rate and lack of monetary base growth was warning of impending crisis: but at the time the main worry would have been inflation well above target. The remarkable thing is that the Fed allowed interest rates to fall as much as it did.

So falling interest rates at this time did indeed indicate deflation, but not the healthy kind. How do we distinguish between falling interest rates that indicate healthy growth (in a period where the size of the monetary base does not change significantly), and falling interest rates that indicate the start of a debt deflationary spiral? Or (assuming that the size of the monetary base is not fixed), how do we distinguish between a gentle downturn which will sort itself out in due course and the start of a disastrous NGDP collapse?

For me, the answer is to look at a wider range of indicators. Had the Fed in 2007-8 taken more account of conditions in the housing market and financial markets (and less notice of inflation), monetary policy might indeed have been much looser, and the appalling crash of NGDP might have been averted. Therefore I welcome the recent decision by the Bank of England and, now, the Fed to take into account a wide range of economic indicators when making monetary policy decisions. Those in favour of a strict rule-based approach to monetary policy based on something like an NGDPLT target will no doubt be disappointed: but as I said above, I don't think an NGDPLT target would not necessarily have resulted in a markedly different policy stance in the crucial early part of the financial crisis.

The truth is that the economy is a great deal more complex than one indicator can show, and making policy decisions on the basis of one indicator alone (or one type of indicator) can have seriously damaging effects.

Related reading:

The postbellum deflation and its lessons for today - Beckworth
A plea for (mild) deflation - Selgin
Deflation is not benign - Forbes
Making the desert of plenty bloom - Pieria

* Sumner says "falling interest rates boost demand for base money". I am unconvinced that falling interest rates necessarily cause increased demand for base money, so I have said "indicate", which acknowledges correlation but leaves the causal direction undefined.

Three dangerous economic ideas

My latest post at Forbes considers what happens when policy makers persist with policies whose underlying economic theory has been shown to be wrong*:
This post by Alex Marsh got me thinking. If economic ideas influence policy makers, what happens when the economic ideas turn out to be wrong?
This is not an idle question. Recently there have been three examples of economic ideas that have had huge impact on policy – and that have subsequently been shown to be false.
Read on here.

* Of course some people will argue that the three economic ideas I have identified are not wrong - it is the research debunking them that is wrong.

Friday, 21 March 2014

Mr Micawber's lessons for George

My latest post at Pieria looks at the Chancellor's budget and finds it long on tax-cutting promises, short on realistic revenue estimates. What does this mean for his hopes of achieving deficit-reduction happiness? And will something turn up?

Wednesday, 19 March 2014

Children are not a lifestyle choice

Chris Dillow complains that the Government's proposal to subsidise childcare for households with incomes up to £300,000 is "inegalitarian and economically illiterate". Much of his argument makes sense. His observation that subsidising childcare will benefit employers as much as parents is particularly important: childcare subsidies are in effect wage subsidies, and wage subsidies are known to depress wages. And his waspish remark that the Government would rather give "yummy mummies an extra bottle of Chardonnay" than fund early years education properly rings all too true. This looks very like the latest iteration of "Help to Buy Votes" - yet more pre-election bribery of middle-class couples. 

But I have to take issue with him on this (my emphasis):
Let's start from the fact that this subsidy must be paid for by other tax-payers. It's therefore not just a subsidy to parents, but a tax on singletons.
This is inegalitarian not just because it means that a single person on the minimum wage is subsidizing the lifestyle choice of couples on six-figure incomes.....
It seems Chris thinks it is unfair that single people on low incomes should pay to support the children of much richer people. I beg to differ.

Having children is often described as a "lifestyle choice", usually by people without children who object to supporting families with children. But this is poisonous quasi-egalitarian nonsense. People who choose not to have children rely on other people's children to support them in their old age. Whose taxes will pay for their pensions, benefits and healthcare if other people don't have children? Whose production will ensure that they have food on the table and money to spend from the returns on their investments?  

When people without children support families with children from their taxes - or directly through philanthropic giving - they are contributing to their own futures. They may not realise it, but they have as much interest in ensuring that those children are properly cared for and educated as the parents do.  

And I'm sorry, Chris, but describing children as a "lifestyle choice" is itself economically illiterate, at least at the macro level. At the individual level, having children is indeed a choice. But for society as a whole, children are essential. Without children, there can be no future growth. Just look at Japan. 

People have come to believe that working hard and saving will be sufficient to ensure a secure and prosperous old age. Children are a cost, so if we can't afford them we shouldn't have them. But if economic growth is absent in the future because the population is ageing and declining, people's faith in working hard and saving as the key to a secure future will turn out to be hollow. And our failure to invest adequately in the care and education of children may come back to haunt us. Investment in human capital is every bit as important for economic growth as investment in physical capital. Sharing the cost of caring for children and educating children is in the interests of people without children as much as those with children.

So it is not "inegalitarian" that a single person on a low wage should subsidise childcare for well-off couples. On the contrary, it is completely egalitarian - perhaps too egalitarian, to some minds, since it to some extent removes the financial responsibility for the care of children from the families into which they were born. Personally I welcome the principle of social contribution towards the care of children. It is a long overdue move towards recognising that care of children is as much a social responsibility as education of children. It doesn't go far enough - parents who choose to give up work to care for their children will not receive this benefit, which I think is wrong. But it is at least a move in the right direction. 

We can argue about whether a single person on the minimum wage should be taxed at all. Personally I think they should not. But if we agree that they should be taxed, it is reasonable that those taxes should be used to contribute towards the care of children, however well-off their parents. And if it is also considered reasonable that well-off couples should contribute more towards the care of children than single earners on low incomes, then tax away their childcare benefits. There is more than one way of using tax policy to achieve an equitable outcome. 

The entire developed world - actually, with the exception of the UK, which currently has something of a baby boom going on - is suffering a decline in fertility rates, which I think is largely to do with the rising opportunity cost of having children, particularly for educated women. If we want a prosperous economic future, we need to enable working people to have children if they wish, by reducing those opportunity costs: subsidising childcare goes some way towards addressing this problem. And we also need to invest generally in the care and education of children: I do not regard early years' education as an alternative to childcare subsidies, but a complement to them. 

But to achieve the political will to do this, we need to stop regarding children as a luxury of the well-off. Children are not a "lifestyle choice". They are our future. 

Wednesday, 12 March 2014

Corporate versus Co-operative: a boardroom battle

Nowadays, whenever there is a report of trouble at t'Co-Op, everyone assumes the problem is the bank (again). So it is perhaps not surprising that people are once again asking whether their money is safe, and people like the BBC's Paul Lewis (and me) are reminding them about the FSCS compensation scheme. Let me deal with this now. The FSCS compensation scheme insures 100% of all bank deposits up to a limit of £85,000 per person (not per account). That is more than enough to cover the vast majority of Co-Op Bank retail depositors. If anyone has more than that in Britannia, Smile and Co-Op Bank accounts combined, they know what to do.

But the current mess isn't about the Co-Op Bank. That is in no worse shape than it was last week, or last month, or even last year. This is about the governance of the Co-Op Group - the sprawling conglomerate that encompasses supermarkets, farms, pharmacies, funeral parlours and health care as well as financial services. Managing such a diverse empire would be a challenge for any CEO, and recent problems in the financial services division coupled with poor performance in the over-extended retail division have created quite a headache for the Co-Op's executive management. In a couple of weeks time, the Co-Op Group is expected to report the worst results in its 170-year history. The last thing it needs is a dysfunctional Board. But, it seems, that is exactly what it has.

Euan Sutherland's resignation came two days after details of his pay deal were leaked to the Observer, causing a storm about boardroom "fat cats" taking over the Co-Op. I admit I found it hard to see how the pay was justified, particularly the bonus and retention payment: we would normally expect discretionary payments like these to be a reward for good performance and a share in profitability, not an up-front payment to persuade a chief executive to stay on in a failing firm. Particularly damning was the revelation that John Lewis Partnership, a successful workers' cooperative, pays its CEO considerably less than the Co-Op was planning to pay Sutherland. This made the Co-Op chair's argument that Sutherland's pay was "at the mid-range of comparable organisations" look somewhat weak.

However, it was not only pay details that were leaked, and in some ways the other leaks were more damaging. Boardroom decisions such as the sale of the farms and possibly the pharmacies were reaching the press prior to formal announcement being made. The source of these leaks could only be the Board itself. Sutherland claimed on Facebook that there were individuals on the Board who were determined to undermine him. I don't know whether their intent was personal, but it does look very much as if someone was out to prevent change at the Co-Op and was prepared to use underhand methods to achieve their ends. If this is the case, then Sutherland's observation that the Co-Op was "ungovernable" is accurate. It is impossible for a CEO to do their job if their decisions are constantly being undermined by dirty tricks.

Sutherland says he had been thinking about resigning for quite some time. I can't say I blame him: he has had a bruising ten months. But the reasons are not personal.

The offer of resignation occurred after a difficult Board meeting in which far-reaching changes to the Board structure were agreed, subject to the approval of the membership. It appears that Lord Myners, the independent director who is conducting a review into governance of the Co-Op, is recommending a two-tier Board - a corporate-style board with executive and non-executive directors, and a secondary board containing "members and colleagues", which would hold the primary board to account on ethical and mutual principles. This second board would contain the present elected representatives of the Co-Op membership. It is this structure that Sutherland and Myners persuaded the present Board to adopt. And this decision too was immediately leaked to the press, thereby undermining the democratic process within the Co-Op itself. I think it was this leak, rather than the pay details, that finally confirmed Sutherland's decision. He resigned the following day.

As Sutherland explained to Robert Peston, his resignation was a judicious sacrifice:
His hope therefore is that by resigning and highlighting that the group is a long way from mended (it still needs to reassure the banks that it is reducing large debts of £1.5bn, it has promised the Bank of England to inject £260m into Co-op Bank), the change to management structure he believes necessary will now happen.
"My hope is that from the resignation will come healthy reform," he said.
What form that "reform" will take is the question. Myners' proposal for a two-tier board is unpopular with the Co-Op's regional boards and elected representatives. The co-operatives movement itself is not unaware of the need for change: there is a "grass-roots" movement to push back against Myners' recommendations with ideas of its own, some of which are eminently sensible and should be taken seriously. But there is a very long-established layer of the cooperative equivalent of "middle management" which has a vested interest in keeping things exactly as they are. The comments of an unidentified "source" reported in the Guardian are typical:
"What we have here is a clash of cultures between plc people and the Co-op people. Euan is a plc animal and he is used to responses on a timescale and of a type that the Co-op isn't used to. We have tried this in the past, to bring people in from outside at a senior level, and it has never worked. Because they have not grown through the culture they try to make the beast dance in a way that the beast doesn't want to dance."
I have heard similar comments from my contacts in the co-operative movement. There is a widespread view that the Co-Op is "different" and that a corporate-style governance model is not appropriate. Even though they are hardly a typical corporate governance model, Myners' proposals will be very hard to implement against such widespread opposition, and it may be that they will end up being substantially amended.

But Sutherland falling on his sword does not really change anything as far as governance reform goes. I fear that those who were intent on forcing Sutherland out in order to derail reform have misunderstood the situation. It is not the CEO's job to restructure the Board: that responsibility falls to the Chair. And the Co-Op Chair, Ursula Lidbetter, has made it clear that she too is in favour of reform:
"Euan's resignation must now act as a catalyst for the real and necessary change which the group must go through".
The question is whether a relatively inexperienced chair can push through reforms in the face of what appears to be determined opposition at Board level - and whether she has the authority to remove from the Board those whose behaviour has caused such chaos at the Co-Op. 

So far she has acted sensibly: she told ITV's Richard Edgar that she was investigating the source of the leaks and would "deal with it". She also said that she would not seek to replace Sutherland until the governance changes have been agreed: the CFO, Richard Pennycook - a sound pair of hands acquired from the supermarket Morrison's - will act as CEO for the present. This is a pragmatic decision. Sutherland's remarks amount to a warning to potential successors not to touch the Co-Op with a barge pole until reforms have been made. Recruiting a replacement at the moment would be well-nigh impossible.  

But despite a strong start from Lidbetter, I'm afraid I am not hopeful. Sutherland's observation that the Co-Op is run too much for the benefit of its activists and not enough for the benefit of its members and customers rings true to me. And if he is correct, then his resignation may give those who benefit from the current arrangement cause to celebrate - indeed it seems some already do. From the Guardian, again:
Jim Lee, former secretary of the Scottish Co-operative party and an influential member of the Co-op movement, said: "I'm pleased that Euan Sutherland has gone. I know that there has to be change but I think he imagined we would agree to a traditional business model being imposed on the Co-op. That was never going to happen."
If vested interests can force out a strong and experienced CEO, then an inexperienced chair should be a pushover. In which case the forces opposing change are those really in charge, and the Co-Op will continue to muddle along in a mediocre way, failing its customers and - ultimately - the members that it says it serves. It's a tragedy.

Related reading - the Co-Op Bank saga:

Thursday, 6 March 2014

The Eurozone credit crunch

As I noted in my previous post, business lending in the Eurozone is very poor - flat in the major core countries and falling in the periphery. The ECB's report on MFI lending to businesses and households for January 2014 confirms the fall in business lending volumes both on a monthly and a yearly basis:

(For some reason the ECB doesn't include loans of 0.25 - 1 million euros in this table, but volumes of these loans are also falling. The full list can be found at the end of the ECB's document.)

The ECB also reports that interest rates are rising for smaller loans and falling for larger ones.

But as usual (I'm getting slightly tired of saying this), Eurozone aggregates don't tell the whole story. This chart shows the path of SME interest rates since the start of the Euro:

(H/t @fwred)

According to this, EMU average interest rates are now falling on SME loans (see circled area). But the ECB says that average interest rates on new lending to non-financial corporations are rising. How do we explain this discrepancy?

I wasn't able to find the source of the data for this chart, despite @fwred's comment that it was ECB data, but it seems to be to do with the amount and duration of the loan. Here is the table of loans to non-financial corporations from the ECB's document:

I've outlined in red those that correspond to the "EMU average" line on the chart. For those loans, the average interest rate has indeed fallen, both month-on-month and year-on-year. But overall, the composite cost of borrowing is rising, not falling. There is nothing to be cheerful about yet.

However, despite its limited data set, this chart is still informative - indeed fascinating. Firstly, average interest rates on this particular subset of MFI loans to German, French and Spanish SMEs are falling, but Italy seems to be heading in the opposite direction. This is probably due to its government shenanigans. It's hardly a stable political situation.

Secondly, there is evident credit bifurcation. The "EMU average" SME interest rate does not exist in reality: SMEs in core countries benefit from lower interest rates, while those in periphery countries suffer much higher rates. This is also consistent with lending volume figures that show rapidly falling lending volumes in periphery countries. Basically, banks don't want to lend to SMEs in periphery countries, and if they have to, they charge high rates.

The reason for this is undoubtedly bank perception of higher risk. It's easy to blame elevated sovereign risk in these countries, and that might indeed be a factor. But so might this:

(h/t @minefornothing)

Clearly, the financial crisis took its toll. Corporate defaults have been rising since 2008. In Spain's case, the sharp rise in defaults in 2008-9 is undoubtedly due to the collapse of its construction bubble. But it's hard not to draw the conclusion that deepening recession in all three countries since 2011 is increasing corporate defaults and therefore raising the risk of lending to SMEs. The ECB raised interest rates in 2011, which may have triggered a rise in corporate defaults, but when the ECB cut interest rates again the corporate default rate did not fall back, and neither did interest rates to SMEs. Evidently any banks still lending to periphery SMEs simply used the rate cuts as a means of increasing margins, rather than reducing rates to borrowers.

Banks are certainly under pressure to reduce higher-risk lending and improve their capital positions. The forthcoming Asset Quality Review is the latest in a long line of attempts to cajole or coerce banks into cleaning up their balance sheets. Unfortunately SME lending, which is generally fairly high-risk, tends to be badly hit when bank regulation is being tightened. And lending to SMEs in damaged periphery countries is about the riskiest form of lending there could be. No wonder SME lending volumes in periphery countries are falling off a cliff and interest rates are much higher than in core countries.

It cannot be assumed that companies that are being forced out of business by lack of finance are all "zombie" companies that should be allowed to die. As Tom Papworth of the ASI notes (in relation to the UK, but the same applies in the Eurozone), some of the companies that struggle to get finance are the new generation of startups....and if they die in infancy, then the future of the economy is compromised:
To terminate these firms in a misguided belief that capital and labour needs to be reallocated would be to kill the next generation of firms and undermine the process of creative destruction. 
If it is true that the combination of recession, fiscal austerity measures and tightening of bank regulation is causing a severe credit crunch for periphery SMEs, then it seems appropriate for targeted support for SME lending in periphery countries to be provided at EU level, most appropriately by the ECB. After all, both sovereign and bank reforms are being done at the behest of the European Commission with the intention of restoring sustainable growth in the long-term. Killing off the very companies that will be needed to secure that sustainable growth is folly.

There is a desperate need to ease credit conditions for SMEs in periphery countries. The slight easing of interest rates on certain categories of loan for Spanish SMEs is welcome, but it is nowhere near enough. The EU must find ways of improving access to finance for SMEs in periphery countries. The future of those countries, and perhaps even of the Eurozone itself, depends on them.

Wednesday, 5 March 2014

Deflation and the ECB

The ECB continues to argue that there is no deflation risk in the Eurozone though many people dispute this. Headline CPI has been steady at 0.8% for the last three months, and core inflation (which excludes volatile things such as energy prices, which have been falling) is inching upwards. And January's M3 lending figures for the Eurozone as a whole, though horrible, do show a slight improvement over December.

But as is often the case, looking at Eurozone aggregates doesn't tell the full story. These charts from Natixis show the collapse of bank lending not only in periphery countries, but in Germany:

(h/t @okonomia)

In an economy where the money supply depends principally upon bank lending, a credit crunch will become deflation unless the money supply is expanded by other means. For the last year, the ECB has allowed monetary conditions to tighten as banks repaid LTROs. It has justified its inaction on the grounds that the credit crunch (and associated deflation risk) only applies in periphery countries, and is a recognition by banks of higher sovereign risk in those countries. Structural reforms, therefore, should over time reduce the sovereign risk, allowing real interest rates to fall and enabling banks to lend. But these charts show that lending is stagnant in Germany and France as well as the troubled Spain and Italy. Evidently, the credit crunch does not apply only in periphery countries.

The right-hand chart - lending to companies - is particularly worrying. Business lending is flat in both Germany and France, the Eurozone's two biggest economies, and in Spain and Italy it is falling fast. If this were the United States we might argue that falling bank lending to businesses is not terribly informative in the absence of information on capital markets performance. But this is the Eurozone, where the majority of businesses obtain finance from banks, not from capital markets. That level of contraction in business lending is potentially disastrous.

The ECB's inaction appears to be primarily due to positive growth rates for household credit, particularly in Germany and France: as Draghi says, "households are not deferring purchases". But it really isn't good enough to argue that household credit is holding up, and therefore there isn't a problem. Yes there is. Stagnant or falling bank lending to businesses means stagnant or falling business investment. And that will follow through in due course into higher unemployment, lower wages and depressed demand.

Relying on household credit growth when business investment is stagnant or falling is unwise (UK government, please take note). It is possible that increasing consumer demand could stimulate business investment. But the ECB's monetary developments report for January suggests that the household credit growth is in mortgages, not consumer lending. I suppose that wealth effects from increased home ownership could encourage higher spending, stimulating business investment. But haven't we played this scene before, with less than happy results?

Admittedly, both Germany and Spain show business investment becoming "less negative", as the ECB puts it. It may be that the slight upturn in German business investment and the larger improvement in Spanish business investment will continue. But in the case of Spain this is from a VERY low base. Remember that these charts show the rate of growth of lending, so a negative means that lending is falling. Spanish business lending is currently falling at a rate of 12% per year. Even if the current improvement continues at the rate shown in the chart, it will be literally years before business investment actually starts to increase. Spain's unemployment is already at 27%: if it takes years for business investment to start increasing, where will unemployment be? Or will all the young and skilled have left by then?

So the ECB's remaining excuses for inaction seem to be an increase in consumer credit that is likely to fizzle out unless business investment responds, and a - possibly unjustified - expectation of rising business investment in the Eurozone's largest economies. This is frankly insufficient. There is a very strong argument for ECB to do something significant to ease monetary conditions. As Tony Yates says, you don't wait for deflation actually to appear before you take action to prevent it. Whether that action takes the form of QE, negative deposit rates, specific measures targeting bank lending, or Tony's suggestion of "lower for longer" forward guidance, is a question for ECB officials. But there is serious risk of deflation. The ECB's continued inaction is dangerously close to incompetence.

The trouble is that any action the ECB takes is fraught with problems. It is so fenced around with treaty limitations and hard-money ideology that it is difficult for it to do anything very constructive without facing political and even legal challenge. In my last post I argued for unwinding of the Euro. That is still my position. But the Euro is what we currently have, and deflation is what we currently risk. The ECB must act, and politicians in the Eurozone must allow it to do so. Treaties be damned.

Monday, 3 March 2014

The ECB is irrelevant and the Euro is a failure

My post at Pieria looking at the ECB's alternatives for monetary easing. 

The latest money supply figures from the Euro area are awful:

But there's very little the ECB can - or will - do about it. The problem is the combination of a common currency with national politics.....

Read the full article here.