The SNB won’t rule out negative policy rates, adding to the frenzy for negative rates as a tool for monetary policy.

This is Andrea Terzi’s FAQ on the subject.

By: Andrea Terzi

At this point, it seems that everybody with an internet connection knows about Herndon, Ash, and Pollin’s (HAP) rebuttal of Reinhart-Rogoff’s (RR) paper on public debt and growth. Minutes after the news started to go round the web though, I was asked what I thought by friends whose interests are quite removed from economics. They were shocked that Harvard professors could make such embarrassing mistakes in their excel file, and that austerity decisions could be based on such an imprudent error.

This is my perspective

Speech given in Zürich, 25 March 2013

By Andrea Terzi

On 18 August 2011, I had shared my concerns about the ECB’s approach to financial balances that seemed to reveal:

a) a misunderstanding of how sector financial balances are logically connected; and

b) a misplaced optimism about the fact that austerity measures were helping to “rebalance” sectors.

One and a half years later, those concerns are (sadly, yet inevitably) proved warranted.

The chart below shows overall net government spending in the euro area in billions of euros (what most people call “government deficit”) and the overall euro unemployment rate.

It clearly illustrates the consequence of the austerity grip on the eurozone.

From 1999 through 2009, lacking any fiscal policy rule aimed at full employment in Europe, every time the private sector fell short of savings, the economy went into recession. Each time, this triggered the automatic countercyclical response of the fiscal balance (i.e., higher unemployment, falling tax receipts, and a larger ‘government deficits’). The rising ‘deficit’ eventually provided the greater private savings that eventually helped the economy reverse its cycle. This explains why unemployment is correlated with net government spending, until 2009.

After 2009, however, as the Stability and Growth Pact was made an increasingly harder constraint, fiscal policy ended in the grip of austerity measures, and became pro-cyclical. The standard countercyclical fiscal forces were prevented from operating, and the forced reduction of public deficits has inhibited the private sector from accumulating financial savings as desired.

Far from indicating a positive “rebalancing” of sector balances, the reduction of nominal government deficits and the simultaneous reduction of financial balances in the private sector is the symptom of a building pressure that is pushing the eurozone economy towards higher unemployment rates and economic depression.

By Andrea Terzi

The European Commissioner for Economic and Monetary Affairs, Olli Rehn, has said:

What I don’t understand is where on earth the stimulus money could have come from—I sincerely hope that people who are cleverer than me will suggest alternative ways of getting credit flowing into Europe.

Reuters reports that Rehn was quoted as saying:

So far, distinguished economic experts had not suggested any financially or politically realistic alternative.

I do not know who Commissioner Rehn includes under the definition of ‘distinguished’. Anyway, this is a brief lesson on ’stimulus’ (my self-imposed limit was 500 words) for Olli Rehn’s perusal.

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By Andrea Terzi

French industrial production fell in January as Europe’s second-largest economy teetered on the brink of its third recession in four years.

The current euro predicament has its roots in the troubles of the euro predecessor, the European Monetary System (EMS), and in the problems of the two leading countries of the European Union (EU) and of the Economic and Monetary Union (EMU), namely France and Germany.

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By Andrea Terzi

In the U.S. and (particularly) in euro countries, policies aimed at stimulating exports are (sadly) considered an effective response to lagging growth (U.S.) and recession (Euroland). Viewing a net export balance (i.e., an international trade surplus) as an economic virtue and a growth engine is a relic of Mercantilism that has had a powerful comeback, not coincidentally, with the abandonment of fiscal policy as a counter-cyclical tool.

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This proposal was first discussed on Moslereconomics blog.

It is now a petition to the White House.

Anthony Coley, a spokesman for the Treasury Department, said the Treasury won’t mint this coin: “Neither the Treasury Department nor the Federal Reserve believes that the law can or should be used to facilitate the production of platinum coins for the purpose of avoiding an increase in the debt limit,” he said.

Interesting that the reason he gave is strictly political. He did not say the coin would create inflation, or debauch the dollar!
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By Andrea Terzi

Ulrich Bindseil and Adalbert Winkler have co-authored a consequential paper entitled Dual Liquidity Crises Under Alternative Monetary Frameworks: a Financial Accounts Perspective.

As far as I know, this is the first time an ECB Working Paper characterizes a closed system of financial accounts as “a rigorous framework for analysis” that “has the advantage of making precise the otherwise vague interpretations of liquidity flows and policy options, and in particular how the various constraints interact.”

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