Reuters blog archive
from The Great Debate:
One reason is that the economy constantly evolves and each recession is different; that alters the way monetary policy is supposed to work. The latest recession is notable for the way it destroyed households’ wealth. Median household net worth fell nearly 40 percent between 2007 and 2010. The severity of the recession also heightened awareness that the world is riskier than many people thought. Each of these factors make people want to save more. The Fed’s policy is to keep interest rates low to juice demand. But the state of household balance sheets going into the recession and the aging U.S. population may be why the Fed has not been more successful.
The Fed is currently buying bonds and mortgage-backed securities to keep interest rates low. The low rates are supposed to increase demand through several different channels. One way is through firms; if you lower real interest rates it’s cheaper for them to invest, expand and hire. Also, low rates encourage more consumption. They lower the returns to saving so it’s cheaper to consume today instead of in the future. This is called substitution effect. Or, the lower rates change how wealthy you feel -- this is a wealth effect.
However, whether the substitution or wealth effect dominates, and how strong each is, depends on the age of the consumer. A recent paper from the IMF points out that the aging population may result in less effective monetary policy.
from The Great Debate:
America has moved to a system where nearly everyone is expected to save and invest for their retirement. Yet remarkably little attention has been paid to the big question: what should people do with their money when they actually retire? Neither the government nor the financial industry has any good answers. This leaves individuals ill-equipped to figure it out for themselves. Before the bulk of baby boomers reach retirement they will need a better solution. That will require the government and the financial industry to define their role in how people finance their retirement.
Starting in the 1980s many countries (America, Chile and later Australia, Britain, Sweden, Switzerland, Singapore and other Latin American and Nordic countries) moved to a regime where individuals had to save and invest to finance their retirement. Prior to this, pensions from the government or employers provided stable, predictable, and often inflation-adjusted income. As the typical retirement lengthened and populations aged, the old way looked unsustainable. Personal accounts, which shift the burden to individuals, became more popular. The individual account solution has well-known problems associated with the saving stage: people don’t save enough, pay too much for investment funds, and do not understand investment risk they are exposed to, as the recent economic crisis revealed. As these programs evolved, so have solutions and better regulation. Countries like Australia, Switzerland and Chile require people to save a large fraction of their income. Sensible and reasonably priced default investment options and savings rates help people make better decisions. Some countries, like Switzerland, provide a minimum return on the accounts’ assets. But even with best practices for the saving phase, major questions remain: When people arrive at retirement, what are they supposed to do with their life savings? How much can they spend each year and how should they invest their assets?
from Reihan Salam:
Right now, it looks as though Larry Summers has the inside track to be named the next chairman of the Federal Reserve. This is despite the fact that many on the left, from Democratic lawmakers like Oregon Senator Jeff Merkley to influential activists like Mike Konczal of the Roosevelt Institute, are deeply skeptical of Summers, owing to his ties to the financial sector, his impolitic reputation, and the fear that he might be more concerned about the dormant threat of inflation than the very real scourge of long-term unemployment. The discouraging job growth numbers released by the Bureau of Labor Statistics earlier today can’t help his case. But Summers, the former chairman of President Obama’s National Economic Council, seems to have the trust and respect of his former boss, and that may be all he really needs to secure the most powerful economic policy-making job in the country.
So it is worth thinking through what Summers’ priorities might be as Fed chairman. Though the Federal Reserve is responsible for setting monetary policy, it also has a great deal of influence over the larger workings of the U.S. financial system. Zachary Goldfarb, a reporter for the Washington Post, reports that Summers hopes to use the Fed’s influence to restructure the financial system to better serve the interests of low- and middle-income households. This could be a ploy on the part of Summers’ allies, who understand that his reputation as a friend of Wall Street is his greatest political liability. If it’s more than that, however, Summers could use his bully pulpit to great effect.
By Andy Mukherjee
(The author is a Reuters Breakingviews columnist. The opinions expressed are his own)
A reversal of hot money inflows is a worry for Asia. But there's another: policymakers must guard against their own savers turning tail.
The end of quantitative easing is drawing near. Half the members of the U.S. Federal Reserve’s monetary policy committee anticipate the liquidity spigots will close by year-end. For Asian households, that means the prospect of earning higher rates abroad than have been available for years.
At the same time, real returns at home look unappetizing when compared with pre-financial crisis levels. Take Indonesia, where the inflation-adjusted interest rate was 5 percent in late 2007. Now, the gap between 10-year Indonesian risk-free rates and consumer price inflation has shrunk to 1.2 percent.
Wealth owners in India have it worse; they face minus 3 percent real interest rates on a 10-year bond. A strengthening U.S. dollar further dims the appeal of keeping money at home and boosts the lure of U.S. real interest rates of around 0.7 percent, the best since March 2011.
For savers to chase higher returns overseas wouldn't be all bad. Since the financial crisis, yield-starved depositors have displeased authorities by chasing returns in asset classes that can bring worrying side effects: wealth-management products in China, real estate in Singapore and gold in India. Where savers are able to take their money across borders, some of these vulnerabilities will go away as US interest rates normalize.
Besides, not all economies are equally exposed. Taiwan and South Korea may withstand withdrawal of global excess liquidity better than India or Indonesia. Malaysia and Singapore have acquired more overseas assets in the past six years than foreigners have bought in these two economies. That’s a source of strength for their currencies, mitigated only by a surge in Malaysian government debt.
In the event of serious outflows, though, policymakers' hands are tied. Capital controls can be circumvented by fake trade transactions, as China learned earlier this year. Raising interest rates could hurt growth and stall investment, though Indonesia is now being forced to go down that route to stem capital flight. Thailand and the Philippines aside, Asian GDP growth rates are now lower than in late 2007. The Fed has done Asia's depositors a favour, but put its policymakers in a tight corner.
from Felix Salmon:
It's May Day, and Henry Blodget is celebrating -- if that's the right word -- with three charts, of which the most germane is the one above. It shows total US wages as a proportion of total US GDP -- a number which continues to hit all-time lows. Blodget also puts up the converse chart -- corporate profits as a percentage of GDP. That line, you won't be surprised to hear, is hitting new all-time highs. He's clear about how destructive these trends are:
Low employee wages are one reason the economy is so weak: Those "wages" are represent spending power for consumers. And consumer spending is "revenue" for other companies. So the short-term corporate profit obsession is actually starving the rest of the economy of revenue growth.
from Global Investing:
Indians have reacted to the latest gold prices falls by --- buying more gold. And why not? Aside from Indians' well known passion for the yellow metal (yours truly not excluded) gold has by and large served well as an investment: annual returns over the past five years have been around 17 percent, Morgan Stanley notes.
Now, gold's near 20 percent plunge this year has wiped some $300 billion off Indians' gold holdings, Morgan Stanley estimates in a note (households are believed to own about 15,000 metric tonnes of gold). So is the gold rush in India over?
from Global Investing:
Will the yen continue to weaken?
Most people think so -- analysts polled by Reuters this month predict that the Japanese currency will fall 18 percent against the dollar this year. That will bring the currency to around 102 per dollar from current levels of 98. And all sorts of trades, from emerging debt to euro zone periphery stocks, are banking on a world of weak yen.
Now here is a contrary view. David Bloom, HSBC's head of global FX strategy, thinks one-way bets on the yen could prove dangerous. Here are some of the points he makes in his note today:
from David Cay Johnston:
Another financial crisis looms for U.S. taxpayers, a disaster likely to create even worse human misery than the mortgage fiasco that some of us warned about years before the Wall Street meltdown in 2008.
The crisis next time: collapsing investment incomes for older Americans as artificially reduced interest rates force them to use up their savings and drive more pension plans into failure.
By Martin Hutchinson
The author is a Reuters Breakingviews columnist. The opinions expressed are his own.
The middle-class American dream has taken a hit from real estate. According to the Federal Reserve’s new triennial survey of family finances, U.S. families in the middle income bracket lost 29 percent of their net worth between 2007 and 2010 in real terms, with the median household left with $65,900 of net assets. The plunge in home values was largely to blame. Yet the rich got richer, helped by tax deductions for retirement accounts and mortgage interest that make it cheaper for them to save. Policy can help redress the balance.
from Felix Salmon:
The big news from the Fed this week is, in the words of the NYT headline, that Family Net Worth Drops to Level of Early ’90s. But if you look at the actual report, there isn't any data in there on family net worth before 2001. So many thanks to Peter Coy, who actually went ahead and ran the numbers.
Now these are Coy's numbers, not the Fed's. But Coy uses the Fed's data, and here's what he comes up with: