Tag: Eurozone

Connecting the Dots: Debt, Savings and the Need for a Fiscal Growth Policy

Twice in the second half of the twentieth century, in the midst of a robust economy, economists optimistically talked about the taming and even “the death of the business cycle” based on the belief that advances in macroeconomics had reached a point of perfection. Yet, both times, the economy underwent serious turbulence and the policies that seemed to have “solved the problem” proved inadequate to the challenges presented by unexpected realities. In the 1970s, the “neo-classical synthesis,” with its faith in forecasting and macroeconomic “fine tuning,” succumbed to stagflation and a new theory, the Monetarist paradigm, came to prominence. By the 1990s, Monetarists and their descendants— the rational expectations and New Keynesian models—had convinced themselves, and policy makers, that they could stabilize the economy for good and that policy intervention beyond interest rate adjustments and inflation targeting was no longer necessary. The Financial Crisis of 2007-8 and the subsequent “Great Recession” should have been a wake-up call that, just as in the 1970s, instability was not gone and that a new paradigm for running the economy was needed, thankfully we have Loans Now.

Yet, as of today, the orthodoxy continues to dominate the policy debate in the United States and in Europe shaping inadequate policy responses to the main problem of contemporary capitalism: the persistence of private debt overhangs and their impact on both short run and long run growth. However, rather than examining these issues, OECD countries—Europe in particular—and many emerging markets have continued to embrace a framework under which central banks setting the “price” of money, or setting the quantity of the “monetary base”, is the only game in town. Accordingly, the world’s central bankers have launched a series of ad hoc stabilization programs, driven by extensions of the Monetarist/New-Keynesian paradigm, which evidently do little to address the consequences of the financial crisis.

Continue reading this article on Private Debt Project

Salvare l’Europa dopo Brexit: l’elicottero non serve

Chiedere alla Bce di distribuire denaro a pioggia è un sintomo dell’inefficacia delle normali regole di politica fiscale. Il principio del bilancio in pareggio ha finito per ostacolare ogni ragionevole tentativo di gestire il disavanzo in funzione anti-ciclica. Soluzioni nuove per salvare l’Europa.

(continua a leggere su lavoce.info)

Debt and savings in the euro area: An update (and how net exports have been keeping the EA afloat so far)

This is an updated chart of the flow of financial savings and debt in the euro area (EA).

EA balances

For each quarter, the red bars (when positive) measure the flow of financial savings to resident households (dark red) and financial corporations (light red).

The flow of financial savings has been consistently positive throughout the period, reflecting the quarterly addition to the stock of private savings. Notice the recent decline of financial savings of financial corporations.

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More Target2 divergence: This time is different

In the midst of the Eurozone “sovereign debt” crisis and increasing spreads in 2010-11, interbank lending came to a halt. At the same time, bank clients were moving funds from the banks of the countries “in trouble” to the banks based in “safe countries”. Because “core” banks were not willing to lend liquidity back to them, “periphery” banks borrowed from the Eurosystem to settle their payments, and Target2 balances diverged. This ended with Draghi’s “whatever it takes” announcement in the Summer of 2012 and the introduction of OMT in the ECB’s toolbox.

What is happening today (SEE CHART) is very different, and does not reflect a “flight to safety” as it did back then. Today’s divergence is a consequence of the ECB asset purchase program (QE), as well as of the current levels of policy interest rates set by the ECB.


T2

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