The typical way Central Banks give a helping hand to the economy is by lowering interest rates. By making it cheaper to borrow they can encourage spending and thereby create growth. Today countries such as America and the United Kingdom find themselves in a situation of near zero nominal interest rates. From this one could easily draw the conclusion that interest rates can't be used to stimulate demand further.
This is of course true if we think of interest rates in a nominal sense. But in a real sense, that is when taking inflation in to account there is no such limit. Let's say that nominal interest rates are at 0% while inflation is at 2%, then the real interest rate would be a negative 2%. Borrowers would then in effect get paid to borrow. Since Central Banks hold the power over the printing press they are free to set inflation at whatever level they choose. The higher they push inflation the cheaper borrowing will become. This can be done purchasing pretty much anything of value and paying with fresh money.
Quantitative easing would be a good example of this practice. Even if more attention is given to its power to channel private investment over from public debt to the stock market and they way that it lowers the currency. By in effect increasing the money supply it also drives real interest rates further and thereby has the same positive effect on the economy as a lowering of the prime interest rate.
If the actions of central banks are constrained by anything it is their fear of inflation. Not by any practical limit on their power to shape the business cycle.
Saturday, September 24, 2011
Friday, September 9, 2011
Governments could do more
The world economy is slowing and a return to negative growth in Europe and America is a real possibility. There is a lot governments could do to prevent this.
Governments everywhere are cutting spending and raising taxes with the aim of cutting their budget deficits leading to a fall in demand. This is not what the world economy needs right now. Some states understandably needs to get their house in order, Greece, Portugal, Italy and Spain are in this category. But many of the nations who are not plagued by high interest rates on their debt are also tightening the belt. If another recession is to be prevented it would be a good idea for those economies who can afford to do so to stimulate demand by increased spending or cutting taxes. This would have to be financed by additional borrowing but it is hard to imagine a more advantageous time to borrow then now when investors are thirsting for the safety of government bonds. The United States, Germany and Japan can all borrow at almost no cost when taking inflation in to accountant. signaling that their debt burden is not a problem and there is room for much more borrowing. Increased spending by these nations together with those smaller states with sound finances could help compensate for the necessary austerity measures in the troubled European countries.
Then there is the ECB which has lots of room to act with its key interest still relatively high. A lowering of which should greatly help the economy. Over in America the prime interest rate is still near zero, making it harder for the Fed to boost the economy by conventional means. But since they control the money supply there is no limitations on their ability to support the economy, even if this will have to be done by less tested and therefore more uncertain measures such as quantitative easing. The risk of an expansionary monitory policy is always high inflation, but with such a weak economy this should be less of a risk. If the inflation figures ends up a bit over the central bank targets this would of course not be a good thing, but preferable over a return to recession.
Governments everywhere are cutting spending and raising taxes with the aim of cutting their budget deficits leading to a fall in demand. This is not what the world economy needs right now. Some states understandably needs to get their house in order, Greece, Portugal, Italy and Spain are in this category. But many of the nations who are not plagued by high interest rates on their debt are also tightening the belt. If another recession is to be prevented it would be a good idea for those economies who can afford to do so to stimulate demand by increased spending or cutting taxes. This would have to be financed by additional borrowing but it is hard to imagine a more advantageous time to borrow then now when investors are thirsting for the safety of government bonds. The United States, Germany and Japan can all borrow at almost no cost when taking inflation in to accountant. signaling that their debt burden is not a problem and there is room for much more borrowing. Increased spending by these nations together with those smaller states with sound finances could help compensate for the necessary austerity measures in the troubled European countries.
Then there is the ECB which has lots of room to act with its key interest still relatively high. A lowering of which should greatly help the economy. Over in America the prime interest rate is still near zero, making it harder for the Fed to boost the economy by conventional means. But since they control the money supply there is no limitations on their ability to support the economy, even if this will have to be done by less tested and therefore more uncertain measures such as quantitative easing. The risk of an expansionary monitory policy is always high inflation, but with such a weak economy this should be less of a risk. If the inflation figures ends up a bit over the central bank targets this would of course not be a good thing, but preferable over a return to recession.
Tuesday, September 6, 2011
Palestinian statehood
It seems fairly likely that the UN general assembly will recognize Palestine as a sovereign state later this year. What does this mean? Since it is the general assembly and not the security council (in which such a resolution would never pass) it doesn't really mean anything. The security council would have the authority as the UN's only super national body to force the creation of a Palestinian state. The general assembly can just say that they believe a Palestinian would be a rather good idea, it has no power to tell a sovereign state such as Israel what to do, only the security council could do that. It would how ever be a PR nightmare for Israel.
So what one might ask, why should Israel be occupying the Palestinian territories in the first place? The answer is that it is necessary for Israeli security. There are basically two types of security threats to the Jewish state. Foreign invasion and terrorism.
The Arab states have attempted to destroy Israel a number of times since its creation. This is what sparked the occupation of the Palestinian territories in the first place. In order to prevent enemy armies from being stationed at walking distance from Israel's cities, Israel occupied a part of Jordan (the West Bank) and a part of Egypt (Gaza) after the six-day war.
This occupation has contributed greatly to Israel's security by moving its previously near indefensible border. But it has also created a new security threat in the form of terrorism. This is not an existential threat like the threat posed by foreign armies but the prospect of having rockets fired in to kindergartens and busses blown up by suicide bombers is something Israel must protect itself from. The occupation while being at least partially the cause of the terrorism has also turned in to a mean for Israel to protect itself from terrorism. The daily rocket attacks that followed the Israeli pullout from Gaza made that clear.
Unfortunately before these two security concerns are satisfied the occupation is necessary for Israel to protect itself. The threat of foreign occupation has lessened as Israel has made peace with Egypt and Jordan but it is still technically at war with a number of Arab states and the Egyptian revolution has also once again raised the prospect of a return to hostilities between Israel and its old enemy. The terrorist groups who routinely try to slaughter Israeli civilians seek not only an end to the occupation but the end of Israel itself. So a Palestinian state would not solve the terrorism problem.
What is needed is a true peace between Israel and the Muslim world as well as an end to terrorism and acceptance of Israel's right to exist. Unfortunately we are no where near achieving this today. A Palestinian state remains incompatible with Israel's need for security and will sadly have to wait.
So what one might ask, why should Israel be occupying the Palestinian territories in the first place? The answer is that it is necessary for Israeli security. There are basically two types of security threats to the Jewish state. Foreign invasion and terrorism.
The Arab states have attempted to destroy Israel a number of times since its creation. This is what sparked the occupation of the Palestinian territories in the first place. In order to prevent enemy armies from being stationed at walking distance from Israel's cities, Israel occupied a part of Jordan (the West Bank) and a part of Egypt (Gaza) after the six-day war.
This occupation has contributed greatly to Israel's security by moving its previously near indefensible border. But it has also created a new security threat in the form of terrorism. This is not an existential threat like the threat posed by foreign armies but the prospect of having rockets fired in to kindergartens and busses blown up by suicide bombers is something Israel must protect itself from. The occupation while being at least partially the cause of the terrorism has also turned in to a mean for Israel to protect itself from terrorism. The daily rocket attacks that followed the Israeli pullout from Gaza made that clear.
Unfortunately before these two security concerns are satisfied the occupation is necessary for Israel to protect itself. The threat of foreign occupation has lessened as Israel has made peace with Egypt and Jordan but it is still technically at war with a number of Arab states and the Egyptian revolution has also once again raised the prospect of a return to hostilities between Israel and its old enemy. The terrorist groups who routinely try to slaughter Israeli civilians seek not only an end to the occupation but the end of Israel itself. So a Palestinian state would not solve the terrorism problem.
What is needed is a true peace between Israel and the Muslim world as well as an end to terrorism and acceptance of Israel's right to exist. Unfortunately we are no where near achieving this today. A Palestinian state remains incompatible with Israel's need for security and will sadly have to wait.
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