The Deflation Bogeyman

Martin Feldstein

FEB 28, 2015

hallway door bogeyman

CAMBRIDGE – The world's major central banks are currently obsessed with the goal of raising their national inflation rates to their common target of about 2% per year. This is true for the United States, where the annual inflation rate was -0.1% over the past 12 months; for the United Kingdom, where the most recent data show 0.3% price growth; and for the eurozone, where consumer prices fell 0.6%.
But is this a real problem?
The sharp decline in energy prices is the primary reason for the recent drop in the inflation rate. In the US, the core inflation rate (which strips out changes in volatile energy and food prices) was 1.6% over the last 12 months. Moreover, the US Federal Reserve, the Bank of England, and the European Central Bank understand that even if energy prices do not rise in the coming year, a stable price level for oil and other forms of energy will cause the inflation rate to rise.
In the US, the inflation rate has also been depressed by the rise in the value of the dollar relative to the euro and other currencies, which has caused import prices to decline. This, too, is a “level effect," implying that the inflation rate will rise once the dollar's exchange rate stops appreciating.
But, despite this understanding, the major central banks continue to maintain extremely low interest rates as a way to increase demand and, with it, the rate of inflation. They are doing this by promising to keep short-term rates low; maintaining large portfolios of private and government bonds; and, in Europe and Japan, continuing to engage in large-scale asset purchases.
The central bankers justify their concern about low inflation by arguing that a negative demand shock could shift their economies into a period of prolonged deflation, in which the overall price level declines year after year. That would have two adverse effects on aggregate demand and employment.
First, the falling price level would raise the real value of the debts that households and firms owe, making them poorer and reducing their willingness to spend. Second, negative inflation means that real interest rates rise, because central banks cannot lower the nominal interest rate below zero.
Higher real interest rates, in turn, depress business investment and residential construction.
In theory, by depressing aggregate demand, the combination of increased real debt and higher real interest rates could lead to further price declines, leading to even larger negative inflation rates. As a result, the real interest rate would rise further, pushing the economy deeper into a downward spiral of falling prices and declining demand.
Fortunately, we have relatively little experience with deflation to test the downward-spiral theory.
The most widely cited example of a deflationary economy is Japan. But Japan has experienced a low rate of inflation and some sustained short periods of deflation without ever producing a downward price spiral. Japan's inflation rate fell from nearly 8% in 1980 to zero in 1987. It then stayed above zero until 1995, after which it remained low but above zero until 1999, and then varied between zero and -1.7% until 2012.
Moreover, low inflation and periods of deflation did not prevent real incomes from rising in Japan. From 1999 to 2013, real per capita GDP rose at an annual rate of about 1% (which reflected a more modest rise of real GDP and an actual decline in population).
Why, then, are so many central bankers so worried about low inflation rates?
One possible explanation is that they are concerned about the loss of credibility implied by setting an inflation target of 2% and then failing to come close to it year after year. Another possibility is that the world's major central banks are actually more concerned about real growth and employment, and are using low inflation rates as an excuse to maintain exceptionally generous monetary conditions.
And yet a third explanation is that central bankers want to keep interest rates low in order to reduce the budget cost of large government debts.
None of this might matter were it not for the fact that extremely low interest rates have fueled increased risk-taking by borrowers and yield-hungry lenders. The result has been a massive mispricing of financial assets. And that has created a growing risk of serious adverse effects on the real economy when monetary policy normalizes and asset prices correct.

Barron's Cover

Private Bank Survey: Where to Invest Cash Now

America’s top 40 asset managers predict a grind in 2015.

By Karen Hube           

February 28, 2015

What happens when asset managers believe that equities are still the best and perhaps only play in town, but that shares, particularly in the U.S., are close to being fully valued, and long-term bonds are risky? Answer: Cash positions spike, as wealth managers park money in cash or cash equivalents and wait for dips in the market before buying more stocks.
“We think stocks are going to deliver reasonable returns. The problem is, you’re not going to get return from bonds, so we’ve put some risk mitigation into cash,” says Seth Masters, chief investment officer at Bernstein Global Wealth Management.
Photograph: Brad Trent for Barron’s
There’s an important nuance here. The larger-than-normal liquid positions that we are spotting don’t mimic the defensive crouch seen in a recession. Rather, they are often cautious and temporary sideline holdings, awaiting the right buying opportunities.
That, in essence, is where our 40 asset managers stood at the end of 2014, a story that can be found buried deep inside our asset-allocation table of America’s largest asset managers, on pages 28 and 29.
At first blush, allocations by the group of 40 haven’t changed much because of contradictory and uncertain views. Overall stock allocations average 51%, the same as a year ago, but U.S. stock holdings are up slightly, to 33% compared with 31% last year. Counterintuitively, with U.S. interest rates soon to rise, allocations in fixed income are also slightly higher this year -- at 27% versus 26% last year.
But that’s our story: A good portion of those fixed-income holdings are due to asset managers quietly parking cash in “cash equivalent” short-term fixed-income instruments. Among them are a smattering of corporate bonds, commercial paper, and mortgage-backed securities, and a bigger proportion of asset-backed securities, such as those backed by consumer loans, mortgage-servicing fees, and communication-tower lease revenues.
JPMorgan Chase, Highmount Capital, Wilmington Trust, and Barclays are some of the wealth managers that have increased cash or cash-equivalent investments in this way. Consider Brown Brothers Harriman, which had 27% in cash and equivalents on hand at year-end 2014, by far the largest stash -- some to offset risk, but most on hand to deploy on market dips, says the firm’s chief investment strategist, Scott Clemons.
Here is why Clemons’ cash position isn’t easy to spot in our table: Brown Brothers has just 3% in pure cash, but it has quietly shifted 24% of its portfolio into ultrashort-term instruments that are lumped into the firms’ fixed-income bucket.
It’s an opportunistic holding. When the oil-price collapse triggered a fall in shares in early December, Brown Brothers added modestly to stockholdings. With cash levels still over 20%, Clemons said he is poised to pounce further into emerging markets, encouraged by temporary oil-price-induced weaknesses.
Brown Brothers Harriman is not alone. Among other firms with cash embedded in their fixed-income allocations are Genspring, with 8% of its total portfolio; Atlantic Trust, with 9%; and Barclays, with 7%. It raises the question: Why?
BLAME IT ON UNCERTAINTY. Wealth managers are all privy to the same data, but they’re coming up with very different conclusions about the meaning for investors. It’s a sign of abnormal times.
“Earlier in the recovery cycle, people were more certain in their allocations and there was more uniformity in outlooks, but now everyone realizes growth isn’t bouncing back as it has historically,” says Bruce McCain, chief investment strategist at Key Private Bank. “Since you can’t frame what’s going on based on historical trends, you get a wider range of ideas about how to exploit what’s happening.”
Barron’s annual asset-allocation survey typically finds strong majority opinions, such as last year’s 75% that backed an increase in foreign developed stocks. But in this year’s survey, for which data were gathered in December, only U.S. stocks got a thumbs up, with 56% of wealth managers recommending adding a touch more. In other asset classes, a roughly equal number of wealth managers were positive or negative.
Photograph: Brad Trent for Barron’s
The current, anything-seems-possible environment set the tone for the discussion at a year-end JPMorgan Private Bank meeting, during which investment analysts found a high probability for both bull and bear markets for 2015, says Kate Moore, the bank’s chief investment strategist. “We found the number of realistic outcomes are much greater than 12 months ago,” she says.
Blame the central banks, says Tim Leach, chief investment officer of U.S. Bank Wealth Management. “We’re in an era of the activist central banker employing heavier-weight strategies as opposed to modest incremental shifts at the margin,” he says. “Now you have to think, ‘What happens when the 800-pound gorilla throws a piece of furniture into the ring and changes everything?’ ”
There is, in short, a sort of mayhem out there: In the first six years of the recovery, central bankers were all pulling the sled in the same direction. Now, the Federal Reserve is heading into a tightening cycle, the European Central Bank wants to add more stimulus, and Japan needs to.
What that means, in concrete terms, is that most wealth managers continue to maintain the overweight positions in U.S. stocks that they began building up in 2013, even though about a third, such as UBS, Goldman Sachs, Janney Montgomery Scott, PNC Asset Management, and BMO Private Bank, have since lightened their positions somewhat.
With valuations in the top quartile of their historical range, there’s reason for concern, “but the environment’s still reasonably good for risk-taking supported by central-bank policy. Fundamentals are OK, and profit margins are good,” says Christopher J. Wolfe, chief investment officer at Merrill Lynch Wealth Management Private Banking and Investment Group.
Technology stocks are a favorite, based on the view that U.S. companies will finally begin to make significant upgrades in their technological infrastructures. The financial sector is also poised for a lift.
Once interest rates start rising, which most expect this year, “it’ll be the ground zero for profit-making” at the banks, says Hans Olsen, global head of investment strategy at Barclays Wealth and Investment Management.
Banks will not only be able to charge higher rates on loans, but low oil prices mean consumers have more money in their pockets and are likely to begin borrowing more.
Banks were already strong performers last year, up 15% versus 14% for the Standard & Poor’s 500, but Brett Nelson, managing director at Goldman Sachs Investment Strategy Group, points out that their price-to-book ratios -- the favored valuation method for banks -- are in the lowest third of their range since 1990.
Meanwhile, in foreign developed stocks, uncertainties about central banks’ abilities to further stimulate economies produced opposing views tugging this way and that, all over the lot.
“The only thing you can hang your hat on in Europe is central-bank stimulus,” says Paul Chew, head of investments at Brown Advisory. “We find it difficult to invest in a market when easing will be the driving factor, not the fundamentals.” Brown Advisory, UBS, and Atlantic Trust are among the firms that agree it’s best to wait before stepping up investments in European stocks.
But for Wells Fargo, Deutsche Bank, and Glenmede, valuations on European stocks -- trading near a 40% discount to U.S. counterparts -- are low enough to offset other concerns.
“Where we’d normally turn to U.S. companies in industrials, energy, and health care, now we’re looking at European companies. We compare Johnson & Johnson maybe to GlaxoSmithKline for better value. Or within the energy sectors, ExxonMobil to Total,” says Mark Luschini, chief investment strategist at Janney Montgomery Scott.
There’s a similar range of views on Japan’s prospects. While some wealth managers have lost confidence in Prime Minister Shinzo Abe’s ability to drive much-needed stimulus, others are encouraged by his success in devaluing the currency and bringing about at least modest reform.
But whatever the outlook, all expect both the yen and the euro to further depreciate against the almighty dollar this year. “If you don’t hedge the currencies, you’re talking about cutting your returns in half,” warns Larry Adam, chief investment strategist of Deutsche Bank Private Wealth Management.
In emerging markets, better-than-expected growth is likely in Mexico, South Korea, and Poland, claims Chris Hyzy, U.S. Trust’s chief investment officer. In backing his call, he has bumped the firm’s emerging-market allocation from 5% to 6%. Mexico will benefit from its strong trading ties with the U.S., as domestic growth north of the border picks up, he figures.
“Korea is a direct beneficiary of the advancement of the tech cycle, and Poland is a conservative way to invest in the growing middle class of Eastern Europe and the outsourcing that’s happening in other parts of Europe,” he says. Brown Brothers Harriman maintained its overweight 10% exposure to emerging markets that it established in early 2014, but is avoiding companies with exposure to the U.S., says chief investment strategist Clemons.
Wealth managers generally prefer Asia over Latin America, and in some cases are betting on frontier markets, believing that the economies have stabilized and corporate earnings and gross-domestic-product growth are poised to improve. “We’ve gone to a modest overweight with additions to India, the Philippines, Indonesia, and Vietnam,” says Garrett D’Alessandro, chief executive officer at City National Rochdale.
FIXED INCOME is a different mess. In the U.S., the looming question is whether interest rates will begin rising sooner or later, and how quickly they’ll go up. But regardless of timing, the view is dour.
“There’s not a whole lot of upside you can earn when you’re at a 2% yield on the 10-year Treasury,” says Brown Advisory’s Chew.
Many wealth managers recommend paring back U.S. high-quality bonds, in some cases to historic lows. Constellation Wealth, for example, reduced its overall fixed-income allocation by a third, and has just 10% devoted to U.S. high-quality securities.
They are not alone. Wells Fargo reduced its fixed income by 21%, to 17%, of which only 6% is now in core U.S. bonds. “If you think historically of what a balanced portfolio looked like -- 60% stocks and 40% bonds -- to have such low levels in high-quality fixed income tells you we’re in very different times,” explains David Donabedian, chief investment officer at Atlantic Trust, which has 18% of its portfolio in high-grade corporate and municipal bonds.
Alternatives? While private-equity allocations haven’t changed in the past year, firms are putting more into U.S. and foreign private debt to eke out mid-to-high single-digit yields. But the flat allocation doesn’t reflect the growing number of families that are investing directly in private equity. (For more on this, see our private banking story, “The $800 Million Club.”)
Real estate holdings are down, primarily on the volatility that will hit real estate investment trusts once interest rates creep up, and some of last year’s sweet spot -- investing directly in multifamily housing, for instance -- has been bid up, says Sam Katzman, chief investment officer at Constellation Wealth Advisors. He’s increasingly lending to developers of multifamily housing. “We can get a decent return -- yields are in the 12% to 15% range -- and still get the asset as collateral,” he says.
Commodity exposure has been cut further this year, with poor global demand, a strong dollar, and falling oil all contributing to the bearish sentiment. And hedge funds posted disappointing returns in 2014 yet again, prompting Highmount Capital and Key Private Bank to reduce allocations to zero, and others to scale back.
But many firms continue to rely on hedge funds to replace bonds as a portfolio ballast, and aim to seek out hedge fund performance uncorrelated to the stock market. Citi Private Bank’s David Bailin, for example, says he likes event-driven hedge funds that are actively involved in mergers and acquisitions.
“There’s sizable money to be made on those deals,” he says, noticing a high level of mergers-and-acquisitions activity as companies become more concerned about how to create value. That’s still not a convincing argument for everyone. Looking across asset classes, Barclays’ Olsen summed up the investing landscape in 2015, quipping, “It’s going to be a grind.”
On that point, at least, wealth managers can agree.

Economic Data

Inflation in Developed Economies Halved in January, OECD Says

Widespread disinflation likely to prompt further interest rate cuts or other easing measures

By Paul Hannon

March 3, 2015 6:00 a.m. ET

Workers carrying vegetables at a market in Kolkata, India. India's government expects the country’s inflation rate to drop to between 5% and 5.5% in 2015/16, opening up space for more monetary easing. Photo: Reuters

The annual rate of inflation across the world’s developed economies more than halved in January, reaching its lowest level since the recession that followed the global financial crisis.

While consumer prices rose at a faster pace in a small number of developing economies, inflation rates also eased in China, Indonesia and South Africa.

That widespread disinflation is likely to prompt further cuts in benchmark interest rates or other easing measures by central banks around the world, adding to a flurry of such moves in the first months of 2015.

The Organization for Economic Cooperation and Development on Tuesday said the annual rate of inflation in its 34 members fell to 0.5% in January from 1.1% in December, the lowest level since October 2009.

Slowing inflation rates largely reflect the sharp decline in energy prices over the second half of 2014, but also the disappointingly weak performance of the global economy. The OECD said that among its members, energy prices were down 12% in the 12 months to the end of January, having fallen 6.3% in the 12 months to December.

Across the Group of 20 largest economies, which account for 90% of world economic output, the annual rate of inflation fell to 2.5% from 2.8% in December. Inflation rates picked up in Russia, Brazil and India.

The worry for policy makers is that low inflation will itself hinder a long-awaited economic recovery.

When inflation is low, companies, households and even governments have a harder time cutting their debt loads, a particular problem for a number of highly-indebted nations in the eurozone.

And while very low inflation or falling prices can help boost real incomes, it can also make households and businesses postpone spending and investment.

Some economists say it is the biggest problem facing the global economy as it enters 2015, and will likely lead to further stimulus efforts by a number of central banks, while others will wait longer to raise their benchmark interest rates from unusually low levels.

Indeed, 2015 has begun with a series of moves by central banks to boost growth and inflation rates. The People’s Bank of China on Saturday cut its benchmark lending and deposit rates less than four months after the previous reduction.

That followed the announcement of a new program of quantitative easing by the European Central Bank in late January, a surprise rate cut by the Reserve Bank of India in the same month, and a series of easing moves by smaller central banks around the world.

By contrast, the U.S. Federal Reserve has signaled its desire to raise its benchmark interest rate late this year, anticipating a pickup in inflation after energy prices stabilize. The Bank of England has also said its next move will most likely be a rate increase, probably in early 2016, but possibly later this year.

According to the OECD, 19 of its members experienced a decline in prices over the 12 months to Jan, up from 13 in the 12 months to Dec. Most of those were in Europe, although U.S. consumer prices fell 0.1% on the year, the first such decline since 2009. The largest decline was recorded in Greece, a 2.8% drop.

A preliminary estimate for February indicates consumer prices in the eurozone fell less sharply than in January, as energy prices began to recover. Figures released Tuesday by the European Union’s statistics agency showed the prices of goods leaving the eurozone’s factory gates were 3.4% lower in January than a year earlier, the largest drop since November 2009.

Party Like It's 2015

By: Michael Pento

Monday, March 2, 2015

In 1982 the artist formally known as Prince released a popular party anthem called "1999".

The song was a premonition that 1999 would be a year we would all aspire to "party like". It was obvious that Prince was making reference to the excitement associated with ringing in a new century. However, unbeknownst to him, the accommodative policies of the Federal Reserve would lead to a festal bubble in NASDAQ stocks, making his call to party in 1999 that much more appropriate.

After that hangover lapsed, our central bank--in full cooperation with the Wall Street casino--was once again donning party hats by the mid-2000s. The Fed's cheap money, along with the private banks' proclivity to create credit, produced similar merriment in the housing market.

The fallout after this party ended was much more severe than the previous monetary orgy.

Today, even as most Americans are still suffering the ill effects brought forth by all the aforementioned partying, the festivities on Wall Street's trading floors have reached its apogee.

Although GDP growth has remained below trend for years and household incomes have stagnated, the corrupt carnival barkers that dominate the financial services industry have caused investors to party like its 1999 and 2007...combined.

Last year venture capital investments reached a level that was last seen during the dotcom bubble, as they poured a staggering $48.3 billion into startup companies. One of those companies, Pinterest Inc., recently announced they were looking to raise $500 million in a new round of funding, which will double the company's valuation to a hefty $11 billion. That's a frothy valuation for an on-line scrapbook. But there is no room for the process of honest price discovery in an environment where money is free and failure has been annulled. And, if you are ever invited to one of these gluttonous venture capitalist galas, and are looking for a ride, check out Uber Technologies, an internet car service company valued at a whopping $41 billion dollars.

Today's festivities span well beyond the 1999 internet startup theme. Those who missed their invite to the NASDAQ bubble and the real estate flipping bash, will be happy to learn subprime lending is back to its profligate peaks. Loans to consumers with low credit scores have reached the highest level since the start of the financial crisis. In fact, almost four out of every ten loans for autos, credit cards and personal borrowings in the U.S. went to subprime customers during the first 11 months of 2014.

That amounted to more than 50 million consumer loans and credit cards totaling more than $189 billion, the highest levels since 2007.

But as Wall Street resumes its gaiety, Main Street is still mired in despair. According to a newly released report from Bankrate, 24 percent of Americans have more credit card debt than emergency savings. And 13 percent of consumers don't have any credit card debt; but, they don't have any savings either.

The jobs picture, which is paraded by Wall Street and government as the one bright spot in an otherwise lackluster recovery, just isn't as rosy as it appears at first glance. According to the Federal Reserve Bank of Atlanta, "The economy has been generating full-time general-service jobs at a much slower pace than in the past." In fact, the economy has 2.5 million more part-time workers and 2.2 million fewer full-time workers than it did at the start of the Great Recession in December of 2007.

Despite what the MSM would have you believe, the economy is more fragile today than at any other time in the past. The virtually free money and QEs provided by many global central banks have caused economies to pile on an additional $60 trillion of debt on top of the already unsustainable and insolvent conditions that existed in 2007.

Sadly, the mindset of governments and central banks remain unchanged from the collapse of the previous two bubbles. Unprecedented money printing and artificially-produced low interest rates have created a perpetual happy hour. And it's placed all of us at the precipice of a collapse in equities and real estate prices once again.

Naysayers will point to the six-year stock rally as evidence that all is well. And are also quick to point out that record-low bond yields illustrate that investors have complete confidence in sovereign nations to service and pay off their debt. But these are not the results of the free market price discovery process at work. Rather, it is merely the ability of central banks to use the availability of free money to artificially and massively inflate asset prices.

Another reason for today's complacency is the widespread belief that banks are now properly capitalized--unlike the condition experienced at the start of the Great Recession. U.S. banks, once loaded with insolvent mortgage securities, are now thought to "safely" hold over $4 trillion worth of Treasury, Agency and Mortgage Backed Securities. And, thanks to Basel III and the Dodd Frank legislation, these banks have $2 trillion worth of Treasuries that carry a zero-risk weighting in their capital ratios.

Therefore, these banks only appear to be well capitalized. Once the sovereign debt bubble bursts and investors dump their bond fund holdings, interest rates will soar. Banks will then become capital constrained and will once again be forced to hold illiquid assets that cannot be sold without destroying their balance sheets. In addition, rising interest rates will put a severe strain on the global economy, which is now saturated with a record amount of debt in relation to total output.

Unless you believe the global economy has entered into a multi-decade recession like Japan, interest rates have nowhere to go but up; dramatically. The problem is that debt levels are at all-time highs. Once the cost of money rises this part-time working, no savings, asset-bubble driven and debt-laden economy will collapse. And, the next time the wheels fall off Wall Street's party bus, the crash will be more severe than 1999 and 2007...combined.

The Costs of Grexit  Jean Pisani-Ferry FEB 28, 2015  

Greek exit sign


PARIS – Earlier this week, following days of tense discussions, the new government in Athens reached an agreement with its eurozone creditors that includes a package of immediate reforms and a four-month extension of the financial assistance program. But, despite Europe's collective sigh of relief, the compromise does not preclude the need for further tough negotiations on a new financial-assistance program that should be introduced by the end of June.
In any negotiation, a key variable influencing the protagonists' behavior, hence the outcome, is what failure to reach an agreement would cost each of them. In this case, the issue is the cost of Greece's exit (“Grexit") from the eurozone – a prospect that was widely discussed in the media throughout the recent negotiation, with considerable speculation about the stance of the various players, especially the Greek and German governments.
From Greece's perspective, leaving the euro would be highly disruptive, which explains why there is very little support for it in the country. But what about Grexit costs for the rest of the eurozone? Ever since the question was first raised in 2011-2012, there have been two opposing views.
One view – dubbed the domino theory – claims that if Greece exited, markets would immediately start wondering who is next. Other countries' fate would be called into question, as occurred during the Asian currency crises of 1997-98 or the European sovereign-debt crisis of 2010-2012. Disintegration of the eurozone could follow.
The other view – often dubbed the ballast theory – claims that the eurozone would actually be strengthened by Greece's withdrawal. The monetary union would be rid of a recurring problem, and a eurozone decision to allow or invite Greece to leave would bolster the credibility of its rules. No country, it is claimed, could dare to blackmail its partners anymore.
Back in 2012, the domino theory looked realistic enough that the creditor countries ditched the Grexit option. Having reflected and pondered over the summer, German Chancellor Angela Merkel went to Athens and expressed her “hopes and wishes" that Greece remains in.
But the situation today is different. Market tension has eased considerably; Ireland and Portugal are not under assistance programs anymore; the eurozone financial system has been strengthened by the decision to move to a banking union; and crisis-management instruments are in place. A Grexit-induced chain reaction would be significantly less likely.
But it does not follow that the loss would be harmless. There are three reasons why Grexit could still seriously weaken Europe's monetary union.
First and foremost, a Greek exit would disprove the tacit assumption that participation in the euro is irrevocable. True, history teaches that no commitment is irrevocable: according to Jens Nordvig of Nomura Securities, there have been 67 currency-union breakups since the beginning of the nineteenth century. Any exit from the eurozone would increase the perceived probability that other countries may, sooner or later, follow suit.
Second, an exit would vindicate those who do consider the euro merely a beefed-up fixed-exchange-rate arrangement, not a true currency. Confidence in the US dollar relies on the fact that there is no difference between a dollar held in a bank in Boston and one held in San Francisco. But since the 2010-2012 crisis, this is not entirely true of the euro anymore. Financial fragmentation has receded but not disappeared, meaning that a loan to a company in Austria does not carry exactly the same interest rate as a loan to the same company on the other side of the Italian border. Critics like the German economist Hans-Werner Sinn have made a specialty of tracking exposure to the break-up risk.
None of this is currently lethal, owing to the initiatives taken in recent years; but it would be a mistake to assume that full confidence has been restored. European citizens would certainly respond to a country's withdrawal (or expulsion) from the eurozone by starting to look at the currency in a different way. Where a euro is held would become a relevant question. Domestic and foreign investors would scrutinize more closely whether an asset's value would be affected by a breakup of the monetary union. Governments would become more suspicious of the risks to which their partners potentially expose them. Indeed, suspicion would become irreversible, and it would replace the belief in the irreversibility of the eurozone.
Finally, an exit would force European policymakers to formalize their so-far unwritten and even unspecified rules for divorce. Beyond broad principles of international law – for example, that what matters for deciding an asset's post-divorce currency denomination are the law governing the underlying contract and the corresponding jurisdiction – there are no agreed rules for deciding how conversion into a new currency would be carried out. A Grexit would force these rules to be defined, therefore making it clear what a euro is worth, depending on where it is held, by whom, and in what form. Indeed this would not only make the break-up risk more imaginable; it would also make it much more concrete.
None of this means that eurozone members should be ready to pay whatever cost is needed to keep Greece inside the eurozone. This would obviously amount to a surrender. But they should not harbor any illusions, either: there can be no such thing as a happy Grexit.

In Europe, Bond Yields and Interest Rates Go Through the Looking Glass


FEB. 27, 2015

Eva Christiansen, left, an entrepreneur, was stunned to learn about negative interest. Ida Mottelson, a student, received a notice from her bank saying it would start charging her a percentage to hold her money. Credit Sofie Amalie Klougart for The New York Times       

HVIDOVRE, Denmark — At first, Eva Christiansen barely noticed the number. Her bank called to say that Ms. Christiansen, a 36-year-old entrepreneur here, had been approved for a small-business loan. She whooped. She danced. A friend took pictures.
“I think I was so happy I got the loan, I didn’t hear everything he said,” she recalled.
And then she was told again about her interest rate. It was -0.0172 percent — less than zero. While there would be fees to pay, the bank would also pay interest to her. It was just a little over $1 a month, but still.
These are strange times for European borrowers, as if a wormhole has opened up to a parallel universe where the usual rules of financial gravity are suspended. Investors lent Germany nearly $4 billion this week, knowing they would not be fully repaid. Bonds issued by the Swiss candy maker Nestlé recently traded in the market for more than they will ever be worth.

Such topsy-turvy deals reflect the dark outlook for the region’s economy, as policy makers do whatever they can to revive growth, even taking interest rates below zero to encourage borrowing (and spending). In this environment, the simplest of banking tasks have become a curiosity.
Consumer loans and mortgages with interest rates that are outright negative remain rare, and Ms. Christiansen appears to be one of the few who actually received one while banks mull how to proceed. Some other Danes are getting charged to park their money in their bank accounts.
Such financial episodes are taking place all across Europe.
To breathe life into Europe’s economy and stoke inflation, policy makers recently resorted to a drastic measure tried by some other central banks. The European Central Bank, which dictates policy in the 19-member eurozone, announced a plan that involves printing money to buy hundreds of billions of euros of government bonds.
Just the anticipation of the program prompted bond prices to plunge and the euro to drop in value. Other countries that do not use the euro were then forced to take defensive countermeasures to keep a lid on the value of their currencies, encourage lending and bolster growth.
Switzerland, for instance, jettisoned its currency’s peg to the euro, shocking markets, and cut interest rates further below zero. Denmark’s central bank has reduced rates four times in a month, to minus 0.75 percent. Sweden followed suit earlier this month.
The most profound changes are taking place in Europe’s bond market, which has been turned into something of a charity, at least for certain borrowers. The latest example came on Wednesday, when Germany issued a five-year bond worth nearly $4 billion, with a negative interest rate. Investors were essentially agreeing to be paid back slightly less money than they lent.
Bonds issued by Switzerland, the Netherlands, France, Belgium, Finland and even fiscally challenged Italy also have negative yields. Right now, roughly $1.75 trillion in bonds issued by countries in the eurozone are trading with negative yields, which is equivalent to more than a quarter of the total government bonds, according to an analysis by ABN Amro.
One reason investors are willing to tolerate such yields is the relative safety of the bonds, in a weak economy. Traders are also betting that the prices of the bonds will keep going up.
Even some corporate bonds, which are generally deemed less creditworthy than government bonds, are falling into the negative territory, including some issued by Nestlé and Novartis, a Swiss pharmaceutical company. While they did not initially have negative yields, investors bid up their prices after they were issued.
“This is obviously a once-in-a-lifetime and once-in-history phenomenon,” said Heather L. Loomis, a managing director at JPMorgan Private Bank, who specializes in bonds, “and it is hard to make sense of it.”
It can be especially hard for people who are not bankers. Ms. Christiansen, a sex therapist, took out a loan to finance a website called LoveShack that is part matchmaking site, part social network.
For her, the full novelty of her loan didn’t sink in until a spokeswoman for the bank called her back.
“She said, ‘Hi, Eva, they have contacted us from TV 2’ — it’s a big station in Denmark, one of the biggest — ‘and they would like to talk to you because of this loan,’” Ms. Christiansen said. “Then I was really like, ‘O.K., this is big.’”
She said she was generally aware of what the Danish central bank was doing, but fuzzy on the specifics and had not paid close attention to the issue until she realized she might be asked about it in front of a camera.
“When I was contacted by the television, I was like, ‘O.K., I need to know something,’” she said, laughing, during an interview at her office, where two distant windmills were visible outside the windows.
“So I actually called my bank adviser and said, ‘Can we please have a meeting?’ Because all these financial terms, I’m not used to them,” she said. “If I talk about something, I’d like to know something about it.”
Some other Danes are facing a related, if somewhat opposite, issue.
Last month, Ida Mottelson, a 27-year-old student, received an email from her bank telling her that it would start charging her one-half of 1 percent to hold her money.
“At first I thought I had misunderstood this, but I hadn’t,” she said.
Ms. Mottelson is studying for a master’s degree in health sciences, and lives in Odense, a city about 100 miles west of Copenhagen. She said she had been following the news about the central bank, but called her own bank just to make sure she was reading the email correctly.
“I asked him super-naïvely, ‘Can you explain this to me?’ And he tried, but I got the feeling he was like, come on, just move the money and you’ll be fine.”
She does plan to move her money to another bank. And there are signs that such practices are spreading to the United States. This week, JPMorgan Chase said it would start charging some institutional clients to hold their money, because of a combination of new regulations and low interest rates.
Economists are now pondering some of the odd things that might occur if interest rates stay negative for a long time.
Companies and individuals may start to hoard cash outside of ordinary banks if the banks start to effectively charge substantial sums to hold deposits. Large savers, for instance, may choose to put their money in special institutions that do little more than warehouse their cash.
“There is some negative interest rate at which it would become profitable to stockpile cash,” said James McAndrews, an economist at the Federal Reserve Bank of New York. He said that economists had speculated that such cash hoarding might begin once interest rates were around minus 0.5 percent.
For most people not poring over the financial pages, it can all seem a bit strange.
“I’m not an expert,” Ms. Mottelson said, “but to me it sounds so weird that you have to pay to have your account at a bank.”

Wall Street's Best Minds

Byron Wien Isn’t Too Worried About World

The Wall St. veteran argues that the global economic outlook isn’t as bad as the consensus view.

By Byron Wien           

Updated Feb. 27, 2015 5:56 p.m. ET

Looking forward several years, there will be three important factors that will determine the economic and investment outlook. They are decoupling, deflation and demand. The decoupling concept is based on the question, “Can the United States economy expand at about 3% if the rest of the world is in recession or experiencing diminished growth?” The deflation concept is supported by the decline in the price of oil and other commodities, plus the willingness or necessity of the unemployed throughout the world to take a job at almost any level of compensation. Less discussed, but possibly most important, is whether sufficient demand for goods and services exists throughout the world to produce at least modest growth and enough jobs in the major industrialized countries. Right now, various estimates for world real GDP growth this year are just under 3%, but deflation could bring nominal growth lower.
The decoupling idea has gotten off to a slow start. As a result of both the decline in the price of oil and the strength of the dollar, strategists have reduced their estimates for growth for the overall U.S. economy to something approaching 2%, and analysts have reduced their estimates of operating earnings for the Standard and Poor’s 500 to about $120 from $125. 2014 earnings were $118. Energy accounts for approximately 12% of the index weighting and only 6% of the estimated earnings, but oil and energy service company earnings estimates are being reduced by analysts everywhere. A downward adjustment in earnings expectations also seems warranted because the strength of the dollar is increasing costs and reducing translated profits for American companies operating abroad.
The fourth quarter real growth of 2014 was reported at 2.6%, disappointing most analysts. Inventory building accounted for 0 .8%, and a good part of that was probably involuntary. Housing and capital spending were weak, and government spending and trade actually detracted from growth. Wage growth was also less than expected. The January employment report, however, provided some encouragement. Non-farm payrolls increased by 257,000, bringing the three-month increase to the highest in 17 years. Average hourly earnings were up 2.2% over the past year and, with more jobs being created, wage growth should improve. January showed an increase of .5%. The unemployment rate rose from 5.5% to 5.7% as the participation rate notched up, but an increase in the number of people entering the work force is a positive for the economy. Recent data on initial unemployment claims and job openings were both favorable.
Geopolitical conditions have fostered the mood of uncertainty. Russian-sponsored troops have moved aggressively in Ukraine, but now there is a fragile cease-fire that freezes the territorial lines and gives President Putin much of what he wants. While Kurdish troops took back an important city from ISIS, the threat of Islamic extremists remains serious in the region. A new king is in place in Saudi Arabia, creating some uncertainty on future oil production there. The March 24 deadline for an agreement with Iran to pull back from its nuclear weapons development program is approaching, but progress has been uneven. The country is resisting inspection of its facilities, and Congress is considering increasing sanctions. The European Central Bank has announced a program of quantitative easing, which begins this month, yet it is not clear if it will be enough to keep the continent out of a deflationary recession. Leaders from the new Greek government have compromised with their creditors on a four-month extension of the current aid program. The Syriza government had no choice, because capital flows out of the banks were threatening the financial system and the country faced the prospect of not being able to pay civil employees or pensions.
The mix of these positive and negative events has disheartened investors. Sentiment in the U.S. has moved from optimistic to neutral, on its way to settling into a state of caution that will provide a foundation for a better market later in the year if the fundamental framework turns positive, as I expect, in spite of the economic problems abroad. Equities perform better when investors are nervous, not euphoric. While the market has been volatile, it has risen 2.6% year-to-date. At current prices, the valuation of the S&P 500 is about 17 times based on trailing (12-month) earnings, a long way from the bubble points of past cycles of 25 to 30 times. There are, however, other measures of valuation that are more disturbing. Robert Shiller of Yale uses the cyclically adjusted price earnings ratio, which looks back a decade. It is now at 27.5, comparable to 1929 and 2000 levels. Gavekal Dragonomics looks at the aggregate stock market value compared to U.S. gross domestic product. At the current 155%, it is comparable to the 2007 level, but U.S. companies operate more globally than they did back then. I remain optimistic that 2015 will be a positive year for U.S. equities.
The second major concern is deflation. In the U.S., the GDP deflator was negative 0.1% at year-end. In Europe, the Consumer Price Index was down 0.6%. The deflation fear is likely to be supported by data for the next few months. Even in China, recent signs of deflation have brought on calls for monetary easing. In my view, this is largely because of the sharp decline in the price of oil, which, at its low, was down more than 50% over the past year. While this may help consumers, it is a major factor fostering the widespread talk of deflation. There are some signs, including the sharp drop in the rig count, that the price of oil may be bottoming, although the evidence is not conclusive. If that happens, the deflation argument could be neutralized. With storage capacity full, however, the possibility of a further oil price decline is feared. Excess production has to be sold somewhere.
The problem with deflation is that it encourages consumers to defer spending in anticipation of lower prices at a future date. With central banks around the world in a generally accommodating position, you would think inflation concerns would be on everyone’s mind. I understand that the data do not support the inflation view, but a modest increase in the price of oil could turn the deflation thesis around. The January U.S. employment report showing an increase in average hourly earnings adds to the case that deflation is not likely to occur in the U.S. this year. I have observed that inflation through the ages is largely influenced by house prices and wage rates, and both should be headed somewhat higher in 2015.
The situation in Europe is somewhat worse. The Ukraine conflict and the concern about Russian expansionism have made many consumers cautious. The terrorist attacks in France have darkened the mood there. While Greece is only a small part of the European Union, the possibility of default and withdrawal is a negative for the Continent. Also, Europe has an unemployment rate double that of the U.S., with youth unemployment twice the overall level, which has deflationary implications.
While I do not think deflation will be a problem in the United States or China for long, it may continue in Europe. In general, I do not expect it to be a major factor in the world economy this year.

Interest rates will remain low and money supply is expanding almost everywhere, which should reduce deflationary expectations.
The concept of demand is more elusive. You would expect the combination of monetary expansion coupled with population growth to increase the demand for goods and services. The middle class in poorer regions of the world, such as India and China, is expanding rapidly. The problem is that the supply of manufactured products is also increasing, and world income does not seem to be growing fast enough to absorb all these goods at the same or increasing prices. The issue of inequality may also be at play here. Those in the higher brackets spend a smaller proportion of their income on goods and services than those in the middle or lower quintiles. In 1980, the top 1% of United States earners accounted for about 8% of total income. In 2010, the figure was 19%.
The year 1980 was seminal for the supply/demand equation. Two factors came into prominence that endure to this day and will persist. The first is globalization beginning with the rise of China after the Cultural Revolution ended in 1976. Two years later, Deng Xiaoping’s implementation of reforms led to the country’s industrial expansion. Russia’s abandonment of the command economy followed a decade later, and India opened up as well. At first, we viewed these changes as providing three billion new customers for our products, but these countries became competitors as well, producing quality products at attractive prices.
The second factor was technology, which enabled products to be manufactured and services provided by fewer workers. Robots began to appear in factories, and many service workers found themselves displaced by technology. What’s more, the new jobs created in technology required a level of quantitative skill higher than that possessed by those who did not continue their education beyond high school. The combination of more efficient manufacturing; fewer jobs created by the new, Internet-related industries; and a growing world population helps explain our current slow wage improvement and job creation problems. It is unlikely that this condition can be turned around by monetary policy alone. Fiscal stimulus will be necessary.
Economic growth in the future may be accompanied by meager job creation, and wages may increase only modestly. The supply of goods and services will continue to expand. The challenge is whether future buying power will be sufficient to produce jobs at reasonable wages for the growing population, but this is a longer-term problem.
Over the near term, the question is: How bad is the fundamental framework of the world economy?
Some of the recent concern in the U.S. may be related to the 3.4% December decline in durable goods orders. Capital spending and housing were supposed to be two positives for the economy in 2015.
Recent data from the National Association of Independent Businesses was encouraging with respect to small business hiring and capital expenditures. However, some of this will be offset by a slowdown in capital spending in the energy sector. As for housing, the increase in employment among the 16–34 age group, where most family formations occur, is a positive sign that has been reflected in recent data on housing starts, now running at an annual rate of over one million. Single-family starts were the fastest in seven years. Home prices were up and mortgage rates were down, factors which should sustain housing’s momentum. Family formations soared in the fourth quarter, boding well for housing and durable goods spending.
In his State of the Union address, President Obama said that the average family could save $750 on gasoline in 2015 compared with last year. December retail sales were down almost 1%, indicating that the expected boost in retail sales has yet to appear. Perhaps consumers are catching up on unpaid bills and other debts, but at some point consumer spending, the single largest component of the U.S. economy, should improve.
Based on past oil price declines, consumer spending only improves after a lag, and right now the focus is more on services or “experiences” than goods. The rise in the University of Michigan Confidence Index indicates that consumers are feeling more positive about the outlook and may be willing to step up their spending.
Also, the news out of Europe isn’t all bad. Spanish GDP for the recent quarter was reported at 2.8% and retail sales were improving. French consumer spending also increased. Economic expectations were improving in Germany while exports were strong as a result of the decline in the euro, and consumer confidence was rising in Italy. All of this has been happening prior to the start of the European Central Bank’s monetary stimulus program. China may be slowing, but it is still growing faster than most emerging markets, and it is the world’s second largest economy. Their debt to GDP ratio enables them to implement some further stimulus. Better economic data are even coming out of Japan, where exports are up sharply.
There may be some evidence of recoupling, rather than decoupling, in that Europe and Japan are showing signs of strength.
I also believe the geopolitical situation will become more stable during the year. I think U.S. GDP will increase close to 3%, and, taking into account that the valuation framework is favorable, the S&P 500 will have another positive year. I do not believe deflation is a serious near-term problem and concern about it will diminish over the coming months. My big worry is whether supply will overwhelm demand in the years ahead. Right now, I’m not too concerned about decoupling and deflation.

Assessing all of this economic data, I cannot help but wonder whether the world economic outlook is as bad as the consensus view.
Wien is a senior advisor to Blackstone, the private-equity and asset management firm.

The Perilous Politics of the Euro
Andrés Velasco
FEB 28, 2015

Euro currency

SANTIAGO – The jury is still out on whether Greece will manage to avoid default, remain in the eurozone, and reverse the brutal contraction of its economy. But any fair panel already would have issued a verdict on the political consequences of the common currency: utter failure.
Of course, the case for the euro was always political and came in two varieties: earthy and lofty.
The earthy case, seldom made clearly in polite company, was that the countries in southern Europe spent too much, taxed too little, and thus borrowed in excess. So long as they could finance deficits by printing a local currency and devaluing it from time to time, they would stick to their free-spending ways. Only the straightjacket of the euro and a monetary policy governed from Frankfurt could discipline them.
That was the theory. The practical result was precisely the opposite. With the risk of devaluation gone, interest-rate spreads dropped precipitously, and so did borrowing costs.

Cheap money from abroad flooded into Europe's lower-income countries. In some places – Greece, Italy, and Portugal – the money financed an unsustainable public-spending binge. In others – Spain and Ireland – it financed the delusions of private real-estate developers. Debts ballooned everywhere.
The lofty political case for the euro was uttered most pleasingly in French. It promised peace, prosperity, and growing mutual respect, with political union as the ultimate goal. It did not matter that no one seemed to know how to get there. As I heard at countless conferences over the years, European will and determination would do the trick. As a non-European, I was told (sometimes politely, sometimes less so) that I could not possible understand that.
Well, the results are now visible, and even non-Europeans can grasp what has happened.

European institutions' legitimacy is down, and neo-fascist movements are up. Anti-immigrant prejudices and clichés about tight-fisted northerners and lazy southerners proliferate. Even proper newspapers are not above depicting German politicians in lederhosen and Hitlerian moustaches. There may well be a worse outcome for the project of building an integrated and tolerant Europe, but I have trouble imagining it.
It did not have to be this way. Monetary union was always a risky bet, but it did not necessarily have to produce mass unemployment (more than half of all young people in Greece and Spain do not have a job). A significant part of the problem reflects the eurozone's flawed design, and that failure, too, is political.
Yes, many of Greece's troubles were of its own making. Pension benefits have been widely abused, tax collection is a mess, and (aside from beautiful beaches) the country offers few goods and services that the rest of the world wants to buy.
But the depression – now a half-decade old – also has external causes. Other European countries are not just buying too little from Greece; they are buying too little everywhere. As Martin Wolf of the Financial Times never tires of pointing out, there is a massive imbalance in Europe, and it is not the one you might think.
Since the current crisis erupted, the eurozone's current account has gone from a small deficit to a surplus of nearly 2.5% of GDP. As countries like Greece have cut their expenditures, others, like Germany, have not expanded theirs. Northern Europeans are proud of living within their means – never mind that in doing so they are helping to sustain a regional crisis.
This kind of problem already worried John Maynard Keynes at the time of the post-World War II Bretton Woods negotiations. Outsiders can force a country to spend less by refusing to lend to it. But how do you force a country or group of countries to spend more? The eurozone does not have an answer for this inherently political conundrum, and therein lies one of its fundamental flaws.
Nor does the eurozone have the automatic fiscal shock absorbers that – as is widely understood by now – are essential to stabilize incomes across the union. When the price of oil drops and Texas and Oklahoma fall into recession, money flows their way on a moment's notice and without any political vitriol. But such a transfer union will not happen as long as a single northern European citizen is left standing. So the eurozone will be forever plagued by economic imbalances and the political tensions that inevitably accompany them.
And, speaking of political tensions, Greece's negotiations with the EU broke new ground. The new Syriza government caved after barely two weeks, when confronted with the ultimate nuclear threat: misbehave and the European Central Bank will stop funding your banks. Not even finance ministers in leather jackets are willing to countenance a bank run and the financial chaos that follows.
Independent central banks are a great thing, and ECB President Mario Draghi is a great central banker. But that independence is meant to apply to monetary policy (jacking up interest rates if necessary, however unpopular it may be) and not to fiscal policy (forcing a country to cut expenditures and raise taxes to pay outstanding debt). Did anyone say democratic deficit?
Of course, none of this means that Greece's exit from the eurozone would be desirable. As the old joke goes, if you want to go there, I wouldn't start here. But here – in the monetary union – is where Greece finds itself, and leaving in a lurch without a plan B would be disastrous.
Bad economics easily turns into bad politics. Owing to its flawed design, the common currency now threatens to abort the very project of political union that it was meant to advance. Now that would be a Greek tragedy.

February 27, 2015 8:45 pm

We expect too much of the new masters of the universe

Andrew Sentance

By acting as instruments of government policy, central banks are straying from their own dominion into political territory, writes Andrew Sentance

For City bankers who once thought of themselves as masters of the universe, these have been bruising years. Financial scandals, shrinking balance sheets and the humiliation of having to rely on state support have sapped the energy of a profession that once seemed indestructible.

Yet at the same time as private-sector bankers have been on the defensive, their official counterparts have been riding high. Central bankers used to be thought of as timid technocrats operating behind the scenes. Now they stride across the financial stage. They have slashed interest rates, pumped vast amounts of money into the financial system and worked with governments to rescue banks and keep them lending.

They are, it seems, the new masters of the economic universe. But we should be wary. We had too much confidence in private sector bankers before the crisis. Are we now too optimistic about the abilities of the financial system’s new overlords?

Central bankers derive their influence over markets from their independence and credibility — sources of power that they acquired in the two decades following the last big financial crisis, in the mid-1970s. The pioneer was the Bundesbank, which in the 1970s pursued tight monetary policies when inflation was accepted as a fact of life in many other countries. The US Federal Reserve under Paul Volcker followed suit in the 1980s, using high interest rates to bring inflation under control.
The UK emulated these policies under Margaret Thatcher, only to relapse in a spell of inflation in the late 1980s. This led to the Bank of England being put in charge of monetary policy as an independent authority. Since 1997, control over interest rates has been exercised by the Monetary Policy Committee.
Independent central banks committed to low inflation held sway as we moved into the 21st century.
When the euro came into being, the European Central Bank followed the Bundesbank model. But we now know that, during this period, growth was supported in the west by an unsustainable credit boom. When the economy showed signs of faltering — after the Asian crisis of 1997, and again when the dotcom bubble burst in the early 2000s — central banks reduced interest rates to support economic activity. Financial markets believed in the “Greenspan put”: the US Federal Reserve would act to sustain growth, no matter what.
Central banks now seem ready to do whatever it takes to sustain growth — to a degree that casts doubt on the genuineness of their commitment to price stability. Monetary policy deliberately turned a blind eye to relatively high inflation in 2011-12.

And growth is not the only competing objective that central bankers have taken on. They have worked with governments to rescue banks, too. They are experimenting with new tools — quantitative easing, which entails creating money to buy financial assets, and “macroprudential” policy, which uses regulation rather than interest rates to steer the economy.

This carries risks. The most important tasks for central bankers are to maintain the stability of prices and intervene when there is a severe crisis in the financial system. If they over-reach themselves, there will be conflicting pressures which compromise these core responsibilities.

That is a danger to the economy and puts central bank credibility at risk. Central bank independence is also in danger of being eroded. By acting as instruments of government policy, central banks are straying from their own dominion of monetary policy and financial stability into political territory. (For example, the ECB has been drawn into a role in the Troika of institutions supervising the restructuring of the Greek economy). Through QE programmes, central banks have become substantial holders of government bonds — with the result that government spending is financed by money creation rather than issuing debt on the markets.

This is justifiable as a short-term remedy to restore confidence but not as a long-term basis for managing public debt.

It is a measure of how much has changed in the world of central banking that the very institutions that won their credibility by keeping a lid on prices now seem to be trying to create inflation, not subdue it. The 2 per cent inflation target served policy makers well as a definition of price stability when they felt that zero inflation was not achievable. But price stability could mean what it says on the tin — somewhere close to zero, perhaps as close as possible. The odd month in which prices fall is not the same thing as the chronic deflations endured by the US in the 1930s and the UK in the 1920s.
Maintaining financial and price stability in well-performing economies such as the UK and US requires a gradual rise in interest rates. But today’s central banks are behaving more like pussycats than lions in pursuit of this objective.
We may live to regret their caution. The job of a central banker is to make unpopular decisions when politicians will not. We saw that in the 1970s and 1980s from the Bundesbank and the US Federal Reserve. We have yet to see those actions from the current monetary policy makers. The lions of the financial system need to find their roar.

The writer is senior economic adviser at PwC and a former member of the Bank of England Monetary Policy Committee