Coppola Comment

The world is saving like crazy. Corporations are building up cash mountains that they can’t or won’t invest in expanding their businesses. Individuals are building up pensions and precautionary savings. Governments, especially in developing countries, are building up FX reserves. The “ savings glut ,” as former Fed chairman Ben Bernanke dubbed it, shows no signs of dissipating. It is sloshing around the world looking for a productive home. But there isn’t one - or at least, not one that offers the safety that fearful investors desperately crave. That, fundamentally, is what is driving down the returns on assets. It is also the primary cause of the wide US trade deficit. The President likes to think that the reason for the US’s persistent trade deficits is unfair trade practices and currency manipulation. And for some countries, these are undoubtedly contributing factors. But the biggest reason by far is the global dominance of the dollar, and above all, the pre-eminence of dollar

This chart has been fascinating me for ages. It was produced by the Bank of England to illustrate a speech by Andy Haldane . Shock, horror - we have the lowest interest rates for 5,000 years. Even in the Great Depression they were higher than they are now. These are, of course, nominal interest rates. Real interest rates are even lower - though not by much, since inflation is close to zero in all major economies. Note also the divergence of long-term and short-term interest rates. This is encouraging, since it suggests that investors view future prospects as brighter, though hardly scintillating. Central banks have been trying to close that gap with various monetary policy tools, the idea being to bring forward some of that future enthusiasm into the present day. But so far, all they have succeeded in doing is depressing expected interest rates far into the future. Now, policy makers are beginning to talk about interest rates remaining permanently lower than their long-run av

Germany's Finance Minister Wolfgang Schaueble has long been critical of ECB monetary policy,. But now, as Reuters says,  the gloves are off . In a speech at a prizegiving for an ordoliberal economics foundation last Friday, Dr. Schaeuble effectively demanded that the ECB raise interest rates. The justification? Very low interest rates hurt Germany's savers, which are the bedrock of its economy. There is a political dimension to this. Dr. Schaueble's party, the CDU, is losing popularity and desperate for pensioner votes. Dr. Schauble even went so far as to blame ECB monetary policy for the rise of the right-wing eurosceptic AfD: "I said to Mario Draghi...be very proud: you can attribute 50% of the results of a party that seems to be new and successful in Germany to the design of this [monetary] policy," Mr. Schäuble said. This is outrageous. Dr. Schaueble is a politician, not a central banker. His attempt to influence the conduct of ECB monetary policy to ga

On the Save Our Savers website today is this article by John Phelan. It explains why savings are essential to the economy and why - in his view - central bank and government policies that discourage savings are misguided. And why QE is no substitute for "proper" savings. I've heard these arguments a lot recently and they always seem to stem from the idea that there is only one sort of "savings", namely retail deposits in banks and building societies. And indeed, the usual definition of "savings" does mean cash, in its various forms, so bank deposits are "savings" whereas pensions are not - they are "investments". I'm not sure people necessarily make such a clear distinction in everyday parlance. But Phelan's argument is an economic one. How does economics define savings? In economics, "saving" is the residual of income left after consumption . If S = saving, Y = income and C = consumption, S = Y - C. Note tha

" It is time that people took responsibility for managing their own money, and stopped expecting banks to do it for them." My new post at  Pieria  talks about the nature of the relationship between banks and depositors: "I recently  wrote a post  with Euronomist in which we suggested that depositors should be explicitly charged for deposit insurance, rather than insurance being implictly provided by the state or covered by a levy on financial institutions. "This did not go down too well in some quarters. There were a  number of comments  along the lines of "why should I pay for the risks that banks take?" and "banks should look after their customers' money". Underlying these remarks was a fundamentally wrong understanding of the nature of the relationship between modern banks and their depositors. And this wrong understanding is the main source of anger towards banks for putting depositors' money at risk, and anger towards banks

Yesterday, Mark Carney, the new Governor of the Bank of England, announced that there would be no rise in the Bank of England's base rate until unemployment (currently about 8%) is below 7%. At its current rate of fall, this wouldn't be expected until the back end of 2016. So if there is no improvement in the UK economy, UK interest rates are expected to remain very low for the next three years. Predictably, there was a storm of outrage from savers and their representatives. This tweet is typical: What Mark Carney said today is "Savers, I will continue to STEAL your money, as Mervyn King did", for the chancellor. #newsnight — liarpoliticians (@liarpoliticians) August 7, 2013 The idea that very low interest rates is "stealing" from savers is based on savers' expectations that: their capital will be protected from inflation. UK CPI is indeed running above the interest rates on most forms of savings, so savers are losing money as the purchasing pow

A research team at the ECB has issued a paper attempting to explain the origins of financial crises. This has of course been an enduring topic of analysis ever since the fall of Lehman, and just about every economist in the world has now had a go at it, with varying degrees of success. The ECB's paper makes a valiant attempt to fit the financial system into a DSGE model of the economy that previously ignored it. The maths is fearsome and I admit I skipped much of it. But they draw some important conclusions. Very early in the paper they accept the prevailing wisdom that  financial crises are endogenously determined - in other words, they happen as a consequence of behaviour within the system, not because of external shocks to it. Now this immediately causes a problem with the model. DSGE models work on the basis that shocks are exogenous - sort of like meteorite impacts on life on earth. But using the same analogy, an endogenous crisis would be CAUSED by the behaviour of life