An interest rate rise would take the froth out of the US economy

The Fed should act to prevent the build up of imbalances within the financial sector

Elga Bartsch


The Federal Reserve in Washington DC where central bankers are cautious about publicly stating what interest rate would allow GDP to expand at its long-term trend rate © Reuters


US interest rates are climbing towards a level that many market participants deem neutral for growth and inflation. But US central bank officials, notably Federal Reserve chairman Jay Powell, seem to be less enthusiastic about publicly stating what interest rate would allow gross domestic product to expand at its long-term trend rate.

Part of their criticism is understandable; there is much uncertainty surrounding the estimates of the neutral interest rate level. But whether central bankers like it or not, the concept of a neutral interest rate provides a centre of gravity for investors’ expectations for long-term interest rates. That means neutral rates must inevitably be part of the forward guidance that a central bank provides on its future policy rates.

Most estimates of the neutral interest rate level ignore a key feature of the long-term equilibrium that central banks are aiming to achieve. While their main goal is to keep the economy on an even keel long term, central banks also try to steer the financial cycle towards a steady state, avoiding credit booms and busts. This second goal has increased in importance in recent decades as financial cycles have become longer and more extreme.

BlackRock estimates that, if the bank took into account the financial cycle as well as the economic one, the neutral interest rate level in the US would be about 3.5 per cent. That is considerably higher than the Fed funds rate of 2.25 per cent. We also believe the current neutral rate is probably higher than its long-term trend rate of about 3 per cent. The difference is due to the extended period of strong credit growth in the US since the 2008 crisis.

This deviation has key implications for monetary policy. During the financial crisis, falling confidence and declining debt pushed the neutral rate below its long-term trend. That meant that the Fed had to cut policy rates further to stabilise the economy. Over time, the scars have healed, and we have seen a period of sustained increase in borrowing, especially by the corporate sector. This has pushed the neutral rate back above its long-term level.

Hence,I believe the Fed should do what is known as “leaning against the wind”: raise rates to contain overheating in the economy and prevent the building up of imbalances within the financial sector.

The actual Fed funds rate, which measures the cost of borrowing “excess” the Fed reserves overnight without collateral, remains more than 100 basis points below our estimate of the neutral level. So US monetary policy should still be very supportive of economic growth and encourage investors to favour riskier assets.

That said, the Fed is raising interest rates and shrinking its balance sheet. It is therefore providing less economic stimulus than right after the crisis. That means it could lift rates further before monetary policy would start to weigh on economic and credit dynamics in a meaningful way. The median forecast of the members of the Federal Open Market Committee, which sets the rate, is only inching towards the neutral level of US interest rates, BlackRock estimates.

The outlook for economic growth in the US therefore is still good. But the support provided by monetary policy and last year’s tax cuts will gradually diminish next year. Our estimate of the neutral rate of interest suggests that 10-year US Treasury yields are relatively close to their equilibrium level.

The current Fed tightening cycle will probably peak at a much lower level than previous ones. As a result, investors are likely to be willing to accept higher equity prices for the same predicted earnings in the long run. That means the US equity market does not look materially overvalued. In fact, solid corporate earnings and strong economic growth would underpin a positive view on equities.


The writer is head of economic and markets research at BlackRock

miércoles, diciembre 05, 2018

SILENT INFLATION / PROJECT SYNDICATE

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Silent Inflation

Inflation targeting is supposed to reduce uncertainty about prices. But keeping the inflation target at 2% or more, might actually increase a sense of uncertainty about real things like home values or investments.

Robert J. Shiller  

couple finances stress


NEW HAVEN – In many countries, inflation has become so low and stable in recent decades that it appears to have faded into the woodwork. Whereas galloping inflation was once widely viewed as the number one economic problem, today most people – at least in the developed countries – hardly ever talk about it or even pay attention to it. But “silent inflation” still has subtle effects on our judgment, and it may still lead to some consequential mistakes.

Since New Zealand’s central bank set the first example in 1989, monetary authorities around the world have increasingly pursued a policy of setting inflation targets (or target ranges) that are substantially above zero. That is, policymakers plan to have inflation, but steady inflation. What used to be a dirty word is now announced publicly, and moderation is enforced.

Central Bank News tabulates these targets for 68 countries. The European Central Bank targets annual inflation in 2018 at “below, but close to, 2%.” In Canada, Japan, South Korea, Sweden, the United Kingdom, and the United States, the 2018 inflation target is 2%. China and Mexico target 3% annual price growth. In India and Russia, the target rate is 4%. It is 5% in Ukraine and Vietnam, and 6% in Azerbaijan and Pakistan.

Some countries have had double-digit inflation targets. Egypt has set a target of 13%, plus or minus 3%, for this year. But most countries have set their 2018 inflation targets at between 2% and 6%.

It is worth translating these annual inflation targets to longer-term inflation, assuming that the target is not changed in coming years. Inflation of 2% per year implies 22% inflation over a decade, or 81% inflation over 30 years. That will make numbers measured in currency look a lot bigger over time, even if nothing real is changing.

It is a lot worse if one considers a 6% inflation rate. At that pace, prices would rise 79% in ten years and almost six-fold in 30 years.

Such policies cause a sort of magnification of the present in the minds of most people. Suppose you ask someone who has been living in the same house for 30 years what he or she paid for it. The purchase price will probably look ridiculously small. If one is not careful to remember the effects of inflation on all prices, it might seem that we are living in a magnificently successful new era. With silent inflation, it can be easy to forget that the truth is much less dramatic.

At the same time, in an age of Internet rumors and fake news, the world today can look a little unmoored from history. That might create a sense of real risk.

Inflation targeting has other effects, too, which seem to be more on the minds of central bankers.

In his influential 1998 book Inflation Targeting, Ben Bernanke and his co-authors advised policymakers to announce a target inflation rate because it “communicates the central bank’s intentions,” which would “reduce uncertainty.” The announced rate should be substantially positive, they wrote, because if officials tried to get it close to zero, any mistake could result in deflation, which “might endanger the financial system and precipitate an economic contraction.” As Federal Reserve Chair from 2006 to 2014, Bernanke formally introduced inflation targeting in the United States in 2012, setting the annual rate at 2%, where it has remained ever since.

But reducing uncertainty about prices by keeping the inflation target at 2% or more might actually increase a sense of uncertainty about real things like home values or investments. While it is right to worry about massive deflation, the historical relationship between deflation and recession is not all that strong. In a 2004 paper, the economists Andrew Atkeson and Patrick Kehoe concluded that most of the evidence of a relationship comes from just one case: the Great Depression of the 1930s.

The news media’s tendency to fixate on new records serves their short-term interest in creating the impression that something really important has happened that justifies readers’ or viewers’ attention. But sometimes there is a bit of fakery in the record, especially when the record is described in nominal terms and we have steady inflation. As a result, the emphasis on records can encourage a disrespect for history and nurture a sort of disoriented feeling that we live in exceptionally uncertain times.

For example, sometimes the stock market has set a new record, whether up or down, which is nothing more than the result of inflation. On February 5 of this year, the Dow Jones Industrial Average fell 4.6%, far below the record 22.6% decline on October 19, 1987. But media reports chose to point out that the February 5 drop was the biggest-ever one-day decline in absolute terms (1,175 points on the DJIA). Presenting a drop this way is misleading, and might encourage some panic selling. The amplitude of stock-market point swings invariably grows with general inflation in all prices.

The money illusion even bleeds into impressions of the “strength” of the economy, as if a high level of GDP growth or a bull market are indicators of the health of something called the economy. GDP growth numbers are conventionally reported in real (inflation-adjusted) terms, and unemployment numbers are unit-free. But reporting of just about every other major economic indicator is generally not corrected for inflation.

An inflation target of a few percentage points may seem to promote stability, and perhaps it really does. But we need to consider the possibility that it may lead to subtle misperceptions that have the opposite effect on the stability of our judgments.


Robert J. Shiller, a 2013 Nobel laureate in economics, is Professor of Economics at Yale University and the co-creator of the Case-Shiller Index of US house prices. He is the author of Irrational Exuberance, the third edition of which was published in January 2015, and, most recently, Phishing for Phools: The Economics of Manipulation and Deception, co-authored with George Akerlof.


Defeating despair

Suicide is declining almost everywhere

Thank urbanisation, greater freedom and some helpful policies



ZOZH IS A Russian neologism, born of an acronym for a healthy lifestyle. It is visible on Instagram, where millions of posts celebrate newly toned bodies; in the boom in health clubs in Russia’s cities; in the proliferation of cafés where the young sip soft drinks and munch muesli. It is so popular that Russia’s most famous rock band, Leningrad, has satirised it: “They say drinking isn’t trendy, the trend is some sort of zozh. Before he was a drunk, and now he’s muscleman.” The video of the song depicts men dying gruesome deaths while exercising.

For a band that trades on degenerate cynicism, zozh may be laughable, but for the rest of Russia it is great news. It is part of a social transformation that has helped banish Russia’s demons. As exercise and smoothies have replaced despair and alcohol, the suicide rate in Russia has crashed. And this trend is not unique to Russia (see chart).



Globally, the rate has fallen by 38% from its peak in 1994. As a result, over 4m lives have been saved—more than four times as many people as were killed in combat over the period. The decline has happened at different rates and different times in different parts of the world. In the West, it started long ago: in Britain, for instance, the male rate peaked at around 30 per 100,000 a year in 1905, and again at the same level in 1934, during the Great Depression; among women it peaked at 12 in 1964. In most of the West, it has been flat or falling for the past two decades.

In other parts of the world, rates have dropped more recently. China’s started to come down in the 1990s and declined steadily, flattening out in recent years. Russia’s, Japan’s, South Korea’s and India’s rates, still high, have all fallen.

America is the big exception. Until the turn of the century the rate there dropped along with those in other rich countries. But since then, it has risen by 18% to 12.8—well above China’s current rate of seven. The declines in those other big countries, however, far outweigh the rise in America.

Although America’s numbers are probably reliable, there is reason to treat some of these data with caution. Some countries where powerful religions forbid suicide have historically underreported the act; some still do so. For example, a recent study in Iran of attempted suicides came up with a rate ten times higher than the health ministry’s figure. But the trends are probably broadly correct. Experts mostly reckon data are getting better rather than worse, which (given past underreporting) would tend to push rates up rather than down, yet the opposite is happening. Why?

Half the sky

One big reason seems to be an improvement in the lot of Asian women. In most countries, men are more likely to kill themselves than women, and older people more than younger ones. But in both China and India the suicide rate among young women has long been unusually high.

That has changed. Among Chinese women in their 20s, the rate has dropped by nine-tenths since the mid-1990s; that group accounts for around half a million of those 4m lives saved.

Greater social freedom is one of the reasons, suggests Jing Jun, a professor at Tsinghua University in Beijing: “Female independence has saved a lot of women.” In a study in 2002 looking at high rates among young rural women, two-thirds who attempted suicide cited unhappy marriages, two-fifths said they were beaten by their spouses and a third complained of conflict with their mothers-in-law. Professor Jing explains: “They married into their husbands’ families; they’d leave their home town; they’d go to a place where they knew nobody.” These days, scarcity may enhance the value and power of rural women: in Chinese villages, among 30- to 34-year-olds, there are three unmarried men for every unmarried woman.

There may be something similar going on in India. “Young women face particularly challenging gender norms in India,” says Vikram Patel of the Harvard Medical School. If parents disapprove of a relationship, they will tell the police their daughter has been abducted. The cops will then take a 21-year-old away from a consensual relationship. So, he concludes, many suicides in India “are related to the lack of agency for young people to choose their own romantic partners”. As social mores have liberalised, that is changing. Rates among young women have fallen faster than among any other group since 1990; Mr Patel believes they will continue to improve as social liberalisation continues.

Urbanisation has probably helped in both China and India. That seems counter-intuitive since it is associated with the weakening of the social bonds which, according to Emile Durkheim, a 19th-century sociologist and theorist of suicide, helped protect people against suicidal urges. Yet all over the world, suicide rates tend to be higher in rural areas than in urban ones. Social bonds sometimes constrain people as well as sustaining them; escaping an abusive husband or tyrannical mother-in-law is easier in a city than in a village. And the means to kill oneself are harder to come by in a town than in the countryside.

While the demographic oddity in China and India was the high rate among young women, that in Russia was the high rate among middle-aged men. They, it seemed, were the victims of the huge social dislocation that happened after the collapse of the Soviet Union. The period is brought to life by “Second-Hand Time”, an oral history by Svetlana Alexievich, a Nobel-prizewinning author, notable for a bleak pattern: its characters keep killing themselves.

Worn down by hunger and poverty, one man set himself on fire in his vegetable patch. An ageing veteran survived the second world war, only to throw himself under a train in 1992. An officer who took part in the attempted coup against Mikhail Gorbachev in 1991 later hanged himself in the Kremlin. “Everything I heretofore considered to be the meaning of my life is being destroyed,” he wrote in a suicide note.

Hyperinflation, falling incomes and rampant unemployment in the first years of transition left many facing misery and want. The 1998 financial crisis, when the Russian government defaulted on its debts, wiped out many families’ savings. Since the early 2000s, however, the trends have been reversing. Russia’s suicide rate now sits at 25—very high by global standards, but down by half from its peak. The decline has happened disproportionately among middle-aged men, the group that suffered most in the 1990s.

A big reason is probably that society is settling down after the upheaval of the post-Soviet era. According to Olga Kalashnikova, a psychologist at the suicide and crisis-psychiatry department of Moscow City Hospital No 20, “Now people know how to get by, and how to get by without the state.” Since 2000 GDP per head has nearly doubled. Wages recovered their losses from the 1990s and more. Unemployment is below 5%. Relatively high current levels of suicide among males in rural areas, which tend to be less well-off, reinforce the socioeconomic hypothesis. Ilnur Aminov, a demographer, points out that nearly 40% of all suicides in his home region of Bashkiria are by unemployed people.

There are parallels between the rise in suicide in post-Soviet Russia and the “deaths of despair” in America identified by Anne Case and Sir Angus Deaton, economists at Princeton University. Suicide rates among white Americans are higher, and have risen faster since 2000, than among any other group except native Americans (see chart). The same trend can be seen among the middle-aged. At the turn of the century, older people were much more likely to kill themselves than those in their 50s, but that is no longer true. Rates among people in rural areas are higher, and have been increasing faster, than those among people in towns and cities.




It is hard to conclude that the explanation is a simple economic one of stagnating median incomes and falling employment rates. Blacks and Hispanics have faced similar economic problems to whites, and employment rates among the young tend to be lower than those among the middle-aged. Ms Case and Sir Angus put it down to “familiar stories about globalisation and automation, changes in social customs that have allowed dysfunctional changes in patterns of marriage and child-rearing, the decline of unions, and others. Ultimately, we see our story as about the collapse of the white working class after its heyday in the early 1970s, and the pathologies that accompany this decline.”

The increase in the American suicide rate predated the economic crash, but accelerated in the recession that followed it. Research suggests that, after the global economic crisis, an uptick in suicide rates in Europe, America and Canada led to 10,000 more deaths between 2007 and 2010. Debt, foreclosure and unemployment are all implicated in suicide: unemployed people kill themselves at a rate 2.5 times higher than those in work. A spike of suicides in South Korea followed the Asian financial crisis of 1997-98.

Policy can mitigate the effects of recession. According to research by David Stuckler of Bocconi University in Milan, Sweden saw no increase in suicide in either its recession of 1991-92 or after 2007. Mr Stuckler attributes this in part to better health services—unemployment is less daunting where health care is available to all than in countries such as America where it is linked to employment—and government efforts to get people back into the workplace. A study of 26 European countries showed suicide rates to be inversely correlated with spending on active labour-market policies. Japan’s suicide-watchers attribute the decline there in part to the success of Abenomics in bringing down unemployment. Michiko Ueda of Waseda University thinks the economy is the “number one reason” for the decline in suicide.

Also clearly linked to suicide is alcohol—at least in “dry drinking” cultures, such as Russia, eastern Europe and Scandinavia, where people drink to get drunk, though not in “wet drinking” places such as southern and central Europe, where people drink socially over a meal. In Russia, drinking and suicide have risen and fallen in tandem. Alcohol consumption halved between 2003 and 2016; by then, Russians were drinking less per head than French or Germans. As Russians adopt healthier lifestyles, beer’s share of the market has been rising and that of spirits falling.

Suicide and drinking do seem to go together—but both might be the effect of social turbulence. Evidence from before the collapse of the Soviet Union, however, suggests that, to some extent at least, alcohol leads to suicide. In 1985 Mr Gorbachev imposed tough regulations on the production and distribution of alcohol. Vodka sales fell by half between 1984 and 1986. Over that period, the male suicide rate dropped by 41% and the female rate by 24%. When the Soviet Union collapsed, the state’s alcohol monopoly was abolished and the regulations were ripped up. Alcohol consumption and suicide both soared.

State intervention is probably in part responsible for the recent fall in suicide, too. In 2006 new rules on alcohol production and distribution pushed up prices. Statistical analysis suggests that those restrictions led to a 9% decline in male suicide, which saved 4,000 lives a year; a similar policy in Slovenia in 2003 led to a 10% decline.

Improvements in the lives of the elderly are also believed to have helped bring down suicide rates. Globally, the rate among the old has tended to be higher than among the young and middle-aged, but in most places it has also fallen faster.

One reason may be that, as Diego de Leo, former head of the Australian Institute for Suicide Prevention and Research, points out, across the world poverty rates among the old (often the poorest group in society) have been declining faster than those among other groups. Better health services, used by the old more than the young, may be another reason. Long-term sickness is a common reason for suicide, and efforts to ease patients’ pain can make a big difference. Britain’s palliative-care system, regarded as the best in the world, helps explain a remarkable fall in the suicide rate among old people.



Home care, too, can cheer up the elderly. Mr de Leo points to the influx of badanti, migrant care workers, in Italy. Italian children are reluctant to consign their parents to old people’s homes, but also often have neither the time nor the inclination to look after the elderly themselves. Migrant workers, says Professor de Leo, have brought “a massive improvement”. (Too much so, grumble some middle-aged Italians, aghast at their aged parents’ hooking up with supposedly gold-digging migrants.)



Tsinghua University’s Jing Jun believes that China also needs to focus on reducing suicides among the old. He blames the Chinese tradition of responsibility for parental care. With the one-child policy, there are too few children to bear the burden, and if there is more than one, parents may find themselves causing conflict. “In the West, your children are bickering only about the time they’re spending with you. In China they’re fighting over the money they’re spending on you.” But he says things are moving in the right direction: rates among the old have come down as pension and health-care provision have improved.




Restricting access to the means to kill oneself can also make a big difference. Suicide is a surprisingly impulsive act, especially among the young. According to that 2002 study of young Chinese women who had tried to kill themselves, three-fifths had been thinking of suicide for two hours or less, including two-fifths who had been thinking of it for ten minutes or less, and one in ten for just a minute. Reaching for the rat-poison—88% of them had used agricultural pesticides—is likely to lead to many more deaths than, say, grabbing a bottle of pills. That may help explain why the decline in rates among Chinese women has been sharper than among men. In urban areas, men favour violent means such as hanging or jumping off buildings, whereas women tend to favour medication, which is less likely to kill them. So moving away from rural areas tends to save more women than men.

Better never than late

People tend to believe that those who intend to kill themselves are very likely to end up doing so. In a survey carried out by Matthew Miller of Northeastern University, 34% of respondents thought that all or most of those who jumped from the Golden Gate Bridge would have found another way of killing themselves if a barrier had stopped them; a further 40% thought most would have. But a study of 515 people who had survived the leap between 1937 and 1971 showed that 94% were still alive when the study was carried out in 1978, which suggests that suicide is often a fleeting impulse rather than a settled intention.

Britain in the 1960s offers a sharp illustration of what can happen if access to an easy means of killing oneself is foreclosed. When the country switched from toxic coal gas—the favoured means of suicide among women and elderly men—to harmless North Sea gas, rates among those groups crashed. At the time, rates were rising among young men, lending support to the idea that the gas switch played a role.

That was the fortuitous consequence of an energy find, but deliberate policy can play a role in restricting access to the means of suicide. A series of bans in Sri Lanka—most recently of paraquat, in 2008-11—helped bring the rate down from 45 in the early 1990s to 20 now. When South Korea banned paraquat in 2011, the reduction in suicide deaths is reckoned to have contributed half of the overall decline in suicides over the next two years. Paraquat is now banned in the EU; China has said it will ban it; distribution is restricted in America; but in many parts of the world it remains freely available.

In western Europe, where pesticides are no longer a serious risk, the focus has been on limiting access to dangerous pills. In Britain, for instance, a law was passed in 1998 to limit the number of aspirin and paracetamol that could be sold in a single pack. In the following year, aspirin suicides were down by 46% and paracetamol ones by 22%. Blister packs help, too, because pills must be pushed out tediously one by one, allowing a would-be suicide time to reconsider. In America, alas, paracetamol is still sold loose in bottles, so 50 pills can be chugged in one go.

But the main means of suicide in America is guns. They account for half of suicides, and suicides account for more firearms deaths than homicides do. Guns are more efficient than pills, so people who impulsively shoot themselves are more likely to end up in the morgue than in the emergency ward. According to Matthew Miller of Harvard University, gun-ownership levels largely explain the variation in suicide rates, which range from 26 per 100,000 in Montana to five in Washington, DC. If America gave up its guns, suicides would crash.

Self-restraint on the part of the media can also play a role. Even in death, people are influenced by celebrities. This is known as the “Werther effect”, after the rash of suicides that followed the publication in 1774 of a novel by Goethe which ends with the eponymous hero’s suicide. Particularly common in Asia, the phenomenon has been observed all over the world. After Robin Williams, an American comedian, hanged himself in 2014, researchers calculated that there were 1,841 more suicides—a 10% increase—than would have been expected during the next four months. The rise in hangings, and among the middle-aged, was particularly marked.

Suicide experts criticised the sheriff of Marin County for describing in detail the method that Williams had used. Reporting clearly makes a difference. Paul Yip of Hong Kong University points to trends in the territory after a front-page story in 1998 on the suicide of a woman who had killed herself by sealing up a room and burning charcoal, thus poisoning herself with carbon monoxide. Within a year, charcoal-burner suicides had gone from zero to 10% of the total. When Ahn Jae-hwan, a South Korean actor, killed himself in his car with a charcoal-burner in 2008, the method went from less than 1% of South Korean suicides to 8% in 2011, accounting for most of the overall rise in the rate in that period.

Many countries have media guidelines, which basically say the same things: don’t write about suicides in a heroic light and don’t report the location or method in detail. Media restraint seems to make a difference. After a spate of suicides on the underground in Vienna, when people were killing themselves at a rate of nine every six months, newspapers were persuaded to stop reporting suicides or at least to keep them off the front page. Numbers went down to one to four every six months. But in some countries media guidelines are widely ignored. A study of South Korean suicide-reporting earlier this year showed that three-quarters of articles gave details of method and location, and half revealed the contents of the dead person’s suicide note. Readers’ prurient fascination with the gory details of suicide trumps responsible journalism.

Faced with the horror of a suicidal friend or relation, people feel scared and impotent. Yet just as individuals can make a difference—talking, listening, helping people through a difficult time—so can societies. Giving women more control over their lives, cushioning the impacts of social change, providing better care for the elderly, restraining the way that suicide is reported, restricting access to the means of killing oneself: all these things can make life a little more worth living, or at least persuade the desperate to hold onto it until it seems that way.

Empty Words Are Failing. A Timeline For What Comes Next

A quick recap of the past couple of months:

Stocks plunge.

The politicians, bureaucrats and bankers who depend on artificially-elevated financial asset prices start to panic.

The Fed announces that maybe it won’t have to raise interest rates any more, and the president announces a temporary cease-fire in the trade war with China.

The markets bounce, leading some to conclude that the worst is over and it’s time to go back to buying the dip.

A larger number of people conclude that the changes in policy were really just empty words. No actual actions had taken place.

Stocks start falling again. You are here — as this is written on Tuesday Dec 4, the Dow is down about 300 points.

What happens next?

Think of the past few months as the first act in a play that is performed in virtually every business cycle, with later acts following a predictable script. Here’s how it’s likely to go this time:

Words give way to modest action (early 2019). When the markets figure out that empty promises don’t change the underlying reality of slowing growth, falling corporate profits and rising loan defaults, they return to panic mode. Governments are then forced to actually do things to try to stop the bleeding. In the current US case, that means the Fed will announce that it’s done raising rates and will soon start cutting. Trump, meanwhile, will cut a trade deal with China that accomplishes little but removes the future uncertainty.

This will be greeted with another few days of market euphoria, followed by the realization that, again, nothing substantive has changed. Stocks will resume their decline. Let’s call this “2008 revisited.”

DJIA 2008 empty words fail

The action turns serious (mid-2019). Now Wall Street, Silicon Valley and Washington (i.e., the 1%) are in full-on panic mode, and ready to take radical steps to save themselves. The Fed, which just a few months ago had proclaimed rates to be “neutral,” which is to say just right, starts cutting in earnest. ZIRP is now on the horizon, with NIRP promised in a “whatever it takes” speech by the Fed chair.

The Fed also re-introduces QE, with some twists. Either it’s bigger, or broader to include equities and real estate in addition to bonds, or both.

The government starts forgiving student loans and possibly auto mortgages. Tax cuts move through Congress, along with infrastructure spending that dwarfs any previous roads/bridges program.

Federal deficits exceed $2 trillion and will – Washington assures its citizens – stay that high for as long as it takes to restore “normal markets.”

Then things get really interesting (2020 and beyond). At this point in the usual script things start to stabilize. The torrent of public money flowing into financial assets more-or-less offsets the private money that’s fleeing, and prices stop falling. Loans at essentially zero cost start to entice businesses and individuals back into the economy, and private sector debt stops falling and starts rising. “Normality” returns.

The question this time around is whether there’s a limit to aggressive monetary ease. Last time it took tens of trillions of dollars to stabilize a flat-lining economy. In the intervening decade global debt has risen dramatically, which implies that the next bail-out will have to be even bigger. Will it work, or will the markets recoil from the spectacle of electronic printing presses running flat-out forever? Will capital flow away from financial assets and into real things that governments can’t create with a mouse click? And will this stampede out of the currency destabilize the system? Here’s how Austrian School economist Ludwig von Mises described the process:
But then finally the masses wake up. They become suddenly aware of the fact that inflation is a deliberate policy and will go on endlessly. A breakdown occurs. The crack-up boom appears. Everybody is anxious to swap his money against “real” goods, no matter whether he needs them or not, no matter how much money he has to pay for them. Within a very short time, within a few weeks or even days, the things which were used as money are no longer used as media of exchange. They become scrap paper. Nobody wants to give away anything against them.

So which is coming, the standard final act or a crack-up boom? That, alas, won’t be clear until after the fact. If the last round of ZIRP, NIRP and QE didn’t create a crack-up boom, it’s possible that the next, even more extreme iterations of these policies will “work” just as well as the originals. It’s also possible that they won’t.

Either way, gold and silver should do just fine.


Colombia’s Fragile Stability

It’s better off than other countries in the region, but that’s not enough to cope with the challenges coming down the road.

By Allison Fedirka  

Earlier this month, U.S. President Donald Trump canceled an official visit to Colombia that had been scheduled for early December. It’s the second time the president has canceled a planned trip to the country this year, which may give the appearance that relations between the two nations are less than cordial. But in reality, Colombia has been a key, reliable partner for the United States, particularly on security matters. For decades, both countries have worked together to monitor security of the Panama Canal, contain Venezuela and curb drug trafficking (93 percent of the cocaine in the U.S. is produced in Colombia, so Washington needs Bogota’s help on this front). In May, Colombia became the first South American country to join NATO as a “global partner,” a title reserved for some of the United States’ closest security allies. Bogota and Washington are also in early talks to expand the U.S. Customs and Border Protection's Preclearance program to El Dorado International Airport in the Colombian capital. Only 15 airports in six countries – Ireland, Aruba, the Bahamas, Bermuda, the United Arab Emirates and Canada – are currently part of the program.

Colombia has become a reliable U.S. ally in part because of its economic and political stability, at least relative to other countries in the region. Brazil, for example, is embroiled in an ongoing political scandal that resulted in charges being laid against two former presidents. Argentina’s economy is still highly volatile, and Venezuela is mired in an economic crisis that has forced hundreds of thousands of people to flee the country. Colombia, meanwhile, has weathered the global financial crisis relatively well and, in 2016, was able to strike a peace deal with the largest rebel group in the country to end a decadeslong civil war.

But despite being a relatively stable country on the continent, Colombia is facing a number of challenges that will put pressure on the government and could pose security risks down the road. The first, and perhaps most immediate, problem is the influx of Venezuelan migrants. In the past two years, Colombia has taken in more than 950,000 migrants from Venezuela. The government in Bogota has dedicated massive amounts of financial, administrative, health and security resources to help accommodate and settle the migrants. A World Bank report released earlier this month estimated that the issue could cost Colombia up to 0.41 percent of its gross domestic product. The influx has also had a social cost. A survey conducted by Cifras & Conceptos in April found that 68 percent of Colombians are concerned about increased job competition from migrants and 59 percent fear they will affect security in the country. Local protests have also broken out against camps and facilities set up to temporarily accommodate migrants, though the demonstrations remain small for now. On Nov. 11, for example, dozens of residents from the Engativa neighborhood in Bogota protested the city’s decision to relocate at least 300 Venezuelan migrants to a shelter in the area for at least three months.

 


 

Colombia has also been grappling with economic challenges. Economic growth has been declining since 2013 and fell to 1.76 percent last year, only slightly above the rate immediately following the global financial crisis. Among the country’s top economic concerns are high public debt and disappointing levels of foreign investment. The government sees foreign direct investment as one of the main drivers of growth and development, but the country’s FDI dropped by 27 percent year over year in 2015, after peaking at $16.16 billion in 2014. It recovered somewhat by 2017, totaling $14.52 billion, but still has yet to reach the levels seen just a few years ago. The government had anticipated a spike in FDI following the peace deal with the Revolutionary Armed Forces of Colombia, or FARC, but it hasn’t materialized. Meanwhile, the three major credit rating agencies have warned that the country’s credit rating could be downgraded if the government doesn’t scale down the debt. According to Moody’s, the government debt-to-GDP ratio stood at 47 percent in 2017, up from 35 percent in 2012. The deficit is set to reach 3.1 percent of GDP this year, down from 3.6 percent last year, though Moody’s says reaching the 2.1 percent target for 2019 will be difficult given the government’s spending habits.

 


 

To tackle these problems, the government has introduced a series of austerity measures. Over the next three years, it will slash spending by $2.2 billion by reducing executive and administrative expenditures. Congress, meanwhile, is debating a tax reform bill that would raise an additional $4.37 billion next year. The reforms will increase taxes for middle- and upper-income earners from 32 percent to 37 percent. Individuals with high levels of net equity may also see a tax hike. Corporate taxes, however, will be reduced by 5 percent to 30 percent in an effort to spur investment and employment. The most controversial part of the bill is a gradual introduction of a 17 percent value-added tax on consumer goods, though it includes a vague clause stating that the lowest income earners will get some type of rebate. Protests against this portion of the bill have already erupted in multiple cities, and as the government moves ahead with these changes, more social unrest is possible.

On the security front, Colombia’s main challenges are related to expanding organized crime and a thriving cocaine industry. According to U.N. figures, the area under coca cultivation in Colombia reached a record 171,000 hectares in 2017, a 17 percent increase from 2016. The vacuum left by the FARC has opened the door to Mexican cartels to boost their presence in Colombia, particularly in the west, by building stronger ties with local criminal groups. There may even be plans to reestablish a wing of the FARC with dissident members to coordinate drug-related activity, according to a commanding officer in the Colombian military. This has resulted in increased competition and clashes among these groups, which in turn has led to rising violence against the local population. Homicides have increased this year, thousands of people have been displaced by the violence and protests have erupted against the deteriorating security situation. The government, for its part, is planning to crack down on coca cultivation by tightening control on input materials, cutting off power supplies to drug facilities and potentially using drone technology.

 


 

In eastern Colombia, particularly in Norte de Santander department along the Venezuelan border, organized crime carries an extra security threat. Many groups in this area operate across the border, and some Colombian organizations, including FARC, have had strong ties with the Venezuelan government for years. (Venezuela benefited from having ties to organizations that could help destabilize a neighboring country.) Colombian rebel groups like the National Liberation Army even have camps and control territory in Venezuela’s Bolivar, Apure and Amazonas states. In addition to drug trafficking, they exploit mining resources to support their operations and funnel some of their profits to the Venezuelan government. While border incursions have happened in the past, they are now becoming more frequent and altercations with Venezuela’s military are rising. It’s a situation fraught with potential security risks because as both countries’ militaries get involved to try to control and push back these groups, the possibility of direct confrontation between the militaries themselves rises.

 


 




None of these issues on their own will destabilize Colombia. Indeed, the country remains relatively secure and able to cope with the more immediate challenges posed by the Venezuelan migrant crisis. But that all these issues are arising at the same time gives the government less room to maneuver. Dropping the ball on any one problem could risk making the others worse. And the consequences of mismanaging the situation would be felt not only in Colombia but also in the United States, which has an interest in making sure Colombia can help suppress the drug trade. Washington, therefore, will become more inclined to increase its economic and security support for Bogota as these forces intensify.