According to George Magnus of UBS, most of the western world has now been struck down by “most unusual monetary policies” or ‘Mumps’ for short. And — contrary to popular belief — the disease is being underpinned not by western profligacy but possibly the very phenomenon. Too much thrift. The want and need for too many savings in an economy that demands spending on available capacity and goods today — a theme also actively being explored by Paul Krugman as part of his anti-austerity reasoning. Read more
Here is a lengthy and ambitious shopping list from Willem Buiter and Ebrahim Rahbari at Citi. Essentially, they want central banks to do more…. much, much more, including (with our emphasis):
(i) reducing rates, first by lowering them all the way to zero (UK and euro area), then by eliminating the effective lower bound on nominal interest rates (all four currency areas) [essentially: go negative, my friends] Read more
Dire Straits wisely observed back in 1985 that it’s nice — but possibly derisible — to have people give you money for nothing.
Nevertheless, it happens to be the way to do it if you’re the US Treasury (H/T Clusterstock). Read more
The Fed has published an interesting working paper on the subject of foreign shocks to a country bound by zero rates. Authored by Martin Bodenstein, Christopher Erceg and Luca Guerrieri, it seems roughly to conclude that a zero-rate liquidity trap has the effect of amplifying the effects of a foreign shock on GDP.
Ongoing foreign shocks, meanwhile, can greatly extend the duration of the liquidity trap. Read more