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The financial crisis is over; US Fed raises interest rates, ECB ends QE

Most of us have noted that the past decade hasn’t been all that hot on the economic front. That grand and resounding crash back in 2008 has led to government and bank finances being near obliterated, the follow on effects being not much to no economic growth, wages stagnating and so on. The good news though is that it’s all pretty much over.

Yes, a decade is a long time, yes, it’s even possible that different economic policies would have made recovery faster. Even, that not having the excess in the first place would have meant no crash. But it is still good news that it does, finally, seem to be over.

To think like an economist for a moment – yes, OK, so we all insist they don’t know anything. And yet they are the only experts we’ve got about this economy type thing. And they will be saying that these two events mark at least the beginning of the end. We’re now properly into recovery, rather than continuing crisis.

The US Federal Reserve has voted to raise the target for its benchmark interest rate by 0.25%, citing solid economic expansion and job gains.

The widely-anticipated decision will lift the target for the central bank’s benchmark rate to 1.75%-2%, the highest level since 2008.

When the economy goes kablooie the first thing we do is lower interest rates. The counterpart to that, the other side of the coin, is that when the economy has recovered and we’re worried again about inflation, not that kablooie, then we raise interest rates. Among economists who are not central bankers there’s a little muttering about whether interest rates should rise right now, or perhaps in a month or two – for the US that is. But that they should rise is agreed, the crisis is over and recovery well under way.

The European Central Bank said on Thursday it will end its unprecedented bond purchase scheme by the close of the year, taking its biggest step in dismantling crisis-era stimulus a decade after the start of the euro zone’s economic downturn.

When you’re really in the hole and you can’t reduce interest rates any further then you have QE. No, don’t worry what it is, it’s just what you do when there’s deep economic doo doo ahead. And if you stop doing QE then that’s the indication we need that the doo doo has been avoided, we’ve turned the corner and we’re back on the upturn. It’s not as good a sign as raising interest rates again but it’s a necessary precursor to it at the very least. The US stopped QE a few years back, has even started to reverse it – not something the ECB is starting to even talk about yet – and it took them a few years to then raise rates. So Europe is perhaps three or four years behind the US in recovery here, something which sounds about right to be honest.

The other way to put this is that if the crisis were over we’d be stopping QE and raising interest rates. We are stopping QE and we are raising interest rates, thus we should conclude that the crisis is over.

Posted: 18th, June 2018 | In: Money, News | Comment


What’s Really Wrong In The Eurozone: The ECB-Triggered Depression Looms

HOW we got here is something that we can all argue over. Workshy Greeks, idiot politicians, bankers’ greed, whatever, knock yourself out with your favourite explanation. However, where we are is easier to explain.

We’re just before a Depression. Yup, one just as bad as the one 80 years ago. And yup, for exactly the same reason.

No, that’s not workshy Greeks, bankers’ greed but it is idiot politicians and central bankers. What turned the 1929 Crash into the 30s Depression was the way that the money supply was allowed to contract. It just didn’t have to happen at all.

What’s happening now over in the eurozone?

Greek banks are insolvent, it’s true, if you mark their sovereign debt exposure to market. But to a first approximation, no other banks are. Mark French banks’ holdings of Italian sovereign debt down by say 10%, and they’re still fine; their capital drops, of course, as it would with any write-down, but certainly to nowhere near zero.

What is true is that Europe is in the middle of a textbook liquidity crisis. Banks are not lending to each other — and the ECB isn’t stepping in to solve the problem. This is a serious structural issue with the way that the European monetary system was constructed: the ECB is tasked only with guarding inflation, and not with ensuring the health of the banking system. Individual national central banks are meant to do that. But they can’t print money — only the ECB can. So when there’s a liquidity crisis, no one’s able to step in and solve it.

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Posted: 15th, November 2011 | In: Money | Comment (1)