“Growth is turning out to be much slower than we thought three months ago, and the risk of hitting patches of negative growth going forward has gone up,” OECD Chief Economist Pier Carlo Padoan said during a presentation of the OECD’s latest Interim Economic Assessment. (For the detailed tables and charts, click here.)
Two key US policy developments this week:
Fiscal Policy: President Obama’s proposed $447bn package of tax cuts and spending measures aimed at boosting growth and jobs. More details about costs of the American Jobs Bill and about debt stabilisation will be announced on 19 Sep….
Instant market views I
Instant market views II
Monetary Policy: US legislation requires the Fed to aim for both full employment and stable prices. Usually – even though there is no explicit CPI inflation target as in Europe – ensuring low, steady inflation has taken precedence. But as the US economy stares over the double-dip abyss there are signs that conventional central banking views may be changing….
The Fed’s Dual Mandate Responsibilities and Challenges Facing U.S. Monetary Policy, FRB Chicago speech by President/CEO Charlie Evans in London, 7 Sep 2011
Should the Fed target unemployment?, The Economist, 8 Sep 2011
The case for structural reforms and a more supply-side focus for fiscal policy…
The West’s economy: How to avoid a double dip, The Economist, 27 August 2011
Is there a role for the ECB as a lender of last resort in the government bond market?
The European Central Bank as a lender of last resort, VoxEU, 18 August 2011.
Key background material can be found on the EU and ECB websites….
The European Stability Mechanism, ECB Monthly Bulletin, July 2011
Q&A on Financial Assistance to Euro-Area Member States, European Commission (Economic & Financial Affairs)
Stability & Growth Pact, European Commission (Economic & Financial Affairs)
Treaty establishing the European Stability Mechanism (ESM), European Commission (Economic & Financial Affairs)
The usual moral hazard arguments against QE – akin to the arguments about the “Greenspan put” – are well known and neatly summarised in this Reuters analysis, “Fed’s QE2: Miracle Cure or Moral Hazard?“, May 2011.
However, there is another angle that is rightly getting far more attention these days – the moral hazard imparted by easy monetary policy to profligate governments. For an interesting overview as to how boundaries between monetary and fiscal policy are getting blurred – much to the disgust of die-hard Bundesbankers now residing in the ECB – have a look at the Economist’s latest briefing, “Emergency Manoeuvres“, 13 August 2011. The conclusion makes grim reading,
“Although the [ECB] central bank’s monetary tightening is an own goal, the broader malaise in the euro area has a clear resemblance to those of America and Britain—and that which has gripped Japan since the 1990s. As Kenneth Rogoff, co-author of a recent 800-year history of financial crises, has pointed out, the recovery of debt-laden Western economies was bound to be slow and halting. Central banks may be the last people standing, but they cannot produce better growth out of nowhere. The emerging markets which provided a cushion during the financial crisis look less helpful now, especially if they put up capital controls in the face of a new round of QE. The sharp equity declines in August suggest investors understand the grim reality of a long period of slow growth.”
Olaf Storbeck has highlighted a useful piece of research on the links, if any, between fiscal austerity, economic conditions and social unrest. Needless to say, it is not a simple story. The analysis looks at the last 90 years and crunches data from 26 European countries. In days of old, there was in fact a strong and causal link between austerity and unrest. Interestingly, though, since the late 80s, this relationship has broken up and vanished. According to the results, in modern, industrial societies, there is no longer any palpable link between spending cuts and rioting.
The Association of British Insurers has revised its estimated figure of claims likely to be paid out by the insurance industry to be in excess of £200 million.
Comparisons with the French riots of 2005 can be found here. It might be worth remembering that, in France, the unrest lasted several weeks with a State of Emergency in place for over 3 months.
Of course, Britain’s riots are not just about budget cuts and the state of the economy: policing methods, social morality, parenting skills, technology, inequality, alienation – the list is long! But when Iran starts its wagging its finger at the UK about “violent suppression” of human rights you have to worry about where this whole debate is going!
Thirteenth century tally sticks
These narrow shafts of wood are receipts. They are made of hazel wood and were originally stored in leather pouches or canvas bags. The notches in the wood indicate the amount that has been paid.
According to the Latin writing on them, several of the tallies were issued to Nicholas de Turevill. He was sheriff of the counties of Buckinghamshire and Bedfordshire between 1293 and 1296, during the reign of Edward I. One tally was a payment relating to royal forest in the counties. Another cleared some of his outstanding debts to the king.
Tally sticks were used by accountants and by officials of the Exchequer who managed the revenue of the Crown. They were a physical proof of payments made into the Treasury. The ‘Dialogue of the Exchequer’ describes a tally as:
“the distance between the tip of the forefinger and the thumb when fully extended … The manner of cutting is as follows. At the top of the tally a cut is made, the thickness of the palm of the hand, to represent a thousand pounds; then a hundred pounds by a cut the breadth of a thumb; twenty pounds, the breadth of the little finger; a single pound, the width of a swollen barleycorn; a shilling rather narrower than a penny is marked by a single cut without removing any wood”.
After the notches were made on the stick, the shaft was split lengthways into two pieces of unequal length, both pieces having the same notches. The longer piece (the stock) was given to the payer and the Exchequer officials retained the shorter piece (the foil). When the accounts were audited, the two pieces were fitted together to see if they would ‘tally’.
Exchequer officials continued to use tallies until 1826, with very large tally sticks created to record huge sums of money. It was the burning of unwanted tally sticks in 1834 that caused the fire that destroyed the old Houses of Parliament.
The evolution of money technologies originates with the tally stick. From tally stick comes the modern word “stock,” meaning a financial certificate and deriving from the use of the Middle English for the stick. The piece retained by the bank was called the “foil.” The holder of the stock was said to be the “stockholder” and owned “bank stock.” A written certificate presented for remittance and checked against its security later became a “check.”
According to legend, Wall Street was founded in its present location because of the presence there of an enormous chestnut tree, said to be plentiful enough to supply enough tally sticks for the emerging American stock market.
Does budget austerity boost growth? A decline in interest rates due to a lower probability of default should support investment and asset prices. Expectations of lower future taxes and higher lifetime earnings may encourage investment and spending. A new ECB working paper argues that “a fiscal contraction may turn out to be expansionary if the expectation channel becomes sufficiently strong.” In practice, however, it rarely works out that way. In a recent IMF study of 173 fiscal-policy changes in rich countries from 1978 to 2009, economists from the IMF found that cutting a country’s budget deficit by 1% of GDP typically reduces real output by about two-thirds of a percentage point and raises the unemployment rate by one-third of a percentage point.
Also see the BIS Annual Conference, June 2011 – Fiscal policy and its implications for monetary and financial stability.
The issues were summarised in “Cut or loose: history suggests that austerity and growth just do not mix“, Economist, 14 July 2011
When is a tax increase not a tax increase? Definitions matter, especially when it comes to the politics of the US debt ceiling.
Semantic flexibility holds key to deal, Financial Times, 15 July 2011.