First, some background: over the last decade, the European Central Bank, the Bank of Japan, and the central banks of Denmark, Switzerland, and Sweden have experienced negative interest rates. In other words, banks are forced to pay the park excess cash at the central bank.
Once unthinkable, the practice of negative interest rates is now accepted, even if they have a poor track record of achieving their stated policy goals. In addition, negative interest rates have consolidated and only Sweden manages to decouple its economy from the stimulus and return rates to positive territory.
The pandemic has increased the need for monetary stimulus and, with the rate cut, negative-rated central banks have responded by buying a large number of bonds and other assets to support their economies. The US Federal Reserve and the Bank of England, which have long resisted negative interest rates, are now under enormous pressure to keep up with Europe and Japan.
The Bank of England has long flirted with refusal. On Thursday, policymakers gave banks six more months to prepare for negative rates, insisting they should not be considered inevitable. In the end, the biggest drop in production in recent centuries could force UK rates into negative territory, leaving the US Federal Reserve as the only major central bank that did not make the move.
The pandemic also extends the limits of government spending around the world. The combined fiscal response totals 12% of world GDP, compared to 2% of world GDP after the 2008 financial crisis, according to Capital Economics. Stimulus spending helped raise the U.S. deficit for 2020 to $ 3.1 trillion and the country’s debt topped $ 21 trillion, the largest share of the economy since 1946. , when he left World War II.
There are a couple of reasons why most economists right now aren’t worried about deficits. The first is that government spending is necessary to prevent economies from falling further into recession. The second is that low interest rates make governments have more loans to finance stimulus measures.
Neil Shearing, chief economist at the group at Capital Economics, said deficits become a problem when they remain high, either through continued high spending or substantially lower tax revenues. But the economy could recover relatively quickly once the pandemic is over. Looking even further, low interest rates will help prevent public debt from spiraling out of control.
“None of this means that some countries will not have to suffer a period of fiscal cuts once the pandemic passes. But most governments, particularly those whose central banks can stay behind their bond markets, they have time to assess the scale of the damage and determine an appropriate response, ”Shearing said.
But there are still risks. The huge stimulus triggered by governments has overshadowed some of the economic trauma caused by the pandemic, especially in Europe, where job support programs have kept companies afloat and workers busy. There is a possibility that when the health crisis is reduced and support is withdrawn, unemployment and bankruptcies will increase dramatically.
“If there is large-scale long-term damage to the productive potential of the economy, this will affect your ability to increase tax revenue in the future and your scope to deal with large deficits is now clearly smaller, the more permanent the damage will be. “, he said. David Miles, Professor of Financial Economics at Imperial College Business School.
In the face of mass unemployment and business failures, most governments have put aside concerns about the deficit. The same goes for monetary policy concerns, which suggest that ultra-low interest rates are here to stay in the foreseeable future.
“A world in which unemployment is rising to a significantly higher level is probably one in which inflationary pressures are not increasing much, and it is a world in which central banks will not rush to raise interest rates,” he said. . Miles, who was a member of the Monetary Policy Committee of the Bank of England from 2009 to 2015.
One problem: keeping interest rates low will limit central banks’ ability to respond to the next crisis, just as the global financial crisis and the eurozone debt saga kept rates low earlier. of the pandemic. But central bankers have to deal with the current crisis before entertaining a return to a more conventional policy.
“I would be cutting your nose to bother your face if you think,‘ Well, we set interest rates up to 3% so that when things get even worse, we can reduce them to zero, ’Miles said.
“Go to the next issue, if something like that happens, with ammunition limited to monetary policy, but that doesn’t mean there’s an easy answer,” he added.
The man who could shake up the concert economy
Marty Walsh may not seem like the person to review the concert economy. He spent years advocating for construction workers and less time in the complexities of tailor-made work for billion-dollar tech companies.
Millions of Americans have lost their jobs since the health crisis created an economic crisis. And many were dedicated to working with companies like Uber, Instacart and DoorDash as support for their livelihoods.
At the same time, these companies are pushing to defend a controversial business model, in which they treat their workers as independent contractors instead of employees who would be entitled to traditional benefits and protections, such as workers’ compensation, insurance. unemployment, family leave, medical leave or the right to unionize.
“Right now we’re at a crossroads,” said Shannon Liss-Riordan, a Boston-based labor lawyer who has been challenging Uber and Lyft for classifying workers through various lawsuits for seven years. “If faced with the challenge, Marty Walsh may have one of the biggest impacts on the workforce in this country since Frances Perkins,” he said in reference to Labor Secretary Franklin D. Roosevelt, who was the chief architect of the New Deal.
Until next time
Friday: UK GDP; Market holidays in China, South Korea and Singapore
Correction: An earlier version of this story incorrectly indicated U.S. debt. It stands at $ 21 trillion.