Author: generaltheorist

COVID-19 and the poverty of IMF macroeconomics

“Twenty years of schooling and they put you on the dayshift.” Subterranean Homesick Blues, Bob Dylan, 1965

This month revealed the official macroeconomic policy response, channelled through the International Monetary Fund (IMF), of the impact of COVID-19 in terms of global macroeconomic prospects, financial sector stability, and fiscal tendencies. Respectively, the Fund’s flagship publications were thus laminated for public consumption as the World Economic Outlook (WEO), Global Financial Stability Report (GFSR), and Fiscal Monitor (FM).

Through these vehicles, official country and region responses—ad hoc and uncoordinated—are somehow brought into harmony. And these forecasts are lapped up by the financial press. The Financial Times (FT) being one, where Martin Wolf reels off the IMF’s forecasts as sacrosanct and serious.

However, upon closer inspection, the IMF offers up only gibberish for public consumption. User beware. Continue reading “COVID-19 and the poverty of IMF macroeconomics”

Banca d’Italia balance sheet: March 2020

The publication of the Bank of Italy (BdI) balance sheet for March provides the first glimpse of how the Italian economy is navigating the COVID-19 Crisis through the lens of the official sector. However, there are several moving parts—APP and PEPP purchases, VLTRO access, and USD swap facilities—which makes interpreting the balance sheet trickier than usual. Still, March 2020 will go down as one of the most remarkable in the history of the euroarea as witnessed through BdI balance sheet changes. Continue reading “Banca d’Italia balance sheet: March 2020”

The fiscal response to COVID-19: The time to act is now

It’s becoming increasingly clear that the fiscal response to COVID-19 in Europe and the United States will fall massively short. Policymakers are, as yet, not up to the task.

The “principle of effective demand,” the cornerstone of immediate post-war macroeconomics, requires that the government spends when the private sector might otherwise refuse—preventing a depression in spending and unemployment that would otherwise emerge. In so doing, the government ensures that employment and income across the community remains higher than individual spending choices alone would deliver. Government spending reasonably offsets private prudence. Continue reading “The fiscal response to COVID-19: The time to act is now”

Interpreting the ECB’s EUR120 billion APP envelope

Amongst the policy innovations introduced last week, the ECB’s new EUR120 billion Asset Purchase Program (APP) envelope was most interesting. The policy statement described: “a temporary envelope of additional net asset purchases of €120 billion until the end of the year, ensuring a strong contribution from the private sector purchase programmes.”
Meanwhile, when asked about the capital key, Lagarde confirmed that: “we will make use of all the flexibilities that are embedded in the framework of the asset purchase programme, and that, second, at the end of the asset purchase programme we will converge towards the capital keys.”

Continue reading “Interpreting the ECB’s EUR120 billion APP envelope”

Loose lips cost ships: Lagarde’s language and Italy’s EUR14 billion bill

“We are not here to close spreads.” How expensive were these seven words? It’s impossible to know, of course. But we can put down a marker based on some reasonable assumptions. And they probably cost Italy EUR14 billion in interest payments over the next decade, though it could be even more. That’s EUR2 billion per word. Continue reading “Loose lips cost ships: Lagarde’s language and Italy’s EUR14 billion bill”

ECB: What just happened?

ECB_WTF

Today’s policy meeting and press conference were astonishing for a number of distinct reasons. Amid the noise, there are three crucial take-aways.

First, TLTRO3 has been unleashed from money market rates. Second, the deposit rate is no longer the fulcrum of policy—but for good reasons. And, third, we might have seen the end of the Draghi put—the end of “whatever it takes.” Continue reading “ECB: What just happened?”

Macroeconomics and COVID-19

As the COVID-19 shock continues to fan out across the global economy, policymakers are contemplating the correct response. Curiously, though the shock is of a different character to that during the Great Financial Crisis (GFC) the policy response should be broadly similar—monetary easing, (where possible) liquidity provision by central banks, and fiscal expansion. Whether policymakers react in the correct manner is crucial; the biggest danger facing the global economy right now is that they take the view that a different shock requires a different policy response. This is not the case—with an important caveat. Here we briefly frame the challenge of responding to COVID-19.

Macroeconomics and the COVID.

United Kingdom: Calibrating fiscal policy for Brexit

Text. Charts.

With a new Chancellor of the Exchequer safely in place, Rishi Sunak’s Budget on March 11th promises to be the most important fiscal announcement in the United Kingdom (UK) since Chancellor Osborne’s politically astute, but economically and socially destructive austerity budget in June 2010.

The next Budget needs to provide clarity on two aspects of fiscal policy for the generation ahead: first, how will the UK navigate inevitable Brexit-related disruptions; second, what is the overall fiscal envelope available for necessary long-term investment and “levelling up” of the UK economy. Continue reading “United Kingdom: Calibrating fiscal policy for Brexit”

Argentina: A sustainability assessment

Slides: Argentina_sustainability note_FINAL

Text, charts, tables, and technical annex: Argentina sustainability note_FINAL

What is needed to restore Argentina to sustainability? An emerging view suggests: (i) domestic law debt—largely held by residents, including the central bank (BCRA)—will carry most of the “sustainability” burden, including through a “haircut” of principal and coupons if necessary; while, related, (ii) foreign law debt—held largely by non-residents—might expect to be reprofiled, but no substantial action in terms of coupon or principal haircut is needed. Continue reading “Argentina: A sustainability assessment”

How did the Eurosystem facilitate tiering?

Slides: Tiering adjustment_FINAL

pdf: How was tiering facilitated_FINAL

On 30th October, the European Central Bank’s (ECB) new tiering system came into operation, resulting in the reshuffling of liquidity across the Eurosystem. As noted previously, and reported variously, this caused a record one month decline in Italy’s TARGET2 debit, falling EUR48bn to reach EUR420bn—the lowest debit for 2 years. At that time this blog speculated the introduction of tiering created an arbitrage opportunity, allowing Italian banks to draw in liquidity to deposit at 0%. As liquidity was returned to the periphery, TARGET2 balances adjusted. Continue reading “How did the Eurosystem facilitate tiering?”