Noah Smith is clueless about Monetarism

Israel Arroyo on Twitter alerted me to a new comment BloombergView by Noah Smith titled “Monetarists Are Out of Ideas”. The whole thing is complete nonsense and shows that Noah Smith has absolutely no insight into monetary theory and particularly no knowledge at all about monetarism.

In fact there is basically nothing about monetarism in the article. Most of the article is about views of the so-called Neo-Fisherians (in itself a misnomer), which has nothing to do with monetarism and none of the economists mentioned in the article are monetarist or call themself monetarists.

In fact there is only one paragraph in the article that actually mentions monetarism. Here is the whole thing:

Monetarism — broadly defined as the idea that monetary policy influences inflation and output in the standard, textbook way — is at the core of mainstream New Keynesian models, and still dominates central bank thinking. There’s evidence for it, and there’s evidence against it, but in the end, I think its prominence endures because it represents a compromise between the Keynesian interventionists and the opposing coalition of anti-interventionists. It posits that technocratic central bankers, manipulating a single price in the economy (the interest rate), are all we need. This is a minimal intervention that liquidationists can stomach and that Keynesians can grudgingly accept.

All of that is basically wrong.

Noah Smith argues that “It (monetarism) posits that technocratic central bankers, manipulating a single price in the economy (the interest rate), are all we need.”

I guess Noah Smith never read anything any monetarist ever wrote about monetary policy, but he could for example start with reading Milton Friedman’s 1967 presidential address to the American Economic Association The Role of Monetary Policy:

… the monetary authority could assure low nominal rates of interest-but to do so it would have to start out in what seems like the opposite direction, by engaging in a deflationary monetary policy. Similarly, it could assure high nominal interest rates by engaging in an inflationary policy and accepting a temporary movement in interest rates in the opposite direction. These considerations not only explain why monetary policy cannot peg interest rates; they also explain why interest rates are such a misleading indicator of whether monetary policy is “tight” or “easy.” For that, it is far better to look at the rate of change of the quantity of money.

Noah Smith should of course know that this is the monetarist position since any student of economics will be introduced to Friedman’s classic article i  Macro 101, but maybe Noah Smith skipped that class. In fact it seems like Smith completely skipped reading anything ever written on monetarism or by monetarists.

It is at the core of monetarist thinking that interest rates tell us very little about the monetary stance. Furthermore, monetarists for decades have argued that central bankers should use the money base to control the monetary stance and that central bankers should not use the “interest rate” as a monetary policy instrument. In fact monetarists argue “the” interest rate is not a instrument at all – it is an intermediate target.

So it is very clear that Noah Smith is completely clueless about what monetarism is and consequently it is very hard to take his views on whether monetarists are out of ideas serious.

In fact I would say it is hard to take anything serious Noah Smith says on monetary matters when he so clearly demonstrates that he didn’t study any monetary theory at all.

 

 

The cost of the Sino-US FX deal: Surging money market rates (in Hong Kong)

This is from Financial Times’ FT Fast this morning:

A key lending rate between Hong Kong banks jumped to its highest level since February, potentially making it more expensive to short the renminbi.

The overnight CNH-Hong Kong Interbank Offer Rate (Hibor), a daily benchmark for offshore renminbi interbank lending, jumped to 5.446 per cent on Thursday – its highest level since February 19 – from 1.56767 per cent yesterday, write Peter Wells and Hudson Lockett.

Hong Kong banks do not rely on Hibor to anywhere near the same degree that global banks rely on Libor, the more famous US-dollar counterpart that is a crucial benchmark for loans that global lenders rely on for trillions of dollars of funding each day.

As such, the spike in CNH-Hibor has little practical impact on the banks themselves, but it has recently been viewed as more of a deterrent to speculators betting on CNH, the offshore renminbi.

On January 12, CNH-Hibor hit 66.815 per cent, the highest level since the benchmark was introduced in 2013, amid heavy speculation the People’s Bank of China, acting through state-owned banks, was soaking up liquidity to make the cost of shorting the renminbi more prohibitive as the currency came under pressure from speculators.

Ahead of this month’s G20 summit Commerzbank analyst Hao Zhou was among those predicting the PBoC would hold the line at Rmb6.7 against the dollar for a number of reasons, including a desire to facilitate special drawing rights (SDR) operations set to begin on October 1. However, he noted that “of course, politics tops the agenda again, especially as China is keen to show its ability to manage the whole economy and financial markets although the country still faces strong capital outflows.”

The central bank today weakened the currency’s midpoint fix for the first time since the end of G20, a move in line with analyst predictions that efforts to shore up the renminbi’s value would dissipate when the summit was over.

A spike in Hibor would track with a scenario in which the central bank either intervened itself or had mainland banks sop up liquidity on its behalf. It also has other options – as Commerzbank’s Zhou noted late last month: “We also expect that China’s central bank will allow the local banks to trade CNH in September, in order to narrow the CNY-CNH spread.”

This happens after China and the US over the weekend agreed to “refrain from competitive devaluations and not target exchange rates for competitive purposes”.

As my loyal readers know I am very critical about this deal (see my post on that topic here) as I believe that it is an attempt to quasi fix global exchange rates to avoid ‘currency war’ effectively limits the possibility for monetary easing – both in the US and China.

Ending China’s crawling devaluation will be bad news 

Since the Federal Reserve in December hiked the fed funds target rate the People Bank of China effective has tried to decouple Chinese monetary policy from US monetary policy by allowing a crawling devaluation of the Renminbi.

rmb-crawling-devaluation

This in my view has played a positive role in offsetting the negative impact of the Fed’s foolish attempt to tighten US monetary conditions.

However, the Sino-US ‘currency peace’ deal limits the PBoC’s possibility of continuing this policy and this is why HIBOR rates are now surging. This obviously is bad news for the Chinese economy – in fact it is bad news for the global economy and markets.

China does not need tighter monetary conditions. Chinese monetary conditions in my view is still quasi-deflationary and if the PBoC abandons its unannounced crawling devaluation policy it will cause a excessive tightening of Chinese monetary conditions, which could push back the Chinese economy towards recession.

It is too bad that policy makers from the ‘Global Monetary Superpowers’ believe that limiting currency flexibility is the right policy. Instead they should embrace floating exchange rates and instead focus on avoiding the biggest risk to the global economy – deflation.

 

 

In a deflationary world at the ZLB we need ‘competitive devaluations’

Sunday we got some bad news, which many wrongly will see as good news – this is from Reuters:

China and the United States on Sunday committed anew to refrain from competitive currency devaluations, and China said it would continue an orderly transition to a market-oriented exchange rate for the yuan CNY=CFXS.

…Both countries said they would “refrain from competitive devaluations and not target exchange rates for competitive purposes”, the fact sheet said.

Meanwhile, China would “continue an orderly transition to a market-determined exchange rate, enhancing two-way flexibility. China stresses that there is no basis for a sustained depreciation of the RMB (yuan). Both sides recognize the importance of clear policy communication.”

There is really nothing to celebrate here. The fact is that in a world where the largest and most important central banks in the world – including the Federal Reserve – continue to undershoot their inflation targets and where deflation remains a real threat any attempt – including using the exchange rate channel – to increase inflation expectations should be welcomed.

This of course is particularly important in a world where the ‘natural interest rate’ likely is quite close to zero and where policy rates are stuck very close to the Zero Lower Bound (ZLB). In such a world the exchange rate can be a highly useful instrument to curb deflationary pressures – as forcefully argued by for example Lars E. O. Svensson and Bennett McCallum.

In fact by agreeing not to use the exchange rate as a channel for easing monetary conditions the two most important ‘monetary superpowers’ in the world are sending a signal to the world that they are in fact not fully committed to fight deflationary pressures. That certainly is bad news – particularly because especially the Fed seems bewildered about conducting monetary policy in the present environment.

Furthermore, I am concerned that the Japanese government is in on this deal – at least indirectly – and that is why the Bank of Japan over the last couple of quarters seems to have allowed the yen to get significantly stronger, which effective has undermined BoJ chief Kuroda’s effort to hit BoJ’s 2% inflation target.

A couple of months ago we also got a very strong signal from ECB chief Mario Draghi that “competitive devaluations” should be avoided. Therefore there seems to be a broad consensus among the ‘Global Monetary Superpowers’ that currency fluctuation should be limited and that the exchange rate channel should not be used to fight devaluation pressures.

This in my view is extremely ill-advised and in this regard it should be noted that monetary easing if it leads to a weakening of the currency is not a beggar-thy-neighbour policy as it often wrongly is argued (see my arguments about this here).

Rather it could be a very effective way of increase inflationary expectations and that is exactly what we need now in a situation where central banks are struggling to figure out how to conduct monetary policy when interest rates are close the ZLB.

See some of my earlier posts on ‘currency war’/’competitive devaluations’ here:

Bernanke knows why ‘currency war’ is good news – US lawmakers don’t

‘The Myth of Currency War’

Don’t tell me the ‘currency war’ is bad for European exports – the one graph version

The New York Times joins the ‘currency war worriers’ – that is a mistake

The exchange rate fallacy: Currency war or a race to save the global economy?

Is monetary easing (devaluation) a hostile act?

Fiscal devaluation – a terrible idea that will never work

Mises was clueless about the effects of devaluation

Exchange rates and monetary policy – it’s not about competitiveness: Some Argentine lessons

The luck of the ‘Scandies’

 

Iceland moves to abolish capital and currency controls

Some very, very good news out of Iceland. This is from a press release from the Icelandic Ministry of Finance:

Individuals’ and companies’ freedom to transfer funds to and from Iceland and to carry out foreign exchange transactions will increase greatly, according to the bill of legislation that the Minister of Finance and Economic Affairs will present before Parliament tomorrow.

The bill is part of the authorities’ capital account liberalisation strategy, introduced on 8 June 2015. With it, important steps are being taken to lift the capital controls in full. The bill has been prepared in accordance with recommendations from the International Monetary Fund (IMF), with economic stability and the public interest as guiding principles.

Read more on the details here.

In my view this is a decisive move towards the total liberalisation of capital and currency mobility in and out of Iceland. Finance Minister Bjarni Benediktsson deserves a lot of credit for getting this through.

I am very happy to see this and  I am optimistic that this will have significantly positive effect on the long-term growth perspective.

The question of course is how the global financial markets will take this. Overall I believe that the Icelandic króna is trading fairly close to what we could think of a “fair value”, which should reduce the risk of currency outflows over the medium-term. In fact the free movement of capital will make Iceland significant more attractive as a destination for foreign direct investments. Furthermore, it should be noted that Iceland presently is running 5% current account surplus.

The graph below shows the real effective exchange for the Icelandic króna. The red line is the average value for exchange since 2000.

14012903_10210632005943350_879801731_o

 

 


If you want to hear me speak about these topics or other related topics don’t hesitate to contact my speaker agency Specialist Speakers – e-mail: daniel@specialistspeakers.com

 

 

 

Can Stephen Moore justify Donald Trump’s economic policies?

Today Donald Trump unveiled his team of economic advisers. Interestingly enough there are very few economists among the economic advisors and only one who can be said to have any free market credentials – the Heritage Foundation‘s chief economist Stephen Moore.

Stephen Moore claims to be a free market economist, but then he needs to explain why he is a Trump supporter.

So my question to Stephen Moore is please explain why Donald Trump’s following positions are good free market policies:

45% tariff on trade with China

Default on public debt

10 dollar minimum wage

Keynesian activist fiscal policies 

And the utter and complete erosion of the Rule of Law

In fact it could be very interesting to hear Stephen Moore explain what would happen to the US’ ranking on the Heritage Foundation’s Index of Economic Freedom if these Trump policies were indeed implemented.

And finally, I wonder if Stephen Moore thinks that Donald Trump would be able to explain the tax plan that Stephen Moore has put together for Trump with Arthur Laffer and Larry Kudlow?

I look forward to the answers.

 


If you want to hear me speak about these topics or other related topics don’t hesitate to contact my speaker agency Specialist Speakers – e-mail: daniel@specialistspeakers.com

 

Markets are mostly efficient

I just stumbled on this interesting discussion between Eugene Fama and Richard Thaler – they talked about whether markets are efficient or not.

Thaler argues that markets are not efficient. Fama agrees, but nonetheless are argue that we have no better model of the world. It shouldn’t be a surprise to my readers that I agree more with Fama than Thaler.

What I particularly notice is just how little evidence Thaler is able to present that markets are not efficient. Yes, he comes up with anecdotes, but that is not evidence. With billions of investors and billions of different markets and prices you will always be able to come up with some example of pricing behavior, which in someway looks inefficient or irrational, but that does not mean that you generally can say markets are inefficient rather than efficient.

My own view is very much based on my experience from working more than 15 years in financial markets. So even though I theoretically always have had a lot of sympathy of Euguene Fama’s thinking about financial markets it is not really the theoretical arguments that convince me these days.

It is simply my experience that I never meet anybody in the financial markets who consistently have been able to beat the markets. I met a lot of people who think they can beat the market, but that is not the same as they are right (they are not).

Obviously with billion of people around the world making decision and investments some will for periods do better than others, but this is essentially down to luck (or inside information!).

One thing that particularly has convinced me that markets are mostly efficient is my empirical work on exchange rates. The models I have build over the years has shown me that the more information about the world I get into the model the better the models are. The interesting thing has been that the more information I have incorporated into the empirical models the closer the “forecast” from these models have come to market expectations of future exchange rates.  Furthermore, my experience with the typical bank analysts’ forecasts of exchange rates I have learned that they rarely outperform market expectations.

This has shown me that most available information mostly is also reflected in the exchange rate and as a consequence I have had to come to the conclusion that I probably not will be able to beat the markets. And try to think about it – with billions of people trying to forecast the future exchange rate why would I be able to do better than the average forecast? What information do I have that they don’t? The Efficient Market Hypothesis (EMH) essentially is about being humble about your own abilities.  

What do both Fama and Thaler miss? I notice that both of them completely miss the importance of changes in policy – particularly in monetary policy. Simple forward-looking behavior of for example the stock markets or FX markets will show that even fairly small changes in the expected future growth rate of consumer prices or nominal incomes can have very large impact of for example the spot exchange rate if prices are rigid.

An example of this is Dornbusch’s famous overshooting model for exchange rate determination. In Dornbusch’s model there can be large fluctuations in the exchange rate, but it does not reflect inefficient markets or irrational behavior, but completely rational forward-looking behavior.

Believing that markets are mostly efficient is not assuming somekind of superhuman abilities. It is simply a matter of acknowledging the fact that billions of peoples’ knowledge are very well reflected by the price system. There is no better mechanism for aggregating information and there exist no better mechanism for aggregating information than the price mechanism.

As Eugune Fama stresses – the Efficient Market Hypothesis (EMH) – is a theory and as such is not 100% correct as it is exactly a theory, but so far no economist has come up with any theory that describes the world better than EMH and I see very little reason to think that that will change anytime soon.

Update: Apparently somebody are able to beat the market in a dramatic fashion. Just see the impressive trading performance of US Democrat Congresswoman Judy Chu. I am not making any judgements here other than noting that this is a politicians and not a regular trader. Another Democrat also once had a fantastic trading record.

The scary rise in protectionism

Over at Geopolitical Intelligence Service (GIS) where I am a regular commentator I have a comment on Protectionism’s scary rise.

The smashing success of Czech monetary policy

If we look around the world there has been very few monetary policy success stories from 2008 and onwards. However, there is a success story that unfortunately largely has been untold and that is the success of monetary policy in the Czech Republic after November 2013 when the Czech central bank (CNB) decided to fundamentally to change its operational approach to the conduct of monetary policy.

Until late 2013 the CNB in many way had failed. Effectively interest rates had hit the Zero Lower Bound (ZLB) and the CNB clearly was reluctant to use other instruments to ease monetary policy despite of the fact that inflation consistently since crisis hit in 2008 had been below the CNB’s 2% inflation target and that there clearly was significant slack in the Czech economy.

At the same time nominal GDP had essentially been flat from 2008 until late 2013 and deflation expectations clearly were growing.

However, during 2012-13 a number of CNB board members started to hint that there was a way – indeed many ways – to see monetary policy even with interest rates stuck at zero. During this period – in fact starting around 2010 – I had been arguing  – both in my position at that time as Head of Emerging Markets Research at Danske Bank and on my blog that the CNB could use the exchange rate as an instrument to implement monetary easing to hit the 2% inflation target.

More specifically I argued that the CNB could put a “floor” under EUR/CZK in the same way the Swiss central bank had done with the Swiss franc. In non-technical terms this mean that the CNB should cap any appreciation of the Czech koruna against the euro, but allow for depreciation.

In December 2012 I wrote:

The short version of this is: The Czech economy is in a deflationary trap so the CNB needs to ease monetary policy, but with interest rates basically at zero the CNB needs to use the exchange rate to do this. This basically leaves the CNB with two options.

Either to follow the lead from the Swiss bank bank and put a floor under EUR/CZK or to implement a Singaporean style monetary regime, where the central bank starts using the exchange rate (and communication about future depreciation/appreciation) as the primary monetary policy instrument rather than interest rates.

November 2013 – the floor is announced

Whether or not the CNB listened to me I don’t know, but on November 7 2013 the CNB announced the following:

The Board also decided to start using the exchange rate as an additional instrument for easing the monetary conditions. The CNB will intervene on the FX market to weaken the koruna so that the exchange rate of the koruna against the euro is close to CZK 27/EUR.

This effectively was a 4% devaluation of the koruna and a commitment to curb any appreciation pressures as long as Czech inflation was below the CNB’s 2% inflation target.

Needless to say I was extremely happy with the decision and in a blog post commenting on the decision I wrote among things the following:

…This is probably the most important monetary policy decision in post-communist Czech monetary history.

I have long argued that the CNB should do exactly this. For years the Czech economy has been caught in an quasi-deflationary trap and the CNB has so far been mentally and institutionally unable to ease monetary policy as the CNB has been stuck at the Zero Lower Bound. However, anybody who reads my blog and other Market Monetarists blogs should know that central banks can always ease monetary policy – also when interest rates are close to zero. Said in another way there might be a Zero Lower Bound, but there is no liquidity trap.

…CNB governor Miroslav Singer certainly deserves a lot of praise for this bold move. It has taken him far too long, but he finally got it right in the end. In fact Singer has long wanted to do this – but it has taken some time to convince the majority of CNB board member that this was the right thing to do.

Overall, one can say that Singer is following the advice from Bennett McCallum who in a number of papers over the years have suggested that central banks can use the exchange rate as the key monetary policy instrument when interest rates are at stuck at zero. For my earlier discussion of McCallum’s work see here.

A smashing success 

The development in the Czech economy over the past nearly three years in my view provides a test of Market Monetarist thinking. Hence, MM-thinking led me to argue that there was no liquidity trap and that what the CNB’s announcement would work in the sense it would increase nominal spending growth (NGDP growth) and hence curb deflationary pressures.

So how did it in fact go?

Lets first have a look at the favourite Market Monetarist indicators – Nominal GDP.

Skærmbillede 2016-07-25 kl. 21.52.24

It is pretty hard to miss – before November 2013 NGDP was basically flatlining, but exactly as the “floor” under EUR/CZK was announced NGDP growth took off and within a few quarters had accelerated to just above 5% and NGDP growth has ever since grown steady along a 5% path.

Given the fact that potential real GDP growth in the Czech Republic in my view probably is close to 3% this means that 5% nominal GDP over the cycle will ensure inflation around 2%. Or said in another way – CNB has since November 2013 has got it absolutely right!

But how about inflation?

Skærmbillede 2016-07-25 kl. 21.54.11

If we look at the GDP deflator as our measure of inflation then the picture is more or less the same as for nominal GDP even though inflation had started to pick up already in 2012, but after November 2013 GDP-deflator-inflation for the first time since 2009 rose above 2% and even though inflation has eased somewhat over the past year we have not returned to deflation and with the continued healthy growth rate of NGDP inflation is likely to remain fairly close to 2% going forward.

So it is certainly mission accomplished in nominal terms for the CNB – nominal GDP growth has been stable and GDP deflator has been on a 2% growth path, but what about the real-side of things?

Obviously monetary policy cannot impact real variables such as real GDP growth and unemployment over the long run, but if monetary policy is too tight it will in the short-run – which can turn out to be a fairly long period – lead to a slump in the economy and increased unemployment. This of course is exactly what happened in the period from 2008 to November 2013 as the graph below clearly shows.

Skærmbillede 2016-07-25 kl. 22.07.01

However, the graph also shows that the monetary easing implement after November 2013 has helped push unemployment down significantly in the Czech Republic. Hence, there is no doubt that monetary easing have had a real and large impact in the Czech economy.

Monetary policy is highly potent also at the ZLB

The discussion above in my view clearly shows that there is no “liquidity trap” and that central banks always can ease monetary policy also when interest rates effectively are at the Zero Lower Bound if just central bankers commit themselves to do it as the CNB so forcefully has demonstrated over the past nearly three years.

So once again it is clear that monetary policy in the Czech Republic has been a smashing success over the past three year and CNB governor Miroslav Singer – who stepped down as CNB governor after six years earlier this month – deserves a lot of praise for this policy.

The policy implemented under Singer’s leadership clearly has been hugely positive for the development in the Czech economy over the past three years. However, I think it is equally important to stress that other countries easily could follow CNB’s example or as I wrote in November 2008:

… but I also believe that Miroslav Singer is now demonstrating to his colleagues in the ECB that it is possible to ease monetary policy is at the Zero Lower Bound (the ECB is not even at the ZLB!). In that sense Singer is doing everybody a huge favour by demonstrating this.

I hope other central bankers around the world will be listening.

PS the CNB’s board recently said it plans to maintain the EUR/CZK floor at 27, but expect it to be discontinued mid-2017. Given the fact the Czech NGDP growth has slowed a bit below 5% in recent quarters and that the European economy once again looks fragile and global deflationary pressures remain strong I think the signal of discontinuing the floor is slightly premature. That said I don’t think it would cause a major monetary tightening given the fact that the “fair value” for EUR/CZK probably is fairly close to 27.

PPS CNB still could do a lot of things better. See for example my suggestions from November 2013 or the suggestions I made for the SNB in January 2015. The advice for the SNB also would apply for the CNB.


Laurids Rising (lr@mamoadvisory.com) has provided research support for this blog post.


If you want to hear me speak about these topics or other related topics don’t hesitate to contact my speaker agency Specialist Speakers – e-mail: daniel@specialistspeakers.com

 

Monetary tightening will not solve Mozambique’s problems

I have an op-ed over at Zitamar News.

Opinion: Tighter monetary policy can’t change the fact that Mozambique has become poorer

Mozambique is facing the same situation as many other low-income commodity-exporting countries – the price of its main exports have declined sharply in the past two years. In the case of Mozambique, aluminium in particular.

By definition that means that the country is poorer than it was two years ago. Mozambique has also become poorer due to the suspension of some foreign aid programs and higher food prices due to drought.

There is no way around it and the central bank – Banco De Moçambique – can do little about it as these are all negative supply shocks. However, it is nonetheless facing a dilemma.

As terms-of-trade worsen (export prices drop relative to import prices), Mozambique has two options: either it can accept that this will cause the value of the metical to fall, which in turn pushes inflation up and thereby reduces real incomes to reflect that Mozambique has become poorer – or it can fight the drop in the metical by tightening monetary conditions. This is what it did yesterday when it hiked its key policy rate by 300bp to 17.25%, and tightened reserve requirements.

Read the rest here.


 

If you want to hear me speak about these topics or other related topics don’t hesitate to contact my speaker agency Specialist Speakers – e-mail: daniel@specialistspeakers.com

The Euro – Monetary Strangulation continues (one year on)

Exactly one year ago today I was with the family in the Christensen vacation home in Skåne (Southern Sweden) and posted a blog post titled The Euro – A Monetary Strangulation Mechanism. I wrote that post partly out of frustration that the crisis in the euro once again had re-escalated as Greece fell deeply into political crisis.

One year on the euro zone is once again in crisis – this time the focal point it the Italian banking sector.

So it seems like little has changed over the past year. After nearly eight years of crisis the euro zone has still not really recovered.

In my post a year ago I showed a graph with the growth of real GDP from 2007 to 2015 in 31 different European countries – both countries with floating exchange rates and countries within the euro areas and countries pegged to the euro (Bulgaria and Denmark).

I have updated the graph to include 2016 (IMF forecast).

Monetary Strangulation Summer 2016.jpg

The picture is little changed. In general the floaters (the ‘green’ countries) have done significantly better than the peggers/euro countries (the ‘red’ countries).

That said, I am happy to admit that it looks like we have had some pick-up in growth in the euro zone in the past year – ECB’s quantitative easing has had some positive effect on growth.

However, the ECB is still not doing enough as new headwinds are facing the European economy. Here I particularly want to highlight the fact that the Federal Reserve – wrongly in my view – has moved to tighten monetary conditions over the past year, which in turn is causing a tightening of global monetary conditions.

Second, if we look at the money-multiplier in the euro zone it is clear that it over the past nearly two years have been declining somewhat due in my view to the draconian liquidity (LCR) and capital rules in Basel III, which the EU has pushed to implement fast.

Furthermore, given the increase in banking sector distress in the euro zone recently the euro zone money-multiplier is likely to drop further, which effective will constitute a tightening of monetary conditions. If the ECB does not offset these shocks the euro zone could fall even deeper into a deflationary crisis.  If you are interested in what I think should be done about it have a look here and here.

Concluding, the monetary strangulation in the euro zone continues. Luckily, again this year at this time it is vacation time for the Christensen family so I will try to enjoy life after all.

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If you want to hear me speak about these topics or other related topics don’t hesitate to contact my speaker agency Specialist Speakers – e-mail: daniel@specialistspeakers.com

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