David Brooks discussed the rise of Jeremy Corbyn on the left in the Labor Party in the United Kingdom and Bernie Sanders on the left in the United States, along with Donald Trump and Ben Carson on the right. He argues that none of these people could conceivably win election. He therefore concludes that their support must stem from a psychological problem which he identifies as expressive individualism.
This is an interesting view. Of course, Brooks’ assessment of who is electable may not be right. For example, the Democrats have often nominated centrist figures, such as Michael Dukakis, because they were ostensibly more electable than their more progressive alternatives. While we can’t know the counterfactual, there is little logic in picking a candidate whose views you do not share, because they are electable, when in fact they are not.
But the more important question ignored in Brooks’ analysis is how people are supposed to respond when the party they have supported consistently pursues policies at odds with fundamental principles of their core constituencies. In the case of the Labor Party in the U.K., and the administrations of Bill Clinton and Barack Obama in the United States, the wealthy have received the overwhelming majority of the benefits of economic growth.
This has been due to policies that have favored the financial sector and trade deals that have disadvantaged ordinary workers to benefit major corporate interests. In both countries, there was no effort to prosecute bankers who had violated the law during the housing bubble years. The Clinton administration pushed to remove constraints on the financial sector, even while leaving its government guarantees in place. President Obama has opposed a financial transactions tax in the United States, which would take tens of billions annually out of the pockets of the financial industry. His administration has also worked actively to block the introduction of such a tax in Europe.
He has also pushed the Trans-Pacific Partnership, which would increase the cost of prescription drugs for the countries in the agreement. It is also likely to worsen the U.S. trade deficit in manufactured goods, since more foreign earnings would be diverted to be paying for drugs and other patent-protected products. Of course the Clinton administration explicitly pushed for the over-valued dollar that is the origin of the large U.S. trade deficits.
It is impressive to see Brooks argue that trying to turn the Democratic Party toward an agenda that supports workers rather than the rich is a psychological problem.
Note: spelling for Jeremy Corbyn has been corrected, thank folks.
David Brooks discussed the rise of Jeremy Corbyn on the left in the Labor Party in the United Kingdom and Bernie Sanders on the left in the United States, along with Donald Trump and Ben Carson on the right. He argues that none of these people could conceivably win election. He therefore concludes that their support must stem from a psychological problem which he identifies as expressive individualism.
This is an interesting view. Of course, Brooks’ assessment of who is electable may not be right. For example, the Democrats have often nominated centrist figures, such as Michael Dukakis, because they were ostensibly more electable than their more progressive alternatives. While we can’t know the counterfactual, there is little logic in picking a candidate whose views you do not share, because they are electable, when in fact they are not.
But the more important question ignored in Brooks’ analysis is how people are supposed to respond when the party they have supported consistently pursues policies at odds with fundamental principles of their core constituencies. In the case of the Labor Party in the U.K., and the administrations of Bill Clinton and Barack Obama in the United States, the wealthy have received the overwhelming majority of the benefits of economic growth.
This has been due to policies that have favored the financial sector and trade deals that have disadvantaged ordinary workers to benefit major corporate interests. In both countries, there was no effort to prosecute bankers who had violated the law during the housing bubble years. The Clinton administration pushed to remove constraints on the financial sector, even while leaving its government guarantees in place. President Obama has opposed a financial transactions tax in the United States, which would take tens of billions annually out of the pockets of the financial industry. His administration has also worked actively to block the introduction of such a tax in Europe.
He has also pushed the Trans-Pacific Partnership, which would increase the cost of prescription drugs for the countries in the agreement. It is also likely to worsen the U.S. trade deficit in manufactured goods, since more foreign earnings would be diverted to be paying for drugs and other patent-protected products. Of course the Clinton administration explicitly pushed for the over-valued dollar that is the origin of the large U.S. trade deficits.
It is impressive to see Brooks argue that trying to turn the Democratic Party toward an agenda that supports workers rather than the rich is a psychological problem.
Note: spelling for Jeremy Corbyn has been corrected, thank folks.
Read More Leer más Join the discussion Participa en la discusión
That is what it told readers in its article writing up the data. The piece indicated surprise that wages are not rising more rapidly given the relatively low unemployment rate:
“Over the past 40 years, unemployment has almost never been as low as it is today, with the exception of a few years in the late 1990s.”
This part is not quite right. The unemployment rate was below the 5.1 percent rate reported for August from May of 2005 until April of 2007, so an unemployment rate this low is not quite that rare.
The other part of the story that has been widely noted is that employment rate, the percentage of the population that has jobs, is down by more than three percentage points from its pre-recession level. This is true even if we just look at prime-age (ages 25-54) workers.
Since no one has a very good story as to why 3 million plus people just decided that they didn’t feel like working, the most obvious explanation is that these are people who still want to work but have given up looking for jobs because of the weak state of the labor market.
It is also worth noting that if this decline in the labor force reflects something other than the weakness of the labor market, virtually no one saw it coming before the recession. The economists who want to blame some supply-side factor as the cause of the reduction in the size of the labor force therefore need to explain why they were unable to see this factor before the recession. They also need to explain why anyone should believe their understanding of the economy is better today than it was in 2007.
That is what it told readers in its article writing up the data. The piece indicated surprise that wages are not rising more rapidly given the relatively low unemployment rate:
“Over the past 40 years, unemployment has almost never been as low as it is today, with the exception of a few years in the late 1990s.”
This part is not quite right. The unemployment rate was below the 5.1 percent rate reported for August from May of 2005 until April of 2007, so an unemployment rate this low is not quite that rare.
The other part of the story that has been widely noted is that employment rate, the percentage of the population that has jobs, is down by more than three percentage points from its pre-recession level. This is true even if we just look at prime-age (ages 25-54) workers.
Since no one has a very good story as to why 3 million plus people just decided that they didn’t feel like working, the most obvious explanation is that these are people who still want to work but have given up looking for jobs because of the weak state of the labor market.
It is also worth noting that if this decline in the labor force reflects something other than the weakness of the labor market, virtually no one saw it coming before the recession. The economists who want to blame some supply-side factor as the cause of the reduction in the size of the labor force therefore need to explain why they were unable to see this factor before the recession. They also need to explain why anyone should believe their understanding of the economy is better today than it was in 2007.
Read More Leer más Join the discussion Participa en la discusión
Most of the reporting on China and its current economic problems refers to it as the world’s second largest economy. This is true if its GDP is measured on a currency conversion basis, in other words taking its GDP and effectively converting it into dollars at the official exchange rate.
However economists more typically use purchasing power parity measures of GDP. These involve using a common set of prices for goods and services in all countries. By this measure China’s GDP is already more than 5 percent larger than the GDP of the United States, not counting Hong Kong.
This point is important in understanding China’s impact on the world economy. If its economy slows significantly, the reduction in its imports of oil and other inputs will reflect its size based on its purchasing power parity GDP, not the exchange rate measure. This is why the recent uncertainty in China is having so much impact on the price of oil and other commodities. The reporting should acknowledge this fact.
Most of the reporting on China and its current economic problems refers to it as the world’s second largest economy. This is true if its GDP is measured on a currency conversion basis, in other words taking its GDP and effectively converting it into dollars at the official exchange rate.
However economists more typically use purchasing power parity measures of GDP. These involve using a common set of prices for goods and services in all countries. By this measure China’s GDP is already more than 5 percent larger than the GDP of the United States, not counting Hong Kong.
This point is important in understanding China’s impact on the world economy. If its economy slows significantly, the reduction in its imports of oil and other inputs will reflect its size based on its purchasing power parity GDP, not the exchange rate measure. This is why the recent uncertainty in China is having so much impact on the price of oil and other commodities. The reporting should acknowledge this fact.
Read More Leer más Join the discussion Participa en la discusión
It is amazing how economic reporters and many economists continue to be obsessed with the topic of deflation. They seem to hold the view that when inflation crosses zero and turns negative, then something happens. This is in spite of the fact that there is zero (as in none) reason to believe this would be the case in theory and zero evidence that it is the case in reality.
Yet, we once again see the NYT tell readers in a piece on the current agenda of European Central Bank (ECB) President Mario Draghi:
“Inflation, at 0.2 percent in August, was unchanged from June and July. The rate is still well short of the European Central Bank’s official target of just below 2 percent.
“Some economists remain concerned that the eurozone could yet slip into deflation, which has already infected some eurozone countries like Greece.”
Suppose that inflation went from 0.2 percent to -0.2 percent so that the euro zone was experiencing deflation. Why would this be any worse than a decline from 0.6 percent to 0.2 percent? The problem is that the inflation rate is too low. Any drop in the inflation rate makes the situation worse. It has the effect of raising real interest rates and raising the real value of debt, but crossing zero doesn’t matter, the drop in the inflation rate is all that matters.
There is a story that can be told of spiraling deflation, where deflation feeds on itself, except we never see this. Even Japan never experienced spiraling deflation. We did have something like spiraling deflation at the start of the Great Depression, but there is little reason to believe any countries face this threat now and certainly not from having their inflation rate slip a few tenths of a percentage point below zero. (As I’ve pointed out in times past, our measurements are not even accurate enough to ensure that a reported 0.2 percent inflation rate is in fact above zero.)
Anyhow, the deflation obsession continues. I suppose like the belief in a flat earth, it is impervious to evidence.
It is probably worth mentioning that the deflation in Greece is not seen by the ECB as a problem. It is by design. Greece needs to regain competitiveness with Germany and other northern euro zone countries. This could be done by these countries having higher inflation rates, for example as a result of larger budget deficits in these countries. The euro zone has quite explicitly chosen to not go this route. As a result, the only route for Greece to regain competitiveness is through deflation.
It is amazing how economic reporters and many economists continue to be obsessed with the topic of deflation. They seem to hold the view that when inflation crosses zero and turns negative, then something happens. This is in spite of the fact that there is zero (as in none) reason to believe this would be the case in theory and zero evidence that it is the case in reality.
Yet, we once again see the NYT tell readers in a piece on the current agenda of European Central Bank (ECB) President Mario Draghi:
“Inflation, at 0.2 percent in August, was unchanged from June and July. The rate is still well short of the European Central Bank’s official target of just below 2 percent.
“Some economists remain concerned that the eurozone could yet slip into deflation, which has already infected some eurozone countries like Greece.”
Suppose that inflation went from 0.2 percent to -0.2 percent so that the euro zone was experiencing deflation. Why would this be any worse than a decline from 0.6 percent to 0.2 percent? The problem is that the inflation rate is too low. Any drop in the inflation rate makes the situation worse. It has the effect of raising real interest rates and raising the real value of debt, but crossing zero doesn’t matter, the drop in the inflation rate is all that matters.
There is a story that can be told of spiraling deflation, where deflation feeds on itself, except we never see this. Even Japan never experienced spiraling deflation. We did have something like spiraling deflation at the start of the Great Depression, but there is little reason to believe any countries face this threat now and certainly not from having their inflation rate slip a few tenths of a percentage point below zero. (As I’ve pointed out in times past, our measurements are not even accurate enough to ensure that a reported 0.2 percent inflation rate is in fact above zero.)
Anyhow, the deflation obsession continues. I suppose like the belief in a flat earth, it is impervious to evidence.
It is probably worth mentioning that the deflation in Greece is not seen by the ECB as a problem. It is by design. Greece needs to regain competitiveness with Germany and other northern euro zone countries. This could be done by these countries having higher inflation rates, for example as a result of larger budget deficits in these countries. The euro zone has quite explicitly chosen to not go this route. As a result, the only route for Greece to regain competitiveness is through deflation.
Read More Leer más Join the discussion Participa en la discusión
The NYT had a piece on how Mexico’s economy remains weak and the government is again plagued by corruption. At one point it comments that:
“Growth has been slower under Mr. Peña Nieto’s presidency than the annual 2.3 percent average in the two decades before he took office.”
It is worth noting that a 2.3 percent growth rate is extremely weak for a developing country. It means that Mexico was actually falling further behind the United States even before the slowdown under President Nieto. Furthermore, as the article points out, it appears that workers are seeing little or no benefit from even this limited growth, as wages remain quite low.
Last year marked the twentieth anniversary of the implementation of NAFTA. At the time there was much celebration in the media and among economists anxious to pronounce the deal a huge success. While it is always possible that Mexico’s economy would have performed even worse without NAFTA, its actual record is not much to boast about.
It is worth singling out the Washington Post in this context which periodically celebrates the rise of the middle class in Mexico in the post-NAFTA era. The Post famously invented numbers to make its pro-NAFTA case, telling readers back in 2007 that Mexico’s GDP had quadrupled since 1987. The actual increase was 83 percent. It has never bothered to correct this one.
The NYT had a piece on how Mexico’s economy remains weak and the government is again plagued by corruption. At one point it comments that:
“Growth has been slower under Mr. Peña Nieto’s presidency than the annual 2.3 percent average in the two decades before he took office.”
It is worth noting that a 2.3 percent growth rate is extremely weak for a developing country. It means that Mexico was actually falling further behind the United States even before the slowdown under President Nieto. Furthermore, as the article points out, it appears that workers are seeing little or no benefit from even this limited growth, as wages remain quite low.
Last year marked the twentieth anniversary of the implementation of NAFTA. At the time there was much celebration in the media and among economists anxious to pronounce the deal a huge success. While it is always possible that Mexico’s economy would have performed even worse without NAFTA, its actual record is not much to boast about.
It is worth singling out the Washington Post in this context which periodically celebrates the rise of the middle class in Mexico in the post-NAFTA era. The Post famously invented numbers to make its pro-NAFTA case, telling readers back in 2007 that Mexico’s GDP had quadrupled since 1987. The actual increase was 83 percent. It has never bothered to correct this one.
Read More Leer más Join the discussion Participa en la discusión
Read More Leer más Join the discussion Participa en la discusión
It’s always dangerous when followers of an insular cult gain positions of power. Unfortunately, that appears to be the case with the Washington Post editorial board and the Federal Reserve Board Cultists.
The Federal Reserve Board Cultists adhere to a bizarre belief that the 19 members (12 voting) of the Federal Reserve Board’s Open Market Committee (FOMC) live in a rarified space where the narrow economic concerns of specific interest groups don’t impinge on their thinking. According to the cultists, when the Fed sits down to decide on its interest rate policy they are acting solely for the good of the country.
Those of us who live in the reality-based community know that the Fed is hugely responsive to the interests of the financial sector. There are many reasons for this. First, the twelve Fed district banks are largely controlled by the banks within the district, which directly appoint one third of the bank’s directors. The presidents of these banks occupy 12 of the 19 seats (5 of the voting seats) on the FOMC.
The seven governors of the Fed are appointed by the president and approved by Congress, but even this group often has extensive ties to the financial industry. For example, Stanley Fischer, the current vice-chair, was formerly a vice-chair of Citigroup.
The third main reason why the Fed tends to be overly concerned with the interests of the financial sector is that its professional staffers are often looking to get jobs in the sector. While jobs at the Fed are well-paying, staffers can often earn salaries that are two or three times higher if they take their expertise to a bank or other financial firm. As economic theory predicts, this incentive structure pushes them toward viewpoints that often coincide with those of the industry.
The net effect of these biases is that the Fed tends to be far more concerned about the inflation part of its mandate rather than the high employment part, even though under the law the two goals are symmetric. If the Fed tightens too much and prevents hundreds of thousands or even millions of workers from getting jobs, most of the top staff would not be terribly troubled and it is unlikely anyone would suffer in their careers. On the other hand, if they allowed the inflation rate to rise to 3.0 percent, it is likely that many top officials at the Fed would be very troubled.
There is very little basis in economic research for maintaining that a stable 3.0 inflation rate is more costly to the country than having 1 million people being needlessly unemployed, but the view coming from the Fed is that the former is much worse than the latter. The Fed cultists at the Washington Post and elsewhere want us to just accept that this is the way the world works. It’s not surprising that some folks don’t quite see it that way.
It’s always dangerous when followers of an insular cult gain positions of power. Unfortunately, that appears to be the case with the Washington Post editorial board and the Federal Reserve Board Cultists.
The Federal Reserve Board Cultists adhere to a bizarre belief that the 19 members (12 voting) of the Federal Reserve Board’s Open Market Committee (FOMC) live in a rarified space where the narrow economic concerns of specific interest groups don’t impinge on their thinking. According to the cultists, when the Fed sits down to decide on its interest rate policy they are acting solely for the good of the country.
Those of us who live in the reality-based community know that the Fed is hugely responsive to the interests of the financial sector. There are many reasons for this. First, the twelve Fed district banks are largely controlled by the banks within the district, which directly appoint one third of the bank’s directors. The presidents of these banks occupy 12 of the 19 seats (5 of the voting seats) on the FOMC.
The seven governors of the Fed are appointed by the president and approved by Congress, but even this group often has extensive ties to the financial industry. For example, Stanley Fischer, the current vice-chair, was formerly a vice-chair of Citigroup.
The third main reason why the Fed tends to be overly concerned with the interests of the financial sector is that its professional staffers are often looking to get jobs in the sector. While jobs at the Fed are well-paying, staffers can often earn salaries that are two or three times higher if they take their expertise to a bank or other financial firm. As economic theory predicts, this incentive structure pushes them toward viewpoints that often coincide with those of the industry.
The net effect of these biases is that the Fed tends to be far more concerned about the inflation part of its mandate rather than the high employment part, even though under the law the two goals are symmetric. If the Fed tightens too much and prevents hundreds of thousands or even millions of workers from getting jobs, most of the top staff would not be terribly troubled and it is unlikely anyone would suffer in their careers. On the other hand, if they allowed the inflation rate to rise to 3.0 percent, it is likely that many top officials at the Fed would be very troubled.
There is very little basis in economic research for maintaining that a stable 3.0 inflation rate is more costly to the country than having 1 million people being needlessly unemployed, but the view coming from the Fed is that the former is much worse than the latter. The Fed cultists at the Washington Post and elsewhere want us to just accept that this is the way the world works. It’s not surprising that some folks don’t quite see it that way.
Read More Leer más Join the discussion Participa en la discusión
The NYT had a piece on the proposals that various candidates have proposed to rein in Wall Street. The piece reports that former Secretary of State Hillary Clinton has proposed applying the normal income tax rate of 39.6 percent to capital gains on assets held less than six years rather than the 20 percent tax rate. (In both cases, capital gains for high income taxpayers are also subject to a 3.8 percent surtax connected with with Affordable Care Act.) It would have been helpful to point out that the lower capital gains tax currently only applies on assets held at least one year, so very short-term gains already do not qualify for the lower tax rate. Also, Secretary Clinton’s proposal would phase down the tax rate to 36 percent for assets held between 2–3 years, 32 percent for 3–4 years, on down to 20 percent for assets held more than six years.
It also would have been worth more discussion of the proposals for financial transactions tax. According to an analysis by the Tax Policy Center of the Urban Institute and the Brookings Institution, a tax like the one proposed by Senator Bernie Sanders would reduce Wall Street’s income from trading by more than $75 billion a year. This dwarfs the impact of all the other measures discussed in this article, including the Dodd-Frank financial reform act.
Note: An earlier version of this post had said that Clinton’s proposal would have the 20 percent rate on assets held for more than two years. Thanks to Robert Salzberg for correcting this error.
The NYT had a piece on the proposals that various candidates have proposed to rein in Wall Street. The piece reports that former Secretary of State Hillary Clinton has proposed applying the normal income tax rate of 39.6 percent to capital gains on assets held less than six years rather than the 20 percent tax rate. (In both cases, capital gains for high income taxpayers are also subject to a 3.8 percent surtax connected with with Affordable Care Act.) It would have been helpful to point out that the lower capital gains tax currently only applies on assets held at least one year, so very short-term gains already do not qualify for the lower tax rate. Also, Secretary Clinton’s proposal would phase down the tax rate to 36 percent for assets held between 2–3 years, 32 percent for 3–4 years, on down to 20 percent for assets held more than six years.
It also would have been worth more discussion of the proposals for financial transactions tax. According to an analysis by the Tax Policy Center of the Urban Institute and the Brookings Institution, a tax like the one proposed by Senator Bernie Sanders would reduce Wall Street’s income from trading by more than $75 billion a year. This dwarfs the impact of all the other measures discussed in this article, including the Dodd-Frank financial reform act.
Note: An earlier version of this post had said that Clinton’s proposal would have the 20 percent rate on assets held for more than two years. Thanks to Robert Salzberg for correcting this error.
Read More Leer más Join the discussion Participa en la discusión
The NYT had an interesting piece noting criticisms from the left and right directed at the Federal Reserve Board over its monetary policy decisions. It concludes with a comment from Princeton University professor and former Fed vice-chair Alan Blinder, saying that the Fed cannot do much to either reduce inequality or government indebtedness.
This is not accurate. From February of 1994 to March of 1995, the Fed made a decision to raise its short-term interest rate from 3.0 percent to 6.0 percent. This was done to slow the economy and the rate of job creation. This was due to the fact the unemployment rate was falling into or below the level that the Fed models showed were consistent with stable inflation. In these models, if the unemployment rate was allowed to fall much below 6.0 percent, the inflation rate would begin to accelerate, leading to a problem of spiraling inflation.
In the summer of 1995, after the economy had slowed, the Fed chair Alan Greenspan pushed the Fed to lower interest rates even though the unemployment was below most estimates of full employment. He insisted that the Fed allow the unemployment continue to fall over the next four years even as it crossed 5.0 percent and eventually 4.0 percent in 1999 and 2000. This period of low unemployment was the only time in the last 40 years in which workers at the middle and bottom of the wage distribution saw sustained growth in real wages.
This is how Fed policy can affect inequality. If the Fed had not been pushed by Greenspan, who is not an orthodox economist, it likely would have raised interest rates during this period and prevented the low unemployment and real wage growth of this period.
It is also worth noting that the Fed’s policy was also the basis for the budget surpluses at the end of the decade. In 1996, after all the Clinton-Gingrich tax increases and spending had been passed into law, the Congressional Budget Office (CBO) projected a deficit for 2000 of close to $250 billion (2.5 percent of GDP). The fact that we had a surplus of roughly the same amount was not due to changes in budget policy, but rather the fact that we had an unemployment rate of 4.0 percent rather than the 6.0 percent projected by CBO. (The tax from capital gains created by the stock bubble also helped.)
The NYT had an interesting piece noting criticisms from the left and right directed at the Federal Reserve Board over its monetary policy decisions. It concludes with a comment from Princeton University professor and former Fed vice-chair Alan Blinder, saying that the Fed cannot do much to either reduce inequality or government indebtedness.
This is not accurate. From February of 1994 to March of 1995, the Fed made a decision to raise its short-term interest rate from 3.0 percent to 6.0 percent. This was done to slow the economy and the rate of job creation. This was due to the fact the unemployment rate was falling into or below the level that the Fed models showed were consistent with stable inflation. In these models, if the unemployment rate was allowed to fall much below 6.0 percent, the inflation rate would begin to accelerate, leading to a problem of spiraling inflation.
In the summer of 1995, after the economy had slowed, the Fed chair Alan Greenspan pushed the Fed to lower interest rates even though the unemployment was below most estimates of full employment. He insisted that the Fed allow the unemployment continue to fall over the next four years even as it crossed 5.0 percent and eventually 4.0 percent in 1999 and 2000. This period of low unemployment was the only time in the last 40 years in which workers at the middle and bottom of the wage distribution saw sustained growth in real wages.
This is how Fed policy can affect inequality. If the Fed had not been pushed by Greenspan, who is not an orthodox economist, it likely would have raised interest rates during this period and prevented the low unemployment and real wage growth of this period.
It is also worth noting that the Fed’s policy was also the basis for the budget surpluses at the end of the decade. In 1996, after all the Clinton-Gingrich tax increases and spending had been passed into law, the Congressional Budget Office (CBO) projected a deficit for 2000 of close to $250 billion (2.5 percent of GDP). The fact that we had a surplus of roughly the same amount was not due to changes in budget policy, but rather the fact that we had an unemployment rate of 4.0 percent rather than the 6.0 percent projected by CBO. (The tax from capital gains created by the stock bubble also helped.)
Read More Leer más Join the discussion Participa en la discusión
Robert Samuelson has a column this morning on the impact of globalization on national economies. At one point the piece tells readers:
“Globalization has also punished the United States. From 2004 to 2006, the Federal Reserve raised short-term interest rates by 4.25 percentage points, believing that long-term rates on bonds and mortgages — which affect the economy more — would follow. They didn’t. If they had, would the 2008-2009 financial crisis have been avoided or softened? Then-Fed Chairman Ben Bernanke later argued that a ‘global savings glut’ of dollars — flooding into bonds — kept long-term rates down.”
This comment leaves out a very important part of the story. Foreign central banks, most importantly China’s, were buying up massive amounts of U.S. government bonds in this period. Their goal was to prop up the dollar against their currencies so that they could continue to run large trade surpluses and leaving the United States with large trade deficits. The trade deficit peaked at just under 6.0 percent of GDP ($1.1 trillion in today’s economy) in 2005.
Since the central banks were buying up long-term bonds it is not surprising that long-term interest rates stayed low in spite of the Fed’s decision to raise short-term rates. The impact of the foreign central banks policy on long-term interest rates is the same as the recent Fed policy of quantitative easing. Markets don’t care if bonds are purchased by the Central Bank of China or Japan or the Fed, it has the same impact on bond prices and interest rates.
Robert Samuelson has a column this morning on the impact of globalization on national economies. At one point the piece tells readers:
“Globalization has also punished the United States. From 2004 to 2006, the Federal Reserve raised short-term interest rates by 4.25 percentage points, believing that long-term rates on bonds and mortgages — which affect the economy more — would follow. They didn’t. If they had, would the 2008-2009 financial crisis have been avoided or softened? Then-Fed Chairman Ben Bernanke later argued that a ‘global savings glut’ of dollars — flooding into bonds — kept long-term rates down.”
This comment leaves out a very important part of the story. Foreign central banks, most importantly China’s, were buying up massive amounts of U.S. government bonds in this period. Their goal was to prop up the dollar against their currencies so that they could continue to run large trade surpluses and leaving the United States with large trade deficits. The trade deficit peaked at just under 6.0 percent of GDP ($1.1 trillion in today’s economy) in 2005.
Since the central banks were buying up long-term bonds it is not surprising that long-term interest rates stayed low in spite of the Fed’s decision to raise short-term rates. The impact of the foreign central banks policy on long-term interest rates is the same as the recent Fed policy of quantitative easing. Markets don’t care if bonds are purchased by the Central Bank of China or Japan or the Fed, it has the same impact on bond prices and interest rates.
Read More Leer más Join the discussion Participa en la discusión
