With most of the major powers now availing themselves of loose monetary policies, it’s as good a time as any to have a look at how easy money has changed the world since 2008. Here are two good pieces worth looking at this Saturday:1) Last week, the Economist ran a special report titled “A World of Cheap Money“. Here’s the lede:
Never in recent economic history have interest rates been so low for so many for so long. It is a safe bet that central banks in America, Britain, the euro zone, Japan and Switzerland will not be increasing short-term interest rates this year. Haruhiko Kuroda began his tenure at the Bank of Japan with a dramatic easing of policy on April 4th. Mark Carney, the new boss at the Bank of England, has licence to ease, too. It would be hardly surprising if rates stayed at the low levels of the past four years throughout 2014. When rates were first cut to their current levels in 2008-2009, it looked like a temporary expedient; now it looks like normality.
It then goes on to show how these policy choices are affecting (some might say distorting) economic activity around the world. Important stuff to digest.2) Via ZeroHedge, Der Spiegel interviewed Harvard economist Carmen Reinhart, one of the authors of the very useful history of financial crises, This Time It’s Different. The interview is excellent, and excerpting a part of it doesn’t do service to the whole. Nevertheless, here’s a bit on pensions which ought to get VM readers’ ears perked up:
Reinhart: The best way of dealing with a debt overhang is to never get into one. Once you have one, what can you do? You can pray for higher growth, but good luck! Historically it doesn’t happen — you seldom just grow yourself out of debt. You need a combination of austerity, so that you don’t add further to the pile of debt, and higher inflation, which is effectively a subtle form of taxation …SPIEGEL: … with the consequence that people are going to lose their savings?Reinhart: No doubt, pensions are screwed. Governments have a lot of leverage on what kinds of assets pension funds hold. In France, for example, public pension funds have shifted money from shares (on the stock market) to government bonds. Not because their returns are great, but because it is more expedient for the government. Pension funds, domestic banks and insurance companies are the most captive audiences, because governments can just change the rules of the game.
At VM we tend to focus on the reckless and unscrupulous politicians and policymakers who have promised impossible pension packages to retirees across the country. And while their irresponsibility is real enough, it’s important to remember the effect that the larger macro backdrop is having on everything.David Petraeus reportedly said of Iraq in 2003: “Tell me how this ends.” When it comes to this unprecedented era of easy money, no one has all the answers. Readers, care to speculate in the comments?[Photo of stacks of Benjamins courtesy of Shutterstock]