First, a little background: over the last decade, the European Central Bank, the Bank of Japan, and the central banks of Denmark, Switzerland and Sweden have experienced negative interest rates. In other words, banks are forced to pay the excess cash from the central bank in their park.
Unimaginably, negative interest rates are now accepted practices, even if they have an unusual record of meeting the stated policy objectives. Moreover, negative interest rates have taken root, with only Sweden managing to stifle its stimulus economy and return rates to positive territory.
The pandemic increased the need for monetary stimulus and, with the reduction of the additional rate, the negative rate central banks responded by buying a large number of bonds and other assets to support their savings. The US Federal Reserve and the Bank of England, which have long resisted negative interest rates, are now under enormous pressure to follow the course set in Europe and Japan.
The Bank of England has been flirting with negativity for some time. On Thursday, policymakers gave banks another six months to prepare for negative rates, but insisted they should not be seen as inevitable. Finally, the biggest drop in output in centuries could force UK rates to hit negative territory, leaving the US Federal Reserve as the only major central bank that will not step in.
The pandemic is also extending government spending to the world to its limits. The combined fiscal response totals 12% of global GDP, compared to 2% of global GDP after the 2008 financial crisis, according to Capital Economics. Stimulus spending contributed to the increase in the US deficit for fiscal year 2020 to $ 3.1 trillion, and the country’s debt exceeded $ 21 trillion – the largest share of the economy since 1946, when it came out of the second World War.
There are several reasons why most economists are not too worried about deficits at the moment. The first is that government spending is needed to prevent economies from collapsing even deeper into the recession. The second is that low interest rates mean it is cheaper for governments to borrow to finance incentives.
Neil Shearing, the group’s chief economist at Capital Economics, said deficits become a problem when they remain high, either through continued high spending or substantially lower tax revenues. But the economy could recover relatively quickly once the pandemic is defeated. Looking further, low interest rates will help prevent the government from getting out of control.
“None of this means that some countries will not be subject to a tax cut once the pandemic passes. But most governments, especially those whose central banks may be behind their bond markets, have time to assess the extent of the damage. and establish an appropriate response, “Shearing said.
But there are still risks. The huge amount of incentives triggered by governments has hidden some of the economic trauma caused by the pandemic, especially in Europe, where job support programs have kept businesses afloat and workers hired. There is a chance that when the health crisis relaxes and support is withdrawn, unemployment and bankruptcies will increase dramatically.
“If large-scale and long-term damage is the productive potential of the economy, this will affect your ability to increase tax revenues in the future, and your goal of making large deficits now is clearly lower, the more permanent damage, ”said David Miles, a professor of financial economics at Imperial College Business School.
In the face of mass unemployment and trade failures, most governments have so far raised deficit concerns. The same is true of monetary policy concerns, suggesting that ultra-low interest rates are here to stay in the foreseeable future.
“A world where unemployment is moving at a significantly higher level is probably one in which inflationary pressures are not accumulating at all, and this is a world where central banks will not rush to raise interest rates,” said Miles, who was a member of the Monetary Policy Committee at the Bank of England from 2009 to 2015.
One problem: keeping interest rates low will limit the ability of central banks to respond to the next crisis, in the same way that the global financial crisis and the eurozone debt saga have kept rates low before the pandemic. But central bankers have to deal with the current crisis before returning to a more conventional policy.
“You’d cut your nose to hurt yourself if you thought, ‘Well, let’s set interest rates up to 3% so that when things get worse in the future, we can reduce them to zero,'” Miles said. .
“You will get into the next problem, if that happens, with limited ammunition from the monetary policy, but that does not mean there is an easy answer,” he added.
The man who could shake up the concert economy
Marty Walsh may not seem like the person to review the concert economy. He spent years advocating for construction workers and less time on the complexities of on-demand work at multi-billion dollar technology companies.
Millions of Americans have lost their jobs because the health crisis has created an economic crisis. And many have turned to working with companies such as Uber, Instacart and DoorDash as a backdrop for their livelihoods.
At the same time, these companies are pushing for a controversial business model, one in which they treat their workers as independent contractors rather than employees who would be entitled to traditional benefits and protections, such as workers’ compensation, unemployment insurance. , family leave, sick leave or the right to organize.
“Right now we’re at a crossroads,” said Shannon Liss-Riordan, a Boston labor lawyer who challenged Uber and Lyft over classifying workers in various seven-year lawsuits. “If she faces the challenge, Marty Walsh may have one of the biggest effects on the workforce in this country from Frances Perkins,” she said, referring to Franklin D. Roosevelt’s labor secretary. former chief architect of the New Deal.
It follows
Friday: UK GDP; Market holidays in China, South Korea, Singapore
Correction: An earlier version of this story incorrectly stated America’s debt. It amounts to $ 21 billion.