Home » Posts tagged 'economic stimulus'

Tag Archives: economic stimulus

Olduvai
Click on image to purchase

Olduvai III: Catacylsm
Click on image to purchase

Post categories

China Injects A Record 5 Trillion Yuan In New Debt To Arrest Economic Crash

China Injects A Record 5 Trillion Yuan In New Debt To Arrest Economic Crash

There was a palpable sense of disappointment last night when instead of cutting its benchmark overnight interest rates, Loan Prime Rate, as some – notably Goldman Sachs – had speculated might happen, the PBOC announced that it would only lower its benchmark 1- and 5-year lending rates by 10bps to 4.05% and 5bps to 4.75% respectively, a move that was widely anticipated.

The underwhelming rate cuts left analysts asking for more as consensus emerged that piecemeal lending rate cuts can only help the Chinese economy so much, especially if China is indeed set to unleash fiscal austerity as local Chinese media reported over the weekend: “The ten basis point reduction will help companies weather the damage from the coronavirus at the margins,” Julian Evans-Pritchard, senior China economist at consultancy Capital Economics, wrote in a note after PBOC published its latest loan prime rates. “But even if the … cut is passed on to all borrowers, that would only decrease average one-year bank lending rates from 5.44% to 5.34%. The ability of firms to postpone loan repayments and access loans on preferential terms will matter more in the near-term.”

However the market’s bitter taste from the underwhelming rate cut was quickly reversed after the PBOC reported its latest monthly credit data, which was a whopper, blowing out market expectations: total social financing, the broadest credit aggregate, soared by over 5 trillion yuan, the biggest one month injection on record, surprising the market to the upside mainly on higher government bond issuance. According to Goldman, “this mainly reflected the economic conditions and policy stance as the economic impacts from the virus were still rising.”

Here is the summary from the January credit stats:

…click on the above link to read the rest of the article…

Whatever Happened to Saving for a Rainy Day?

The National Debt Clock is a very very large digital display of the current gross national debt of the United StatesMichael Brochstein/SOPA Images/LightRocket via Getty Images

Whatever Happened to Saving for a Rainy Day?

The US will be paying for its current fiscal excesses with the promise of future payments. But inefficient economic stimulus now will not give future generations the productive resources needed to make good on it.

CAMBRIDGE – More than a decade ago, I undertook a study, together with Graciela Kaminsky of George Washington University and Carlos Végh, now the World Bank’s chief economist for Latin America and the Caribbean, examining more than 100 countries’ fiscal policies for much of the postwar era. We concluded that advanced economies’ fiscal policies tended to be either independent of the business cycle (acyclical) or to lean in the opposite direction (countercyclical). Built-in stabilizers, like unemployment insurance, are part of the story, but government outlays also worked to smooth the economic cycle.

The benefit of countercyclical policies is that government debt as a share of GDP falls during good times. That provides fiscal space when recessions materialize, without jeopardizing long-run debt sustainability.

By contrast, in most emerging-market economies, fiscal policy was procyclical: government spending increased when the economy was approaching full employment. This tendency leaves countries poorly positioned to inject stimulus when bad times come again. In fact, it sets the stage for dreaded austerity measures that make bad times worse.

Following its admission to the eurozone, Greece convincingly demonstrated that an advanced economy can be just as procyclical as any emerging market. During a decade of prosperity, with output close to potential most of the time, government spending outpaced growth, and government debt ballooned. Perhaps policymakers presumed that saving for a rainy day is unnecessary if this time is different and perpetual sunshine is the new normal.

…click on the above link to read the rest of the article…

Low Interest Rates Subsidize Wealthy Households

When the economy begins to sink into recession, politicians, mainstream economists, policy wonks, and the Federal Reserve begin beating the economic stimulus drum.

Politicians, however, disagree over the type of stimulus to implement. The center-left party proposes greater expenditures on public assistance programs. The center-right party supports permanent tax rate reductions. The center-left party opposes tax cuts because they say it benefits the rich. The center-right party opposes raising government expenditures because it increases government debt. This discord generally results in a temporary compromise where government expenditures are boosted and tax rates are cut. This compromise is called “discretionary fiscal stimulus.”

While the debate over discretionary fiscal stimulus has to overcome Senate filibusters and heated House debates, the central bankers at the Fed quickly implement monetary stimulus. Boosting aggregate demand is the intended purpose of it and discretionary fiscal stimulus. In mainstream economic theory, greater aggregate demand lowers unemployment and raises GDP. In spite of grave warnings from Austrian-school economists, the Fed pursues these goals by lowering interest rates via an expansion credit.

Although the political parties disagree over the type of fiscal stimulus to implement, both support the Fed’s monetary stimulus. Perhaps they do so because lower interest rates lower the cost of the budget deficits their discretionary fiscal stimulus produces. The lower interest rates also reduce the interest Americans pay on their debts. The total of this debt is unevenly distributed across the richest 1 percent, the next 9 percent, and the bottom 90 percent of Americans (as ranked by wealth), according to the following table.

snarr1.png

Total household debt averaged $11.295 trillion dollars over the four quarters in 2013, according to the Federal Reserve Bank of New York. Multiplying this value by the percentages in the above table indicates that the richest 1 percent, the next 9 percent, and the bottom 90 percent have aggregate debts of $610 billion, $2.383 trillion, and $8.302 trillion, respectively. These values are listed in the Total Debt column below.

…click on the above link to read the rest of the article…

Low Interest Rates Subsidize Wealthy Households

Low Interest Rates Subsidize Wealthy Households

money_4.PNG

When the economy begins to sink into recession, politicians, mainstream economists, policy wonks, and the Federal Reserve begin beating the economic stimulus drum.

Politicians, however, disagree over the type of stimulus to implement. The center-left party proposes greater expenditures on public assistance programs. The center-right party supports permanent tax rate reductions. The center-left party opposes tax cuts because they say it benefits the rich. The center-right party opposes raising government expenditures because it increases government debt. This discord generally results in a temporary compromise where government expenditures are boosted and tax rates are cut. This compromise is called “discretionary fiscal stimulus.”

While the debate over discretionary fiscal stimulus has to overcome Senate filibusters and heated House debates, the central bankers at the Fed quickly implement monetary stimulus. Boosting aggregate demand is the intended purpose of it and discretionary fiscal stimulus. In mainstream economic theory, greater aggregate demand lowers unemployment and raises GDP. In spite of grave warnings from Austrian-school economists, the Fed pursues these goals by lowering interest rates via an expansion credit.

Although the political parties disagree over the type of fiscal stimulus to implement, both support the Fed’s monetary stimulus. Perhaps they do so because lower interest rates lower the cost of the budget deficits their discretionary fiscal stimulus produces. The lower interest rates also reduce the interest Americans pay on their debts. The total of this debt is unevenly distributed across the richest 1 percent, the next 9 percent, and the bottom 90 percent of Americans (as ranked by wealth), according to the following table.

snarr1.png

Total household debt averaged $11.295 trillion dollars over the four quarters in 2013, according to the Federal Reserve Bank of New York. Multiplying this value by the percentages in the above table indicates that the richest 1 percent, the next 9 percent, and the bottom 90 percent have aggregate debts of $610 billion, $2.383 trillion, and $8.302 trillion, respectively. These values are listed in the Total Debt column below.

…click on the above link to read the rest of the article…

Why no economic boost from lower oil prices?

Why no economic boost from lower oil prices?

There is no question that lower oil prices have been a big windfall for consumers. Americans today are spending $180 B less each year on energy goods and services than we were in July of 2014, which corresponds to about 1% of GDP. A year and a half ago, energy expenses constituted 5.4% of total consumer spending. Today that share is down to 3.7%.

Consumer purchases of energy goods and services as a percentage of total consumption spending, monthly 1959:M1 to 2016:M2.  Blue horizontal line corresponds to an energy expenditure share of 6%.

Consumer purchases of energy goods and services as a percentage of total consumption spending, monthly 1959:M1 to 2016:M2. Blue horizontal line corresponds to an energy expenditure share of 6%.

But we’re not seeing much evidence that consumers are spending those gains on other goods or services. I’ve often used a summary of the historical response of overall consumption spending to energy prices that was developed by Paul Edelstein and Lutz Kilian. I re-estimated their equations using data from 1970:M7 through 2014:M7 and used the model to describe consumption spending since then. The black line in the graph below shows the actual level of real consumption spending for the period September 2013 through February of 2016, plotted as a percent of 2014:M7 values. The blue line shows the forecast of their model if we assumed no change in energy prices since then, while the green line indicates the prediction of the model conditional on the big drop in energy prices that we now know began in July of 2014.

…click on the above link to read the rest of the article…

Why Low Oil Prices Haven’t Helped The Economy

Why Low Oil Prices Haven’t Helped The Economy

Many analysts had anticipated that a dramatic drop in oil prices such as we’ve seen since the summer of 2014 could provide a big stimulus to the economy of a net oil importer like the United States. That doesn’t seem to be what we’ve observed in the data.

There is no question that lower oil prices have been a big windfall for consumers. Americans today are spending $180 B less each year on energy goods and services than we were in July of 2014, which corresponds to about 1 percent of GDP. A year and a half ago, energy expenses constituted 5.4 percent of total consumer spending. Today that share is down to 3.7 percent.

(Click to enlarge)

Consumer purchases of energy goods and services as a percentage of total consumption spending, monthly 1959:M1 to 2016:M2. Blue horizontal line corresponds to an energy expenditure share of 6 percent.

Related: Natural Gas Trading Strategies 

But we’re not seeing much evidence that consumers are spending those gains on other goods or services. I’ve often used a summary of the historical response of overall consumption spending to energy prices that was developed by Paul Edelstein and Lutz Kilian. I re-estimated their equations using data from 1970:M7 through 2014:M7 and used the model to describe consumption spending since then. The black line in the graph below shows the actual level of real consumption spending for the period September 2013 through February of 2016, plotted as a percent of 2014:M7 values. The blue line shows the forecast of their model if we assumed no change in energy prices since then, while the green line indicates the prediction of the model conditional on the big drop in energy prices that we now know began in July of 2014.

…click on the above link to read the rest of the article…

Sweden Central Joins The NIRP Club: Lowers Interest Rate To -0.1%, Launches QE

Sweden Central Joins The NIRP Club: Lowers Interest Rate To -0.1%, Launches QE

It’s a NIRP world and you are either in it, or are determined to lose the currency wars. And hours ago, the world’s oldest central bank, that of Sweden, announced that it too would join its NIRP peers in an attempt to preserve its currency’s fighting power in the global currency wars which make a mockery of what is going on in Ukraine, by lowering the benchmark interest rate to -0.1%, but also launch QE by buying SEK 10 billion of government bonds, thereby making sure that the stock of available debt in private hands is even lower and that central banks monetize even more than merely “all” of all net issuance in 2015.

From the press release:

 There are signs that underlying inflation has bottomed out, but the situation abroad is now more uncertain and this increases the risk that inflation will not rise sufficiently fast. The Executive Board of the Riksbank has therefore decided to cut the repo rate by 0.10 percentage points, to -0.10 per cent, and to adjust the repo-rate path down somewhat. At the same time, the interest rates on the fine-tuning transactions in the Riksbank’s operational framework for the implementation of monetary policy are being restored to the repo rate +/- 0.10 percentage point. Moreover, the Riksbank will buy government bonds for the sum of SEK 10 billion. These measures and the readiness to do more at short notice underline that the Riksbank’ is safeguarding the role of the inflation target as a nominal anchor for price setting and wage formation.

Economic activity in Sweden strengthening but inflation is too low

…click on the above link to read the rest of the article…

 

 

How China Deals With Deflation: A 60% Pay Raise For 39 Million Public Workers

How China Deals With Deflation: A 60% Pay Raise For 39 Million Public Workers

While the rest of the developed world, flooded with re-exported deflation as a result of now ubiquitous money printing, scrambles to print even more money in hopes of stimulating the economy when all it is doing is accelerating a closed deflationary loop (at least until the infamous monetary helicopter drop), China – which still has the most centrally-planned economy in the world even if the US is rapidly catching up – has a more novel way of dealing with the threat of deflation: a massive wage hike across the board for all public workers. Two days ago, at a press conference, the Chinese vice minister of human resources and social security Hu Xiaoyi said that China’s 39 million civil servants and public workers will get a pay raise of at least 60% of their base salaries as part of pension plan overhaul.

The hope is that just like in the US where the Federal government would love to be able to do just that and more, surging wages would stimulate the Chinese economy which over the past year has had to content with the double whammy of surging bad loans and the collapse of shadow banking, as well as the burst housing market.

The pay raise “will make sure that the overall incomes for most of these workers will not decrease after the reform, and some of them could actually earn a bit more,” Ziaoyi said, even if he did not provide details of the plan, which will cover civil servants and public workers, such as teachers and doctors.

According to Caixin, top civil servants, including President Xi Jinping and Premier Li Keqiang, will see their monthly base salaries rise to 11,385 yuan from 7,020 yuan (to $1,833 from $1,130), starting in October. Of course, both are billionaires with hidden money around the world, but the raise is all about optics and boosting confidence. The base salaries of the lowest civil servants would more than double to 1,320 yuan. It is unclear if the plans Caixin saw are final.

…click on the above link to read the rest of the article…

 

Shinzo Abe, Japan’s prime minister, unleashes stimulus plan to spur growth – Business – CBC News

Shinzo Abe, Japan’s prime minister, unleashes stimulus plan to spur growth – Business – CBC News.

Japan’s cabinet approved 3.5 trillion yen ($29 billion US) in fresh stimulus Saturday for the ailing economy, pledging to get growth back on track and restore the country’s precarious public finances.

Prime Minister Shinzo Abe is wrapping up his second year in office hard-pressed to salvage a recovery that fizzled into recession after a sales tax hike in April.

The stimulus plan endorsed by the cabinet includes 600 billion yen ($5 billion US) earmarked for stagnant regional economies. It also lays out Abe’s vision for countering longer term trends such as Japan’s surging public debt and a declining and aging population.

“A strong economy is the wellspring of Japan’s national strength,” said a summary of the plan released by the government.

It pledged to restore vitality to local regions to enable young Japanese “to have dreams and hopes for the future.”

…click on the above link to read the rest of the article…

Olduvai IV: Courage
In progress...

Olduvai II: Exodus
Click on image to purchase