Category: Conjoncture

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Conjoncture Economical and financial crisis

The lasting end of free money

It’s understood. Inflation needs to be fought, and the central banks’ policy will contribute actively to this battle. But the financial markets anticipate that, when inflation returns to its target, the central banks will cut their interest rates again, and long-term rates will gradually return to low levels in anticipation – they are already doing so in part – thus referring to the last decade. Let’s look at why this will probably not be the case. The years 2010 to 2021 saw very low long-term rates for several combined reasons. We were in an extended phase of globalisation and technological revolution. This pushed prices downwards and did not easily allow for wage increases. Inflation was very low, leading to very low interest rates. And because the central banks rightly feared deflation, then were faced with inflation under their target, they dropped their key rates to zero or even to the negative territory, while initiating a “quantitative easing” policy, thus more or less taking control of long-term rates and risk premiums.

However, starting in 2016-2017, while growth normalised after the very serious crisis of 2007-2009 and loans regained good momentum, long-term rates settled at very (too) low levels, for a very long time (too long), admittedly with very (too) low inflation. Long-term rates notched below the growth rate, excluding periods of crisis or convalescence, triggering an increase in financial instability. This means permanent and unsustainable debt growth in the event of a significant rise in interest rates; public and private debt grew by more than 45 points of GDP in advanced countries and 60 in emerging countries between 2008 and 2021. And the development of bubbles in equities and real estate; residential real estate prices rose by more than 40% in advanced countries between 2008 and 2021 and 35% in emerging countries. In addition, risk premiums are too low.

The current rise in interest rates therefore corresponds to a normalisation as well as a fight against inflation. The inflation component was gradually lowered due to insufficient supply – which was partially dislocated by the impact of measures against contagion – and demand that rebounded sharply after the lockdowns. However, a few structural factors are likely to persist. The effects of a partial deglobalisation movement and the sustainable cost of the energy transition. Such as the partial indexation of wages and probably a better ability of employees in the future to negotiate the sharing of added value, which has become distorted over the last 30 years in favour of profits in the OECD (except in France and Italy in particular). Structural inflation is likely to be between 2% and 3%. Once inflation returns to these levels, and excluding the effects of the business cycle, normalised long-term rates will probably average at the potential growth rate, i.e. in the eurozone between 1% and 1.5%, to which the inflation rate should be added, i.e. 2-3%. Long-term rates at around 4% should become the norm again across cycles. They would not facilitate the development of financial cycles, which are moving from growth phases to euphoria phases, leading to gradual over-indebtedness and the creation of bubbles. This leads to violent financial and economic crises. Short-term rates may, however, rise and bite into inflation, then fall somewhat later.

We are most likely to see a lasting end to free money.

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Conjoncture Economical policy Euro zone

“Inflation, interest rates and debt”

Updated on 21/10/2022

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Conjoncture Economical and financial crisis Global economy

Post-lockdown: neither austerity nor voodoo economics

The central banks took swift and effective action. States also acted rapidly in an attempt to handle the cost of the unprecedented fall in production as effectively as possible. They did so by enabling the financing of company losses and by taking on the cost of labour, since businesses generating zero revenue cannot continue paying their employees. The aims are to prevent layoffs and bankruptcies, protect production capacity and avoid an appalling rise in poverty.

The set of measures temporarily lifts monetary constraint – vital in normal circumstances to the efficient functioning of the economy – from economic players, businesses and households.

Monetary constraint

But in today’s economic meltdown, the normal exercise of monetary constraint would be catastrophic, leading to bankruptcies and countless irretrievable job losses. For their part, the central banks, while ensuring the liquidity necessary to the financial system, have wisely suspended the monetary constraint of states.

Once the health crisis is over, putting an end to this exceptional suspension will not be an easy task, and it would be dangerous to let people believe that monetary constraint at all levels could be durably lifted simply by central banks buying state and company debt on an ad lib basis.

While monetary constraint should not be abruptly reintroduced, as this could send the economy into a new downward spiral, neither should it be suspended for too long. This is because we must absolutely avoid a flight from currency, the value of which is wholly dependent on the trust placed in the effective exercise of monetary constraint, and hence in banks and central banks, as well as in the quality of debt, including public debt.

Fatal illusion

Central banks should make a part of the additional public debt resulting from the health crisis interest-free on a practically indefinite basis to lighten the load and foster the return of growth. But they must do so in a precise and strictly circumscribed manner. The idea of central banks permanently suspending monetary constraint is a fatal illusion. The major risk involved in acting as if monetary and economic constraints no longer exist is thus not a return of traditional inflation but a loss of confidence in currency. Sooner or later, this would lead to the appearance of a form of hyper-inflation and deep financial instability.

Pressure from public opinion

The reopening could thus entail elevated risks of economic policy mistakes. Under pressure from public opinion, policy may seek to return too swiftly to orthodoxy or assume that we are exempt indefinitely from any and all constraints.

A solid supply policy must be led to rebuild the country’s production capacity and even increase it to reduce its strategic dependence. The process will require all the capacity for work and entrepreneurial spirit of everyone involved. The supply policy must further mobilise labour and include a substantial focus on recapitalising businesses and facilitating investments. Failing this, companies will exit lockdown heavily in debt and may well be unable to invest sufficiently on a lasting basis.

The supply policy must be accompanied by a policy to boost demand, since both have suffered considerably during the crisis. Increasing taxes will not be compatible with either policy. Consequently, we will need to accept budgets with extremely gradual deficit reductions and the fact that monetary policies can only return to their unconventional practices in a cautious fashion. But to salvage trust in state debt and in currency, this should be achieved as part of a highly explicit plan.

Categories
Conjoncture Economical and financial crisis

Post-lockdown: neither austerity nor voodoo economics (complete version)

Read the complete version of my column in the 14 May 2020 issue of Les Echos

The central banks took swift and effective action. States, including France, also acted rapidly and appropriately in an attempt to handle the cost of the unprecedented fall in production as effectively as possible. They did so by enabling, as far as possible, the financing of company losses and by taking on the cost of labour, since businesses generating zero revenue cannot continue paying their employees. The key objectives are to prevent layoffs and bankruptcies, protect production capacities, in some measure, and avoid an appalling rise in poverty.

In essence, the set of measures introduced temporarily lifts the monetary constraint from the various economic players, businesses and households. Monetary constraint applies in normal periods as it is vital to the efficient functioning of the economy.

The sole businesses that are likely to survive in the medium and long term are those that do not bleed money in an uninterrupted fashion. Otherwise, economic efficiency – which French politician Michel Rocard famously said was the only good way to spare human suffering – would not be possible and no Schumpeterian growth permitted. The same applies to households, which cannot spend more than they earn on a lasting basis.

But in today’s economic meltdown, the normal exercise of monetary constraint would be catastrophic, leading to bankruptcies and countless irretrievable job losses.

For their part, the central banks, while ensuring the liquidity necessary to the financial system, have wisely suspended the monetary constraint of states.

Once the health crisis is well and truly over, reactivating monetary constraint will not be a simple matter. But it will be indispensable. And it would be misleading and dangerous to let people believe that monetary constraint at all levels could be durably lifted simply by central banks buying state and company debt on an ad lib basis.

While monetary constraint should not be abruptly reintroduced, as this would send the economy into a new downward spiral, neither should it be suspended for too long. This is because we must absolutely avoid a flight from currency, the value of the latter being wholly dependent on the trust placed in the effective exercise of monetary constraint, and, hence, the trust placed in banks and central banks, as well as in the quality of debt, and public debt in particular.

In this respect, I believe that central banks should make a part of the additional public debt resulting from the health crisis interest-free on a practically indefinite basis to lighten the load and foster the return of growth. But they must do so in a precise and strictly circumscribed manner. The idea of central banks permanently suspending monetary constraint is a fatal illusion.

While there has not been a correlation between the money supply and inflation since the 1980s, the major risk involved in acting as if monetary and economic constraints no longer exist is not a return of traditional inflation (which would be welcome if it were to remain limited) but a loss of confidence in currency through widespread mistrust.

Sooner or later, this would lead to the appearance of a form of hyper-inflation and major financial instability. Economic history, right up to the present day, is littered with examples of interminable ruin and crises with terrible social impacts resulting from the illusion that no constraint exists and that everything is possible without having to produce the requisite wealth.

The reopening could thus entail elevated risks of economic policy mistakes. Under the sway of emotion and the pressure of public opinion, policy may seek to return too swiftly to orthodoxy or believe that we are exempt indefinitely from any and all constraints.

A solid supply policy must be led to rebuild the country’s production capacity and even increase it to reduce its strategic dependence. The process will require all the energy, capacity for work and entrepreneurial spirit of everyone involved. The supply policy must further mobilise labour and include a substantial focus on recapitalising businesses and facilitating investments. Failing this, companies will exit lockdown heavily in debt and unable to invest sufficiently on a lasting basis.

The supply policy must be accompanied by a policy to boost demand, since both have suffered considerably during the crisis. Increasing taxes will not be compatible with either policy. Consequently, we will need to accept budgets with extremely gradual deficit reductions and the fact that monetary policies can only return to their unconventional practices in a cautious fashion. But to salvage trust in state debt and in currency, this should be achieved as part of a highly explicit plan.

Categories
Conjoncture Euro zone

A wake-up call for Europe ! Full text of the article published in Les Echos on 11 December 2018

For the first time, a Member State wants to leave the European Union. The rise of illiberalism in some countries raises the question of the purpose of EU membership. North-south tensions within the European Union against a backdrop of mutual lack of trust are hampering further progress in building the eurozone, which remains shaky even now. Northern countries are concerned about southern countries’ lack of respect of common rules. For their part, southern countries are concerned about the lack of solidarity from northern countries and their seeming contempt. The situation has culminated in the coming to power of a diverse coalition of extremist parties in Italy.

In addition, and although the trend is not exclusive to Europe, populist movements are on the rise across the continent, seeking simplistic solutions to genuine problems and easy scapegoats. These movements are the tangible political and electoral manifestation of a demand for identity, security and protection. This itself is a consequence, both in Europe and elsewhere, of middle-class fears of becoming weaker and a government response that is perceived as inadequate or insufficient. These concerns are being stoked by globalisation, technological revolution, poorly managed immigration, and Islamic terrorism. Meanwhile, multilateral organisations and the rules and principles of the community of nations established post-war are gradually falling apart. The result is an increase in potentially dangerous, non-cooperative stances, examples being the United States, with its focus on “America first”, and, on a smaller scale, Italy, whose budgetary policy poses dangers for the eurozone, and, to some degree and in contrasting style, Germany, whose current account surplus has been abnormally high for several years.

It is therefore a matter of urgency for Europe to decide on the right way to respond to this mistrust. Two types of reaction are to be avoided. The first such reaction would be the denial of Europe’s intrinsic flaws. The problems perceived by the population will not be dispelled by ignoring them. Indeed, this approach will only exacerbate them. We need to face up to the real problems that exist and acknowledge the issues of poorly managed immigration at Community level and the effects of European expansion, which has made the governance of the European Union less clear and less effective. Likewise, there is a need for openness about the issues with the creation of the eurozone, where lack of completeness has had a number of adverse effects. Clarifying falsehoods about Europe is vital, but appearing to ignore the problems at hand would be hazardous.

Conversely, having taken note of the risk of European disintegration and the EU’s intrinsic shortcomings, the second mistake would be to content ourselves with a sort of cultivated pessimism, giving rise to a mindset that is at once complacent and regretful about the successive backward steps taken by a Europe that is powerless to continue its construction.

Even if it is very difficult, the only possible way forward is to strive tirelessly to develop and strengthen active cooperation in Europe. In the face of the current entropy, it is vital first of all to provide a powerful reminder of what unites the peoples of Europe and the ways that the European Union improves their lives, such as the protection and effectiveness of a social economy; the crucial importance of the rule of law, with the inalienable nature of personal freedom and freedom of critical thought, which goes hand in hand with freedom of the press; the secularism that allows people to live together; the benefits of the single market and the free movement of people; not to mention peace, of course. Let us wager that, ultimately, Europeans mindful of the dangers will not be in favour of these backward steps.

Paradoxically, though, the more the benefits of Europe are taken for granted, the more fragile they are, as human nature is prone to forgetfulness. And so we also need to talk about the importance of a strong Europe for the future. We are currently witnessing a titanic struggle between the United States and China over their respective spheres of influence. The United States has eschewed multilateralism and is unapologetically affirming its non-cooperative attitude, while China sees a latter-day version of the Silk Road as a means to further expansion of its power. We Europeans must quickly open our eyes if we want our peoples to retain control over their own destinies and continue to influence the course of history. If we are to safeguard the special characteristics and values dear to us – the values that unite us and set us apart – then we need not less Europe, but more! To survive between the two titans of the new world, Europe needs to be strong, economically, politically, diplomatically and militarily.

The areas where we urgently need to work together, by introducing new common rules and new cooperative initiatives, include high added value manufacturing, new technologies, the ecological transition, migration flows, and a common defence policy as recently proposed by France and Germany. The aim is to play a greater role in this new world order. Furthermore, we need our own perspective on how world trade should be organised and must defend our interests in this respect. To that end, we need to quickly build a shared geostrategic vision. And lastly, we must look to make the euro a more international currency, on the basis of a complete, robust monetary area. With Europe acting more strategically, greater use of the euro worldwide would actually be useful to help avoid the unacceptable, unilateral rules around extraterritoriality being imposed by the United States, facilitated by the ubiquitous dollar.

This being the case, how can we not see the urgent need for Europe? Above all, for Europeans, but also for other peoples who do not want to have to choose between the two future world rulers if Europe were not to play its own game. This renaissance will happen only if we succeed in forging an intelligent blend of a Europe of nations and a strategic Europe, which is the only force able to take on the towering mass of geopolitical, industrial and environmental challenges that stand before us.

Given the present gradual disintegration, the only way to reverse the tide is to arm ourselves with the determination to recognise and remedy Europe’s flaws, lucidly assess geostrategic issues and the real possibilities of regression, and call on courageous statesmen with a clear vision of the future. But nothing will happen without a pragmatic start on practical projects in the various areas mentioned above, joining forces with our German neighbours. Nor will anything happen without every one of us, wherever and whoever we are, contributing to the best of our ability!

Categories
Conjoncture Euro zone

A wake up call for Europe ! Find my point of view, published in Les Echos on 11 December 2018

The European elections are approaching, while we are experiencing a period of falling confidence in Europe and seeing the pendulum of power swing back towards nation states.

For the first time, a member state wants to leave the European Union. The rise in illiberalism in some countries raises the question of the purpose of membership of the European Union. North-South tensions within the European Union against a backdrop of mutual lack of trust are hampering further progress in the building of the euro zone, which remains shaky even now.

In addition, populist movements are on the rise throughout Europe, seeking simplistic solutions to genuine problems and easy scapegoats. These movements are the tangible political and electoral outcome of a demand for identity, security and protection. This itself is a consequence, both in Europe and elsewhere, of middle-class fears of becoming weaker plus a government response perceived as inadequate or insufficient.

Globalisation, the technological revolution, poorly controlled immigration and Islamist terrorism are the catalysts of this anxiety, and all against a backdrop of gradual disintegration of multilateral organisations and the rules and principles developed post-war linking the community of nations. A higher risk, therefore, of a potentially very dangerous situation of non-cooperation.

What brings people together

It is therefore a matter of urgency for Europe to decide on the right way to respond to this mistrust. It would be futile to deny Europe’s intrinsic flaws. We need to face up to the real problems that exist and acknowledge poorly managed immigration issues at Community level and the effects of European expansion, which has made governance of the European Union less clear and less effective. Likewise, openness is needed about the faults in the establishment of the euro zone; its incompleteness has caused a number of undesirable effects.

Even if it is very difficult, the only possible way forward is to tirelessly strive to set up and strengthen active cooperation in Europe. In the face of the current entropy, it is vital first of all to firmly reiterate what brings Europeans together and how the European Union improves their lives, through aspects such as the protection and effectiveness of a social economy; the crucial importance of the rule of law, with the inalienable nature of personal freedom and freedom of critical thought, which goes hand in hand with freedom of the press; the secularism that allows people to live together; the benefits of the single market and the free movement of people; not to mention peace, of course.

Opening our eyes

We are currently witnessing a titanic struggle between the United States and China over their respective spheres of influence. We Europeans need to open our eyes quickly, if we want our people to retain control over their own destinies and continue to influence the course of history. To survive between the two titans of the new world, Europe needs to be strong.

Areas we need to work on together as soon as possible include high added value production, new technologies, ecological transition, a common defence policy as was recently proposed by France and Germany, migration issues, and so on. To be more influential in this new world order.  Furthermore, we need a specific view of how world trade is organised. And lastly, on the basis of a complete and solid monetary area, we must look to make the euro a more international currency. With Europe acting more strategically, greater use of the euro worldwide would actually be useful to help avoid the unacceptable unilateral, extraterritoriality rules imposed by the United States.

Nothing will happen without making a pragmatic start on practical projects in the various areas mentioned above, joining forces with our German neighbours. Nor will anything happen without all of us, wherever we are and whoever we are, contributing to the best of our ability!