Category Archives: ECB

Currency pairs getting punished on central bank comments.

http://www.bankofengland.co.uk/publications/Documents/speeches/2017/speech986.pdf

https://www.bloomberg.com/news/articles/2017-06-28/draghi-s-prudence-warning-confirmed-by-reaction-to-his-own-words

 

 

 

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  • 78
    Press conference following the meeting of the Governing Council of the European Central Bank on 4 September 2014 at its premises in Frankfurt am Main, Germany, starting at 2:30 p.m. CET: Introductory statement by Mario Draghi, President of the ECB. Question and answer session. Registered journalists pose questions to Mario Draghi, President…
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  • 76
    Runners have target times, golfers judge themselves by their swing, while Mario Draghi watches a technical measure of inflation expectations used by financial markets. Just one problem: it suggests the European Central Bank president is not achieving his objective – and that markets’ fears of eurozone deflation are mounting. Since…
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  • 74
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If Greece defaults on IMF? then …

Greece could take a risky step into the unknown tomorrow if it misses, as expected, a 1.5 billion euro debt payment to the International Monetary Fund.

For the moment, credit rating agencies though would not declare Greece officially “in default” on its debt, because the missed payment is to an official lender and not the commercial funding market.

Although the Greek government has put the deal offered by creditors to a referendum vote next Sunday, IMF Managing Director Christine Lagarde said earlier this month that “there will be no period of grace” for the country.

To help fund a budget shortfall and keep current on all its obligations, Athens has been negotiating to get another 7.2bn in bailout funds from the IMF and European Union.

The talks have broken down, and the Greek government – which was allowed to bundle together several IMF payments due this month into one – is not expected to have enough money on its own for the 30 June payment.

If Athens does not make the payment it would immediately be cut off from access to Fund services and facilities.

If the Greek government misses tomorrow's payment, it will be declared “in arrears” by the Washington-based institution.

Greece has borrowed about 32bn from the global crisis lender since 2010, some of which has already been repaid.

It could also theoretically be placed on track for expulsion from the IMF

Only one country in IMF history has been kicked out: Czechoslovakia, during the Cold War in the 1950s.

Expulsion would require support of a large majority of the Fund’s members, who usually prefer to avoid extreme outcomes.

Long in default on their IMF loans, Sudan, Somalia and Zimbabwe have kept their memberships.

 

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Will Greece have until late July to come to an agreement with its creditors ?

Greece probably has until late July to come to an agreement with its creditors before potentially being forced out of the monetary union. Possible delays in payments to the International Monetary Fund in June shouldn’t prompt the European Central Bank to shut off vital liquidity to Greek banks. By contrast, a default on marketable debt — specifically the failure of the Greek government to pay 3.5 billion euros due to the ECB on July 20 — would probably force the central bank’s hand. The Greek government and its creditors are still likely to reach a deal on a list of reforms before that crucial date.June 5: Greece will have to make a payment of about 240 million SDRs to the IMF. That equals about 303 million euros. Greek Finance Minister Yanis Varoufakis has stated Greece will seal a deal with its creditors by this date. This is a medium-risk event. The raid from Greece’s own reserve account at the IMF to make a recent payment to the fund suggests the Syriza-led government is running out of cash to pay its creditors and will be unable to make this payment in the absence of additional bailout funds, though the immediate consequences of missing a payment to the IMF would be limited.June 12: Greece will have to make a payment of about 270 million SDRs to the IMF. That equals about 341 million euros. This is a medium-risk event, similar to June 5.

June 12: Greece must roll over 3.6 billion euros of Treasury bills. This is a low-risk event.

June 16: Greece will have to make a payment of about 451 million SDRs to the IMF. That equals about 568 million euros. This is a medium-risk event. (See June 5.)

June 18: The Eurogroup will meet. This seems like a low-risk event because the finance ministers would still be able to discuss Greece at their next meeting even if an agreement were to remain elusive.

June 19: Greece will have to make a payment of about 270 million SDRs to the IMF. That equals about 341 million euros. This is a medium-risk event. (See June 5.)

June 19: Greece must roll over 1.6 billion euros of Treasury bills. This is a low-risk event.

June 25-26: The European Council meets in Brussels. German Chancellor Angela Merkel and Greek Prime Minister Alexis Tsipras could use this opportunity to speak about financial aid to Greece. The heads of governments could force their officials to move in a particular direction, though the finance ministers are the government representatives who have to sign an agreement. This seems like a low-risk event because the Eurogroup will meet again on July 13.

End-June: The extension expires for the “Master Financial Assistance Facility Agreement,” as Greece’s bailout is known. This will probably be a medium-risk event. If Greece were no longer officially in a bailout program, the ECB could decide to re-assess its collateral rules linked to Emergency Liquidity Assistance, though the most likely outcome of this soft — and arbitrary — deadline is an extension if an agreement remains elusive.

July 10: Greece must roll over 2 billion euros of Treasury bills. This is a low-risk event.

July 13: Greece will have to make a payment of about 360 million SDRs to the IMF. That equals about 454 million euros. This is a medium-risk event. (See June 5.)

July 13: The Eurogroup will meet. This will probably be a high-risk event because it is the last scheduled Eurogroup meeting ahead of the July 20 payment to the ECB. In other words, this may be the last opportunity for the finance ministers to agree on the disbursement of funds ahead of that date.

July 17: Greece must roll over 1 billion euros of Treasury bills. This is a low-risk event.

July 19 and 20: Greece must make the largest coupon payments of the month — about 199 million euros and 104 million euros, respectively — on government bonds. The total for the month is 810 million euros. In addition, Greece’s 3.5 billion-euro bond held by the ECB matures on July 20. This is a high-risk event. A default could cause the ECB to cut off Greek banks’ access to ELA. That would probably be the first step to an exit of the beleaguered country from the monetary union.

Aug. 1: Greece will have to make a payment of about 141 million SDRs to the IMF. That equals about 177 million euros. This is a medium-risk event. (See June 5.)

Aug. 7: Greece must roll over 1 billion euros of Treasury bills. This is a low-risk event.

Aug. 14: Greece must roll over 1.4 billion euros of Treasury bills. This is a low-risk event.

Aug. 20: Greece must make the largest coupon payment of the month — about 194 million euros — on government bonds. The total for the month is 211 million euros. In addition, Greece’s 3.2 billion-euro bond held by the ECB matures. The riskiness of these events is path-dependent. If Greece has managed to secure bailout funds by this date, the payment shouldn’t create a problem. If it hasn’t secured the funds, Greece will probably have defaulted on the July 20 payment already and this second payment might be immaterial. If Greece hasn’t secured bailout funds and managed to somehow make the July 20 payment, this would be a high-risk event.

This post is courtesy of Bloomberg Intelligence Economics.

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Greece Readies for Another Week of Deadlines

Warnings of an accidental default loom over debt-swamped Greece as Prime Minister Alexis Tsipras’ anti-austerity government heads for another confrontation with an increasingly testy German-led bloc of creditors.

Greece needs at least a symbolic show of progress at Monday’s meeting of euro-area finance ministers in Brussels to persuade the European Central Bank to keep emergency funds flowing to Greek banks at the current pace. The next hurdle comes just a day later, when Greece has to pay about 750 million euros ($840 million) to the International Monetary Fund.

Tsipras met with top cabinet ministers for several hours on Sunday to brief them on the negotiations. Athens expects the Eurogroup to officially acknowledge important progress, a Greek government official, speaking on the condition of anonymity as the talks were private, said after the meeting. Tsipras and his ministers confirmed the need for a mutually beneficial deal within the framework of the government’s mandate, the official said.

The meeting in Athens took place under mounting pressure to abandon election promises made just months ago for more generous retirement benefits and to recommit to selling government-held stakes in companies to raise cash. No one outside of Athens knows for sure how long the country can stay afloat.

Schaeuble’s Warning

“Experience elsewhere in the world has shown that a country can suddenly become unable to pay its bills,” German Finance Minister Wolfgang Schaeuble said in an interview with Frankfurter Allgemeine Sonntagszeitung published Saturday. Schaeuble said if Greece is forced out of the euro “it won’t be because of us.”

Tsipras’s determination to junk the budget cuts associated with Greece’s 240 billion-euro bailout — and to tap creditors for more money after that — has hammered Greek markets since he took power. Greek 10-year bonds now yield 10.67 percent, up from 8.41 percent on the eve of the Jan. 25 election. The yield touched 13.64 percent last month.

Strains are emerging in Tsipras’ Syriza party, a novice at governing. Tsipras took the job of dealing with creditors away from Finance Minister Yanis Varoufakis, who was accused by euro ministers following the last meeting on April 24 of lacking rigor and wasting time.

Agreement Elusive

The personnel change has improved the structure and organization of the negotiations, a European Union official said on Friday. While there has been a rapprochement with Greece in a number of areas, no final agreement is in sight, the official said on condition of anonymity under Brussels briefing rules.

Greece’s program runs until the end of June. The EU official said that while deadlines aren’t cast in stone, a technical agreement on a revised program needs to be struck by early June to allow time for approval by creditor governments.

An accord “will surely not be reached at the Eurogroup meeting on Monday,” Dutch Finance Minister Jeroen Dijsselbloem, the meeting’s chairman, told Italy’s Corriere della Sera newspaper. “We will need more time, but I don’t know how much.” The meeting starts at 3 p.m.

Varoufakis’ Position

While day-to-day deliberations are now in the hands of Deputy Foreign Minister Euclid Tsakalotos, Varoufakis will be Greece’s chief representative at the Brussels meeting. He denied being demoted, telling BBC World on Thursday: “I am the chief negotiator for the Greek government.”

Enthusiasm for Tsipras’s cause has been sapped by Greece’s economic ordeal and the potential choice between a shrunken welfare state inside the euro or an unknown future outside it. Fifty-four percent of Greeks back the government’s negotiating strategy, down from 82 percent in February, a Marc poll for Efimerida Ton Sintakton showed Saturday. Still, Syriza continues to outpoll other parties.

Whether Greece yields before the northern creditor governments’ patience snaps is an open question. Some members of German Chancellor Angela Merkel’s Christian Democratic bloc are challenging her intention to keep Greece in the euro, and some officials in the German Finance Ministry are leaning toward the conclusion that the euro area would be better off without Greece, two people familiar with internal German discussions said.

“In Greece there is a growing awareness that time is running out,” Italian Finance Minister Pier Carlo Padoan said in a Sunday interview with Messaggero.

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German bond yields on course for biggest weekly rise in a decade

 

German government bond yields jumped on Thursday as a rout in euro zone markets worsened, putting them on course for their biggest weekly rise in over a decade.

Yields on 10-year German bonds — the bloc’s benchmark — rose as much as 20 basis points to hit 0.799 percent, their biggest daily rise since the middle of 2012.

As of 0930 GMT, yields were up some 38 basis points on the week, set for their biggest rise seen since at least 2004, according to Tradeweb data.

Other euro zone government bond yields rose 4-15 bps.

Strategists said the market capitulation which started last week was sparked by easing deflation fears and investor weariness with ultra-low yields.

“It’s a historical move that we’re experiencing – a continuation of the move we’ve seen in the past few days,” said Jean Francois Robin, head of strategy at Natixis. “The macro picture is getting better in Europe.”

 

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Greek Debt for Dummies

Here is some facts about the Greek Debt

 

  1. The uncertainty over this week’s payment to the IMF is just the latest episode of a multiyear tragedy for Greece and its creditors as they try to navigate a situation that has been managed too timidly for too long.
  2. The biggest lenders to Greece are: the euro zone – 60%, the International Monetary Fund (IMF) – 10%, the European Central Bank (ECB) – 6%, Greek banks – 3%,Bank of Greece, 1% – foreign banks, 15% – other bondholders, 3% – other loans.
  3. Having struggled to restore economic growth, and with an unemployment rate of 26 percent, Greece isn’t generating enough revenue to meet all of its obligations.
  4. Greece now has its hopes set on another meeting of euro zone deputy finance ministers on April 8-9, although it is unlikely that a deal could be reached by then.
  5. Negotiations between Greece and its creditors over the next tranche of the country’s bailout – worth more than €7bn – have stalled over disagreement about Syriza’s economic reform plans.
  6. Default or no default, Greece will be scrambling for cash unless it is revived by a fresh injection of bail-out cash soon.
  7. After days of talks between officials representing Greece and its creditors about a list of economic reforms and proposals, euro zone finance ministry officials will discuss progress and the prospects for an agreement during a teleconference session on Wednesday afternoon.
  8. Perhaps something good can come from Greece’s debt disaster as it is clear evidence that changes are needed to ensure a healthy economy in the euro zone and for the euro to thrive.
  9. Greece especially its successive governments and irresponsible politicians have been behind the feckless borrowing and now the Greek people have to bear the burden of irresponsibility, perhaps even criminal behavior, of their leaders.
  10.  The new loans represented not a bailout for Greece but a cynical transfer of losses from the books of the private banks to the weak shoulders of the weakest of Greek citizens.
  11. The repayment schedule on the country’s €240 billion rescue package extends to 2054 and, of course, Greece has to also repay its other debt obligations.
  12. Greek debt has been steadily growing as the nation has been subjected to harsh austerity, with the nation seeing an unprecedented contraction in its economic output with all the consequences of such a downturn.
  13. The Greek government faces another crucial deadline in its interminable bail-out drama this week, as fears mount that the country could become the first developed nation to ever default on its international obligations.
  14. The terms of Greece’s existing bail-out programme stipulate that a default to the IMF would automatically constitute a default on the country’s European rescue loans.
  15. The worsening Greek debt crisis has reanimated talk within the ruling Syriza party of a snap general election if discussions with creditors fail, as the country faces a Thursday deadline to repay a €450m loan to the International Monetary Fund.
  16. The Greek finance minister, Yanis Varoufakis, was scheduled to hold informal talks with the IMF’s managing director, Christine Lagarde, in Washington DC on Sunday – 5 Apr 2015 – , while warnings of early elections underscored the political unrest in Athens. IMF Managing Director Christine Lagarde said in a statement after meeting with Varoufakis that she welcomed his confirmation that the loan payment due would be made on schedule.
  17. Beyond this week’s bill auction and the IMF repayment, Greece sees €1.4 billion of short-term Treasury bills mature on April 13, requiring the country to sell more debt to fund that, Rodriguez notes, while another €1 billion in notes matures on April 16.
  18. Meanwhile, Greece’s domestic socio-political context makes it difficult for the government to make payments to the IMF, especially as it struggles to pay salaries and finance basic social services.
  19. Greece has not received any bailout funds since August last year, and the Syriza-led government has so far failed to convince its eurozone partners to dole out remaining funds in the bailout pot.
  20. Although the exact process is uncertain, falling into a protracted arrears procedure could have major consequences for continued financial assistance from Greece’s other creditors – the European Central Bank and European Commission.
  21. “If Greece defaults to the IMF, then they are considered to be in default to the rest of the eurozone,” says Raoul Ruparel, head of economic research at Open Europe.
  22. Prime Minister Alexis Tsipras will visit Moscow next week, with Russia ready to discuss easing restrictions on Greek food products, according to Russian government officials.
  23. Greece won’t default on payments to the International Monetary Fund next week even as a lack of bailout disbursements has left government coffers nearly empty, according to the minister responsible for meeting the obligations.
  24. “It is necessary to restore the Greek economy’s funding flow,” Labor Minister Panos Skourletis told the Greek Ependysi newspaper on Saturday, accusing the country’s lenders of taking advantage of Greece’s funding limits to add pressure on Athens.
  25. The interior minister suggested last week the government would prioritize wages and pensions over the IMF payment, although the government later denied that was its stance.
  26. The government is hoping approval of its reform proposals will free up the remaining aid of 7.2 billion euros (5.30 billion pounds) under its bailout and lead to the return of about 1.9 billion euros in profits made by the European Central Bank on Greek bonds.
  27. The payment to the IMF wouldn’t necessarily make it easier for Greece and its creditors to better work collaboratively to restore the country’s growth and financial viability with the euro zone.
  28. Since Tsipras took office, the chairmen of two of the largest banks, National Bank of Greece and Eurobank, have both been replaced with people who are close to the new government.
  29. Russia’s foreign minister Sergey Lavrov told his Greek counterpart in February that Moscow would consider a loan to Greece if the country asked for one – an offer repeated by the Russian ambassador to Greece last week in an interview with Greek newspaper Kathimerini.
  30. The Prmie Minister of Greece will fly into Moscow today for talks with Russian President Vladimir Putin amid ongoing concern that the Mediterranean country will run out of money this month.
  31. Alexis Tsipras’ meeting had originally been scheduled for May, but has been brought forward, raising suspicions that Greece plans to gain funding from Russia or to use relations with the country as a bargaining chip with its Eurozone partners during bailout negotiations.
  32. “While no member of the government admits to it publicly, the fostering of better relations with Russia is seen as a potential negotiating tool in relations between Greece and its lenders,” said an analyst from Greek think tank Macropolis.
  1. Greece is currently negotiating a short-term bailout extension that it doesn’t really want, offered by European institutions which don’t trust the Greek government and approved by other governments that are running out of patience.
  2. Back in the worst days of the euro crisis, it was feared that banking and sovereign default in Greece would spread to other southern European countries, causing a domino effect.
  3. But even if Greece gets the bailout deal when European finance ministers meet on April 24 (which isn’t assured), we’ll be back in the same place in about two months.

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Greece’s Debt Due: What Greece Owes When

Facing a cash crunch, Greece is seeking to extend its bailout program with eurozone creditors before it expires on Feb. 28. Here’s what Greece owes, when.

Skärmavbild 2015-02-20 kl. 12.47.14

 

Source : http://graphics.wsj.com/greece-debt-timeline/

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What the ECB’s Move on Greek Government Debt Is Really All About

In a press release that jolted the markets, the ECB announced that it will no longer accept Greek government debt as collateral starting next week. But this news is not necessarily a potential liquidity disaster for Greek banks.

The Greek banking system is not particularly reliant on Greek sovereign debt as collateral. Figures from the Bank of Greece show that Greek financial institutions currently have about 21 billion euros of Greek sovereign exposure. Furthermore, this debt hasalready been subject to valuation haircuts of up to 40% when used as collateral at the ECB.

All collateral that the Greek banks use for ECB operations that is not Greek sovereign debt is still perfectly good to use. This decision of the ECB is against the Greek sovereign, not the Greek banks.

Further, any shortfall in liquidity will be fully made up by Emergency Liquidity Assistance that will be issued by the Greek Central Bank at its own risk.

So, all together, the move from the ECB should have very little immediate effect on the Greek banks – provided there is not a complete loss of confidence in the Greek banking system in the coming days – and should be viewed as what it is: The ECB is pressurizing the Greek government.

The Greek finance minister Varoufakis has been agitating for Greek debt relief since his appointment after January’s election. Today the ECB gave its answer to his moves. If the Greek government does not agree to re-enter a program, then the ECB will not allow its debt to be used as collateral.

The immediate effects should be seen as limited within market space, but huge within the political realm.

The ECB has often been accused of placing too much political pressure on governments. Today’s moves shows that it has chosen to ignore those accusations once again and do what it feels is right.

Source : http://www.bloomberg.com/news/articles/2015-02-04/what-the-ecb-s-move-on-greek-government-debt-is-really-all-about

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    Greece is reeling from the effects of the biggest economic crisis in its recent history. Here are some statistics underscoring the severity of the crisis now reaching into all aspects of Greek life. 25% The Greek economy has shrunk since its peak in mid-2008. 25.8% Percentage of Greeks who remain out of…
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Greek Banks Secured an Additional, Hidden €41 billion Bailout from European taxpayers

 

In 2013 Greek taxpayers borrowed from the rest of Europe’s taxpayers €41 billion to pump into the Greek banks. This is well known. What is not known is that, also in 2013/4, the Greek banks received an additional, well hidden, €41 billion bailout loan from Greek and European citizens. This bailout was never authorised by any Parliament or even discussed in public anywhere in Europe.

This is how it worked: Bank X would lend money to… itself. It would do this by issuing a bond which it did not intend to sell. So, why issue such a phantom bond? Why write an IOU and give it to one’s self? The answer is: In order to hand this phantom bond over to the European Central Bank as collateral in exchange for a cash loan. Normally, of course, the ECB would never accept such a phantom bond as collateral. Accepting it would have been to accept a loan it gave to Bank X as collateral for the said loan. It would have been an assault on the meaning of collateral and a gross violation of the ECB’s rulebook. So, bank X, knowing this, took its phantom bond first to the Greek government and had it guarantee it. With the government’s guarantee stamped on it, the ECB then accepted Bank X’s phantom bond and handed over the cash. Why? Because the Greek taxpayer had, in the meantime, unknowingly provided the collateral for Bank X’s loan.

How extensive was this ‘practice’? Since 2008, European governments have been guaranteeing private bank bond issues to assist them in their desperate quest for ‘liquidity’. The Greek government was no different.[1] Such guarantees were discussed in Parliament and were widely acknowledged as an emergency measure. However, what is startling is what happened in 2013: The heavily indebted Greek government borrowed €41 billion from European taxpayers (secured from the EFSF as part of Greece’s 2012 Second Bailout Agreement) in order to hand it over to Greece’s private banks as a capital infusion that would, in theory, plug their ‘black holes’ once and for all.

Athens, Brussels, Frankfurt and Berlin have been waxing lyrical about the success of this ‘recapitalisation’, proclaiming it as the end of Greece’s banking crisis. Alas, they skillfully neglected to inform us that, during the very same period (and continuing to this day), a second, hidden, rolling (and thus potentially never-ending) bailout (based on government guarantees of fresh phantom bonds) is being extended to the same Greek banks! (See Landon Thomas Jr’s recent article in the New York Times.)

So far, since early 2013, this hidden, second bank bailout has amounted exactly the same value (€41 billion again) as the official, approved by European Parliaments, bailout. This means that, between January 2013 and February 2014, the insolvent Greek state had to add to its liabilities, on behalf of the Greek banks, an astounding €82 billion or 45,6% of GDP![2] Remarkably, this second, hidden bailout was never authorised by any Parliament, nor discussed in any public forum.

The above practice raises two concerns; and the reader can decide which of the two is the most worrying.

First, in an open society, whenever the public assumes responsibility for private debts, it should be properly informed. In a democracy this means that Parliament (or Congress) should debate the assumption of such additional responsibilities. It would appear that in the Eurozone such an important principle has been sacrificed on the altar of the bankers’ interests. Is it thus odd to hear that Europe-wide voters no longer trust European institutions?

Second, the above show that the Greek debt is continuing to rise, not fall. With indebtedness being what it is, who can honestly speak of the Greek economy coming out of its black hole? Rather, it seems that this hole is getting deeper and all this to benefit a small section of society which has already received highly preferential treatment.

For more details and background briefing on the above, read on…

http://yanisvaroufakis.eu/2014/05/11/how-the-greek-banks-secured-an-additional-hidden-e41-billion-bailout-from-european-taxpayers/

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No central bank had considered any of these measures

Who would have thought that six years after the global financial crisis, most advanced economies would still be swimming in an alphabet soup – ZIRP, QE, CE, FG, NDR, and U-FX Int – of unconventional monetary policies? No central bank had considered any of these measures (zero interest rate policy, quantitative easing, credit easing, forward guidance, negative deposit rate, and unlimited foreign exchange intervention, respectively) before 2008. Today, they have become a staple of policymakers’ toolkits.

Indeed, just in the last year and a half, the European Central Bank adopted its own version of FG, then moved to ZIRP, and then embraced CE, before deciding to try NDR. In January, it fully adopted QE. Indeed, by now the Fed, the Bank of England, the Bank of Japan, the ECB, and a variety of smaller advanced economies’ central banks, such as the Swiss National Bank, have all relied on such unconventional policies.

One result of this global monetary-policy activism has been a rebellion among pseudo-economists and market hacks in recent years. This assortment of “Austrian” economists, radical monetarists, gold bugs, and Bitcoin fanatics has repeatedly warned that such a massive increase in global liquidity would lead to hyperinflation, the US dollar’s collapse, sky-high gold prices, and the eventual demise of fiat currencies at the hands of digital krypto-currency counterparts.

None of these dire predictions has been borne out by events. Inflation is low and falling in almost all advanced economies; indeed, all advanced-economy central banks are failing to achieve their mandate – explicit or implicit – of 2% inflation, and some are struggling to avoid deflation. Moreover, the value of the dollar has been soaring against the yen, euro, and most emerging-market currencies. Gold prices since the fall of 2013 have tumbled from $1,900 per ounce to around $1,200. And Bitcoin was the world’s worst-performing currency in 2014, its value falling by almost 60%.

To be sure, most of the doomsayers have barely any knowledge of basic economics. But that has not stopped their views from informing the public debate. So it is worth asking why their predictions have been so spectacularly wrong.

The root of their error lies in their confusion of cause and effect. The reason why central banks have increasingly embraced unconventional monetary policies is that the post-2008 recovery has been extremely anemic. Such policies have been needed to counter the deflationary pressures caused by the need for painful deleveraging in the wake of large buildups of public and private debt.

In most advanced economies, for example, there is still a very large output gap, with output and demand well below potential; thus, firms have limited pricing power. There is considerable slack in labor markets as well: Too many unemployed workers are chasing too few available jobs, while trade and globalization, together with labor-saving technological innovations, are increasingly squeezing workers’ jobs and incomes, placing a further drag on demand.

Moreover, there is still slack in real-estate markets where booms went bust (the United States, the United Kingdom, Spain, Ireland, Iceland, and Dubai). And bubbles in other markets (for example, China, Hong Kong, Singapore, Canada, Switzerland, France, Sweden, Norway, Australia, New Zealand) pose a new risk, as their collapse would drag down home prices.

Commodity markets, too, have become a source of disinflationary pressure. North America’s shale-energy revolution has weakened oil and gas prices, while China’s slowdown has undermined demand for a broad range of commodities, including iron ore, copper, and other industrial metals, all of which are in greater supply after years of high prices stimulated investments in new capacity.

China’s slowdown, coming after years of over-investment in real estate and infrastructure, is also causing a global glut of manufactured and industrial goods. With domestic demand in these sectors now contracting sharply, the excess capacity in China’s steel and cement sectors – to cite just two examples – is fueling further deflationary pressure in global industrial markets.

Rising income inequality, by redistributing income from those who spend more to those who save more, has exacerbated the demand shortfall. So has the asymmetric adjustment between over-saving creditor economies that face no market pressure to spend more, and over-spending debtor economies that do face market pressure and have been forced to save more.

Simply put, we live in a world in which there is too much supply and too little demand. The result is persistent disinflationary, if not deflationary, pressure, despite aggressive monetary easing.

The inability of unconventional monetary policies to prevent outright deflation partly reflects the fact that such policies seek to weaken the currency, thereby improving net exports and increasing inflation. This, however, is a zero-sum game that merely exports deflation and recession to other economies.

Perhaps more important has been a profound mismatch with fiscal policy. To be effective, monetary stimulus needs to be accompanied by temporary fiscal stimulus, which is now lacking in all major economies. Indeed, the eurozone, the UK, the US, and Japan are all pursuing varying degrees of fiscal austerity and consolidation.

Even the International Monetary Fund has correctly pointed out that part of the solution for a world with too much supply and too little demand needs to be public investment in infrastructure, which is lacking – or crumbling – in most advanced economies and emerging markets (with the exception of China). With long-term interest rates close to zero in most advanced economies (and in some cases even negative), the case for infrastructure spending is indeed compelling. But a variety of political constraints – particularly the fact that fiscally strapped economies slash capital spending before cutting public-sector wages, subsidies, and other current spending – are holding back the needed infrastructure boom.

All of this adds up to a recipe for continued slow growth, secular stagnation, disinflation, and even deflation. That is why, in the absence of appropriate fiscal policies to address insufficient aggregate demand, unconventional monetary policies will remain a central feature of the macroeconomic landscape.

Read more at http://www.project-syndicate.org/commentary/unconventional-monetary-policies-and-fiscal-stimulus-by-nouriel-roubini-2015-02

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