Negative Interest Rate Policy

Krisis Finansil Cina: Perspektif Kebijakan Moneter, Corporate Finance (Analisa Laporan Keuangan), dan Investment Banking (Valuasi Nilai)
oleh : Sando Sasako
Jakarta, 28 Maret 2016

ISBN 978-602-73508-5-4

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Krisis Finansil Cina
 


Daftar Isi

Kata Pengantar iii
Kata Pengantar dalam buku ‘Corporate Financing’ v

Daftar Isi vii
Daftar Tabel x
Daftar Bagan xi

Pendahuluan 1
Masalah Pengukuran 1
Data, Informasi, Fakta 2
Data Mining 4
Pemilahan Data 5
Business Intelligence 7
Analisa Kuantitatif 8
Analisa Data 8
Self-Organising Map 9
Hambatan bagi Efektivitas Analisa Data 11
Confirmatory Data Analysis 11

Analisa Finansil 11
Standar Akuntansi Keuangan (PSAK, GAAP, IFRS) 12
Peran Perusahaan Audit dalam PSAK 12
Analisa Finansil sebagai Alat Ukur Kinerja Keuangan 12
Analisa Fundamental 13

Rasio-rasio Finansil 14
Pertumbuhan 14
Produktivitas 14
Kontribusi terhadap Stakeholder 14
Dividend Policy Ratios 14

Rasio-rasio Aktivitas Usaha 15
Perputaran aset (asset turnover) 15
Perputaran aset rata-rata (asset turnover) 15
Rasio perputaran aset tetap (fixed assets turnover) 15
Perputaran piutang (receivables turnover) 16
Rata-rata periode penagihan (average collection period) 16
Perputaran inventaris (inventory turnover) 16
Periode inventaris (inventory period) 16

Rasio-rasio Likuiditas 17
Rasio lancar (current ratio, CR) 17
Rasio modal kerja (working capital ratio) 18
Rasio cepat (quick ratio, QR) 18
Rasio kas (cash ratio) 18
Pendapatan lancar (current income) 19
Rasio pendapatan bunga (Time Interest Earned, Interest Coverage) 19
Rasio investasi terhadap kebijakan (investment to policy ratio) 19
Rasio utang lancar terhadap inventaris (current debts to inventory ratio) 19

Rasio-rasio Profitabilitas 19
Marjin laba kotor (gross profit margin) 20
Marjin laba bersih (net profit margin) 20
Return on Equity (ROE) 20
Return on Asset (ROA) dan Return on Capital Employed (ROCE) 20
Return on Capital (ROC) dan Return on Invested Capital (ROIC) 21
Return on Investment (ROI) 21
Beban bunga (Interest Coverage, Times Interest Earned) 22
Beban finansil (financial leverage) 22
Efisiensi beban finansil (efficiency of financial leverage) 22

Rasio-rasio Struktur Modal 23
Rasio utang terhadap modal (debt to equity ratio) 23
Rasio kapitalisasi (capitalisation ratio) 24
Tingkat pertumbuhan ekuitas (equity growth rate) 24
Beban finansil (financial leverage) 24
Rasio utang (debt ratio) 24
Rasio modal saham terhadap aset tetap bersih 24
Rasio utang lancar terhadap modal saham (Current Debts to Net Worth Ratio) 24
Rasio kewajiban total terhadap modal saham (Total Liabilities to Net Worth Ratio) 25
Rasio aset tetap terhadap modal saham (Fixed Assets to Net Worth Ratio) 25

Rasio-rasio Kecukupan Modal 25

Solvabilitas 25
Solvency ratio (SR) 26
Rasio utang terhadap aset (Debt to Asset Ratio, DAR) 26
Rasio utang terhadap modal (Debt to Equity Ratio, DER) 26
Kemampuan laba menutup biaya tetap (Fixed Charge Coverage). 26
Rasio pinjaman terhadap aset (Loan to Asset Ratio, LAR) 27
Rasio pinjaman terhadap simpanan (Loan to Deposit Ratio, LDR) 27

Risks vs Rewards 27
Risiko Mencari Keuntungan 28
Efek Domino Risiko 29
Rent-Seeking Behaviours 30

When the Deal Slips Away 32
Indikator Kesulitan Finansil 34
Indeks Kerentanan 36
Stress Test 38
Indeks Stabilitas Sistem Keuangan 40
Financial Stability Index 43
Indeks Kesehatan Finansil ala IMF 44
Laporan Stabilitas Finansil Global ala IMF 48
Operasi Moneter 48
Inflasi Terencana sebagai Prasyarat Kestabilan Finansil 50

Dinamika Pasar Finansil 52
Dinamika Aset Finansil 53
Kerapuhan Sistem Finansil 54

Krisis Finansil 55
Menelikung Krisis Finansil 56
Kasus LTCM 57
Krisis Subprime Mortgage 60
Kasus Lehman Brothers 63
Krisis Eurozone 64
Spiral Kekacauan Krisis Eurozone 65
Debt Exposures of PIGS 66
AS 68
Inggris 69
Jerman 69
Perancis 70
Jepang 71
Yunani 72
Irlandia 73
Italia 74
Portugis 74
Spanyol 75
Some PIGS are More PIGS 76
Krisis Finansil Cina 77
Kenapa Cina menjadi begitu penting? 78
Bermain dengan nilai tukar 81
Pasar CNH 82
Dominansi nilai tukar CNH terhadap CNY 87
Qualified Foreign Institutional Investor 90
Renminbi Qualified Foreign Institutional Investor 90
Qualified Domestic Institutional Investor 91
Qualified Domestic Individual Investor 91
Shanghai-Hong Kong Stock Connect 91
Pilot Free Trade Zones 91
Mainland-Hong Kong Mutual Recognition of Funds 92
Kenapa pasar finansil Cina bisa crash? 92
Ketika gelembung finansil Cina mulai pecah 93
Pelonggaran likuiditas sebagai solusi ancaman resesi 94
Aksi pemadam kebakaran ala pemerintah Cina 96
Permasalahan fundamental ekonomi Cina 99
Beban utang Cina 101
Kebijakan dan otoritas moneter Cina 102
Pasar obligasi Cina 103
Obligasi Panda 105
Obligasi dim sum 106
Daftar emisi obligasi dim sum 108
Aksi pemerintah Cina terhadap masalah tunggakan utang 110

Policy and Politicisation 113
Primary Dealer 113
Solusi Teoritis, Bisa dan Benarkah? 116
Kebijakan Too Big To Fail 117
Cashless Solution 118
Minyak sebagai Mata Uang dan Sumber Kemakmuran 120
Negative Interest Rates Policy 125

Kas 129

Pengadaan Aset 130
Asset Investment 130
Asset Financing 131
Capital Expenditures 132
Menghitung Biaya Modal 134
Biaya utang 134
Biaya saham preferensi 134
Biaya laba ditahan 134
Biaya ekuitas eksternal 135
WACC 135
Biaya modal marjinal 136
Break point 136

Off-Balance Sheet Financing 136
Perubahan Portofolio The Fed 136
OBS sebagai Produk Inovasi Menyembunyikan Risiko Finansil 137
MBS sebagai Produk Rekayasa Finansil Penyebab Krisis 2008 139
Bencana Prilaku Berisiko Berlebihan 141
Bertaruh pada Aset Fiktif 142
Akuntansi OBS 144
Fleksibilitas Pasal Karet 145
Penyesuaian Pasal Karet 146
Memanfaatkan Celah Hukum 147

Equity Financing 148

Debt Financing 149

Struktur Modal 152
Teori Struktur Modal 153
Teori Pensinyalan 154
Struktur Modal dalam Praktek dan Realitas 155
Menghitung Tingkat Optimal Struktur Modal 155
Besar Beban Operasi 156
Analisis EBIT/EPS terhadap Efek Beban Finansil 157
Besar Beban Finansil 157
Besar Beban Total 158
Efek Struktur Modal terhadap Harga Saham dan Biaya Modal 159
Likuiditas dan Arus Kas 159

Struktur Finansil 160
Ukuran Optimal Beban/Struktur Finansil 161

Valuasi Nilai 162
Corporate Financing vs Investment Banking 163
Pentingnya Valuasi Nilai 164
Valuasi Usaha 164
Komponen Pendapatan 166
Komponen Neraca 167
Komponen Arus Kas 167

Time Value of Money 168
Future Value 169
Future Value Interest Factor for i & n 169
Present Value 169
Present Value Interest Factor for i & n 169
Future Value untuk Anuitas Biasa 169
Future Value Interest Factor untuk Anuitas Biasa 170
Future Value untuk Anuitas Awal 170
Present Value untuk Anuitas Biasa 170
Present Value Interest Factor untuk Anuitas Biasa 170
Present Value untuk Anuitas Awal 170
Present Value untuk Perpetuities 171
Present Value untuk Aliran Arus Kas Variabel 171
Future Value untuk Aliran Arus Kas Variabel 171
Future Value untuk Periode Semesteran atau lainnya 171
Amortisasi Pinjaman 172

Referensi 173
Web 173
e-book 177
Buku 180

Daftar Lampiran

Lampiran – Variabel yang umum dipakai sebagai ukuran stabilitas finansil 181
Jenis data yang digunakan dalam laporan stabilitas finansil beberapa bank sentral (AT-ES) 181
Jenis data yang digunakan dalam laporan stabilitas finansil beberapa bank sentral (GB-TR, ECB, IMF) 182
Variabel yang umum dipakai sebagai ukuran stabilitas finansil 183

Lampiran – Ukuran dan skenario dalam laporan stabilitas finansil global, Okt. 2015 185
Ukuran likuiditas 185
Ukuran utang korporasi di pasar emerging 187
Asumsi dalam skenario gangguan pada pasar aset global 189
Mekanisme transmisi kejutan dalam skenario gangguan pada pasar aset global 190
Asumsi dalam skenario normalisasi yang berhasil 191
Mekanisme transmisi kejutan dalam skenario normalisasi yang berhasil 192

Lampiran – Ukuran Kerentanan Finansil 193
Indikator valuasi risk appetite / aset 193
Indikator ketidakseimbangan non-finansil 194
Indikator kerentanan finansil 195
Indikator Kebijakan Macroprudential 196

Lampiran – Daftar Indikator dalam ISSK Bank Indonesia 197

Lampiran – Profil Cina 199

Lampiran – Jumlah (instrumen) utang Cina menurut emiten, domestik, nasional, internasional, 2015Q2-2015Q4 201

Daftar Tabel

Table 1 – Aktivitas M&A di business intelligence dengan nilai >$100 juta, 2009-2014q1 7
Table 2 – Beberapa indikator kebijakan macroprudential 36
Table 3 – Indikator pengukuran stabilitas sistem keuangan 42
Table 4 – Indikator utama kesehatan finansil ala IMF 45
Table 5 – Indikator tambahan (encouraged) bagi kesehatan finansil ala IMF 45
Table 6 – Indikator parsial dan bobot dalam indeks stabilitas perbankan Republik Ceko 47
Table 7 – Indikator kesehatan finansil ala ECS (Macro-Prudential Indicators) 47
Table 8 – Tiga skenario stabilitas finansil 48
Table 9 – Operasi moneter menurut standing facility 49
Table 10 – Pentingnya likuiditas yang lentur (resilient) 50
Table 11 – Penambahan likuiditas menurut jenis instrumen OPT 50
Table 12 – Penyerapan likuiditas menurut jenis instrumen OPT 50
Table 13 – Nilai ekspor dan impor AS-Cina untuk 5 produk utama, 2014-2015 (US$ juta) 100
Table 14 – Nilai ekspor dan impor AS-Cina untuk produk teknologi tinggi, 2015 (US$ juta) 100
Table 15 – PDB Cina, 2010-2014 dalam milyaran ¥ dan US$ 101
Table 16 – Nilai obligasi pemerintah dan korporasi di Cina, 2002-2015 (US$ milyar) 101
Table 17 – Buletin harga obligasi di pasar uang Hong Kong, 11 Maret 2016 107
Table 18 – Daftar 22 primary dealer di Amerika Serikat, 2014 114
Table 19 – Beberapa veteran primary dealer pilihan Bank Sentral Amerika 114
Table 20 – Daftar 19 primary dealer di Indonesia, 2014-2015 115
Table 21 – Nilai derivatif 25 bank terbesar di AS, Nov. 2015 (US$ milyar) 119
Table 22 – Ringkasan Perlakuan Transaksi Sekuritisasi menurut UK GAAP 145
Table 23 – Jenis data yang digunakan dalam laporan stabilitas finansil beberapa bank sentral (AT-ES) 181
Table 24 – Jenis data yang digunakan dalam laporan stabilitas finansil beberapa bank sentral (GB-TR, ECB, IMF) 182
Table 25 – Variabel yang umum dipakai sebagai ukuran stabilitas finansil 184
Table 26 – Ukuran likuiditas 186
Table 27 – Ukuran utang korporasi di pasar emerging 188
Table 28 – Asumsi dalam skenario gangguan pada pasar aset global 189
Table 29 – Mekanisme transmisi kejutan dalam skenario gangguan pada pasar aset global 190
Table 30 – Asumsi dalam skenario normalisasi yang berhasil 191
Table 31 – Mekanisme transmisi kejutan dalam skenario normalisasi yang berhasil 192
Table 32 – Indikator valuasi risk appetite / aset 193
Table 33 – Indikator ketidakseimbangan non-finansil 194
Table 34 – Indikator kerentanan finansil 195
Table 35 – Indikator Kebijakan Macroprudential 196
Table 36 – Daftar indikator pembentuk ISSK 197
Table 37 – Profil Singkat Cina 199
Table 38 – Indikator Ekonomi Cina, 2011-2017 200
Table 39 – Utang Cina menurut emiten, domestik, nasional, internasional, 2015Q2-2015Q4 202

Daftar Bagan

Figure 1 – Diagram alur hierarki DIKW (Data-Information-Knowledge-Wisdom) 3
Figure 2 – Kontinuum pemahaman dalam konteks DIKW 3
Figure 3 – Proses data mining 4
Figure 4 – Hubungan antara Data, Informasi, dan Intelijen 6
Figure 5 – Analisa eksplorasi data 9
Figure 6 – Taksonomi ketidakpastian 27
Figure 7 – Igloo ketidakpastian 28
Figure 8 – PV perusahaan berutang 32
Figure 9 – Skema indeks kerentanan dan komponennya 37
Figure 10 – Siklus pengawasan macroprudential 38
Figure 11 – Prasyarat bagi antisipasi dan pencegahan ketidakstabilan sistem finansil 39
Figure 12 – Hubungan antara stabilitas sistem finansil dan stabilitas moneter 39
Figure 13 – Keterkaitan antar-variabel dalam BAMBI (Banking Model of Bank Indonesia) 41
Figure 14 – Beberapa indikator pembentuk Indeks Stabilitas Sistem Keuangan (ISSK) 42
Figure 15 – Peran Bank Indonesia dalam menciptakan stabilitas moneter 49
Figure 16 – Bentuk interaksi antara BI, pempus, dan pemda dalam mengendalikan inflasi 51
Figure 17 – Perkembangan aktivitas perbankan internasional 52
Figure 18 – Aset Riel dan Aset Fiktif Bank-bank di AS, 1995–2000 58
Figure 19 – Nilai Derivatif dan Modal 25 Bank AS Ternama (US$ milyar) 59
Figure 20 – CDOs direpresentasikan dalam bentuk building blocks, The Big Short, 2015 60
Figure 21 – Pasar rumah di AS, 1989-2006 61
Figure 22 – Pemetaan proses penularan krisis finansil 2008 62
Figure 23 – Pinjaman sektoral dari Bank of England, 1997-2012 63
Figure 24 – Utang-piutang PIGS 67
Figure 25 – Utang AS ke 4 negara adidaya dan PIGS 68
Figure 26 – Utang Inggris ke 4 negara adidaya dan PIGS 69
Figure 27 – Utang Jerman ke 4 negara adidaya dan PIGS 70
Figure 28 – Utang Perancis ke 4 negara adidaya dan PIGS 71
Figure 29 – Utang Jepang ke 4 negara adidaya dan PIGS 71
Figure 30 – Utang Yunani ke 4 negara adidaya dan PIGS 72
Figure 31 – Utang Irlandia ke 4 negara adidaya dan PIGS 73
Figure 32 – Utang Italia ke 4 negara adidaya dan PIGS 74
Figure 33 – Utang Portugis ke 4 negara adidaya dan PIGS 75
Figure 34 – Utang Spanyol ke 4 negara adidaya dan PIGS 76
Figure 35 – Cadangan Devisa Cina, Des. 1999 – Jan. 2016 78
Figure 36 – Tiga Kekuatan Ekonomi Dunia 79
Figure 37 – Nilai perdagangan Cina dengan negara lain (impor + ekspor) 80
Figure 38 – Nilai tukar bilateral yuan terhadap 3 mata uang dunia, USD, ¥, dan €. 81
Figure 39 – Cadangan devisa Cina dan nilai tukar CNY dan CNH 83
Figure 40 – Selisih CNY dengan CNH, Agustus 2010-Januari 2016 83
Figure 41 – Selisih tajam antara CNY dan CNH berdampak pada lonjakan bunga antar-bank di bulan Januari 2016 84
Figure 42 – Intervensi pasar CNH bisa menyesuaikan bunga CNH dengan CNY, 20151110-20160126 85
Figure 43 – Pasar deposit CNH, Maret 2009 – Des. 2015 86
Figure 44 – Distribusi CNH menurut bank sentral (offshore yuan’s swap line), Nov. 2015 88
Figure 45 – Penyelesaian perdagangan dalam CNH, 2009Q3-2015Q4 89
Figure 46 – Pasar deposit CNH menurut negara, 2014 89
Figure 47 – Beberapa alternatif indikator pertumbuhan ekonomi Cina mengacu pada penurunan yang lebih besar (greater slowdown), 2010–2015 95
Figure 48 – Indeks Saham Gabungan Shanghai (SCI), Mei 2015 sampai 5 Februari 2016 97
Figure 49 – Indeks Saham Gabungan Shanghai, 1 Januari 2015 – 8 Maret 2016 98
Figure 50 – Triple policy trilemma 99
Figure 51 – Pasar obligasi Cina, 2003-2014 104
Figure 52 – Aktivitas perdagangan pasar sekunder obligasi Cina, 2000-2014 104
Figure 53 – Pangsa pasar obligasi Cina menurut jenis obligasi, Des. 2014 104
Figure 54 – Daftar emisi obligasi Panda, 20151010-20160121 106
Figure 55 – Emisi obligasi CNY, 2008-2015 111
Figure 56 – Emisi obligasi CNH, 2008-2015 111
Figure 57 – Asset backed securities di Cina, 2005-2014 112
Figure 58 – Peristiwa bersejarah dan harga minyak mentah, 1861-2014 (US$/b) 121
Figure 59 – Harga minyak mentah Brent (US$), 20040102-20160106 123
Figure 60 – Kelebihan pasokan minyak mentah dunia, 2012q3-2015q3 123
Figure 61 – Distribusi ladang produksi minyak shale AS, April 2015 124
Figure 62 – Suku bunga deposito dan pembiayaan ulang ECB, 2008-Maret 2016 127
Figure 63 – Prediksi nilai tengah suku bunga Federal Funds, Des. 2015-2019 127
Figure 64 – Federal funds target rata (%), 1983-2015 128
Figure 65 – Federal funds rate, 1 Juli 1954-18 Feb. 2016 128
Figure 66 – Skema sumber pendanaan perusahaan 130
Figure 67 – Factors adding to reserves and off balance sheet securities lending program 137
Figure 68 – Multiplikasi Penciptaan Aset Fiktif 143
Figure 69 – Klasifikasi struktur aset, struktur finansil, dan struktur kapital 161


Contents
10 Monetary Policy – Effects of Interest Rate Changes
09 Effect of raising interest rates
11 When interest rates rise
12 20160129 Federal Reserve: Credibility on the line
13 20160131 Economists see 20% chance of US recession
14 201602 Guess who’s spending again?
04 20160206 Debt, defaults, and devaluations: why this market crash is like nothing we’ve seen before
06 20160201 NK-The Potential Power of Negative Nominal Interest Rates
05 20160209 NK-Negative Rates: A Gigantic Fiscal Policy Failure
02 20160210 BlackRock: Negative rates ‘new toy’ around world
03 20160215 Mapped: Negative central bank interest rates now herald new danger for the world
07 20160215 NK-Staying Positive About Going Negative
01 20160216 The consequences of negative interest rates
08 20160216 NK-Monetary Policy and Ending Too-Big-To-Fail
15 20160317 The appearance of disappearance: the CIA’s secret black sites

10 Monetary Policy – Effects of Interest Rate Changes
2016-03-20 08:00 PM
http://www.tutor2u.net/economics/reference/monetary-policy-effects-of-interest-rate-changes
Monetary Policy – Effects of Interest Rate Changes
Geoff Riley

How do changes in policy interest rates affect the macroeconomy?

cpi_inflation_base_rates.jpg

The Monetary Policy Transmission Mechanism

It is worth remembering that when the Bank of England is making an interest rate decision, there will be lots of other events and policy decisions being made elsewhere in the economy, for example changes in fiscal policy by the government, or perhaps a change in world oil prices or the exchange rate. In macroeconomics the ceteris paribus assumption (all other factors held equal) rarely applies!
* There are several ways in which changes in interest rates influence aggregate demand, output and prices. These are collectively known as the transmission mechanism of monetary policy
* One of the channels that the Monetary Policy Committee in the UK can use to influence aggregate demand, and inflation, is via the lending and borrowing rates charged in the financial markets.
* When the Bank’s own base interest rate goes up, then commercial banks and building societies will typically increase how much they charge on loans and the interest that they offer on savings.
* This tends to discourage businesses from taking out loans to finance investment and encourages the consumer to save rather than spend – and so depresses aggregate demand
* Conversely, when the base rate falls, banks cut the market rates offered on loans and savings and the effect ought to be a stimulus to demand and output.

A key influence played by interest rate changes is the effect on confidence – in particular household’s confidence about their own personal financial circumstances.

mon_policy_transmission.png
Transmission mechanism of monetary policy

Monetary Policy in Action

Australia Cuts Interest Rates to Boost Growth

Australia’s central bank has cut its main policy interest rate to a new record low, in an attempt to spur a fresh wave of economic growth. The Reserve Bank of Australia (RBA) cut its key rate to 2.5% from 2.75%. The decision to make monetary policy more expansionary came a short while after the Australian government cut its GDP growth forecasts and warned that unemployment in the country could rise amid a slowdown in output and business investment.
Source: Adapted from news reports

Monetary Policy Asymmetry
* Fluctuations in interest rates do not have a uniform impact on the economy. Some industries are more affected by interest rate changes than others, for example exporters and industries connected to the housing market. And, some regions are also more sensitive to a change in the direction of interest rates.
* The markets and businesses most affected by changes in interest rates are those where demand is interest elastic in other words, demand responds elastically to a change in interest rates or indirectly through changes in the exchange rate
* Good examples of interest-sensitive industries include those directly linked to the housing market¸ exporters of manufactured goods, the construction industry and leisure services
* In contrast, the demand for basic foods and utilities is less affected by short-term fluctuations in interest rates and is affected more by changes in commodity prices such as oil and gas.

mon_policy_evaluation_effects.png
Evaluating the effects of interest rate changes

Ultra low interest rates in the UK from 2009-2014
* The Bank of England started cutting monetary policy interest rates in the autumn of 2008 as the credit crunch was starting to bite and business and consumer confidence was taking a huge hit. By the start of 2009 rates were down to 3% and they carried on falling
* By the summer of 2009 the policy interest rate in the UK was 0.5% and the Bank of England had reached the point of no return when it comes to cutting interest rates
* The decision to reduce official base rates to their minimum was in response to evidence of a deepening recession and fears of price deflation
* Ultra-low interest rates are an example of an expansionary monetary policy i.e. a policy designed to deliberately boost aggregate demand and output.

In theory cutting interest rates close to zero provides a big monetary stimulus – this means that:
* Mortgage payers have less interest to pay – increasing their effective disposable income
* Cheaper loans should provide a possible floor for house prices in the property market
* Businesses will be under less pressure to meet interest payments on their loans
* The cost of consumer credit should fall encouraging the purchase of big-ticket items such as a new car or kitchen
* Lower interest rates might cause a depreciation of sterling thereby boosting the competitiveness of the export sector
* Lower rates are designed to boost consumer and business confidence

But some analysts argue that in current circumstances, a period of low interest rates has little impact on demand. Several reasons have been put forward for this:
* The unwillingness of banks to lend – most banks have become risk-averse and they have cut the size of their loan books and making credit harder to obtain
* Low consumer confidence – people are not prepared to commit to major purchases because the recession has made people risk averse. Weak expectations lower the effect of rate changes on consumer demand – i.e. there is a low interest elasticity of demand.
* Huge levels of debt still need to be paid off including over £200bn on credit cards
* Falling or slowing rise asset prices makes it unlikely that cheap mortgages will provide an immediate boost to the housing market.
* Although official monetary policy interest rates are now close to zero, the rate of interest charged on loans and overdrafts has actually increased – the cost of borrowing using credit cards and bank loans is a high multiple of the policy rate. Little wonder that many smaller businesses have complained that the Bank of England’s policy of ‘cheap money’ has done little to improve their situation during the recession and in the early stages of the recovery.

mon_policy_boe_challenges.png
Some of the challenges facing the Bank of England when operating monetary policy

Negative Interest Rates (Explained in 60 Seconds)


09 Effect of raising interest rates
2016-03-20 07:31 PM
http://www.economicshelp.org/macroeconomics/monetary-policy/effect-raising-interest-rates/
Effect of raising interest rates
Tejvan

The main interest rate is set by the Bank of England. This is known as the base rate. If the Bank of England is worried that inflation is likely to increase, then they may decide to increase interest rates to reduce demand and reduce the rate of economic growth.

Usually, if the Bank of England increase base rates it will lead to higher commercial rates too.

Higher interest rates have various economic effects:
1. Increases the cost of borrowing. Interest payments on credit cards and loans are more expensive. Therefore this discourages people from borrowing and saving. People who already have loans will have less disposable income because they spend more on interest payments. Therefore other areas of consumption will fall.
2. Increase in mortgage interest payments. Related to the first point is the fact that interest payments on variable mortgages will increase. This will have a big impact on consumer spending. This is because a 0. 5% increase in interest rates can increase the cost of a £100,000 mortgage by £60 per month. This is a significant impact on personal discretionary income.
3. Increased incentive to save rather than spend. Higher interest rates make it more attractive to save in a deposit account because of the interest gained.
4. Higher interest rates increase the value of pound (due to hot money flows. Investors are more likely to save in British banks if UK rates are higher than other countries) A stronger Pound makes UK exports less competitive – reducing exports and increasing imports. This has the effect of reducing Aggregate demand in the economy.
5. Rising interest rates affect both consumers and firms. Therefore the economy is likely to experience falls in consumption and investment.
6. Government debt interest payments increase. The UK currently pays over £23bn a year on its own national debt. Higher interest rates increase the cost of government interest payments. This could lead to higher taxes in the future.
7. Reduced confidence. Interest rates have an effect on consumer and business confidence. A rise in interest rates discourages investment; it makes firms and consumers less willing to take out risky investments and purchases.

Therefore, higher interest rates will tend to reduce consumer spending and investment. This will lead to a fall in Aggregate Demand (AD).

If we get lower AD, then it will tend to cause
* Lower economic growth (even negative growth – recession)
* Higher unemployment. If output falls, firms will produce less goods and therefore will demand less workers.
* Improvement in the current account. Higher rates will reduce spending on imports and the lower inflation will help improve the competitiveness of exports.

AD/AS diagram showing impact of Interest rates on AD
Effect of higher interest rates
fall-AD3.jpg

Evaluation of higher interest rates
* Higher interest rates affect people in different ways. The effect of higher interest rates does not affect each consumer equally. Those consumers with large mortgages (often first time buyers in the 20s and 30s) will be disproportionately affected by rising interest rates. For example, reducing inflation may require interest rates to rise to a level that cause real hardship to those with large mortgages. However, those with savings may actually be better off. This makes monetary policy less effective as a macro economic tool.
* Time lags. The effect of rising interest rates can often take up to 18 months to have an effect. For example, if you have an investment project 50% completed, you are likely to finish it off. However, the higher interest rates may discourage starting a new project in the next year.
* It depends upon other variables in the economy. At times, a rise in interest rates may have less impact on reducing the growth of consumer spending. For example, if house prices continue to rise very quickly, people may feel that there is a real incentive to keep spending despite the rise in interest rates.
* Real interest rate. It is worth bearing in mind that what is important is the real interest rate. The real interest rate is nominal interest rates minus inflation. Thus if interest rates rose from 5% to 6% but inflation rose from 2% to 5.5 %. This actually represents a cut in real interest rates from 3% (5-2) to 0.5% (6-5.5) Thus in this circumstance the rise in nominal interest rates actually represents expansionary monetary policy.
* It depends whether increases in the interest rate are passed onto consumers. Banks may decide to reduce their profit margins and keep commercial rates unchanged.


11 When interest rates rise
2016-03-20 08:06 PM
http://ig.ft.com/sites/when-rates-rise/#what-is-happening
When interest rates rise
Financial Times

What’s happening?
Federal Reserve keeps close eye on market moves
The US central bank met on January 27 – its first policy meeting since it raised interest rates for the first time in nearly a decade at the end of last year.
The Fed said it was keeping a close eye on the volatility in financial markets since its historic rate decision, but signalled that it would not rush to judgement over its plans for adjusting the interest rate.
But there is already growing criticism about its decision to raise rates at all.

How fast will rates rise?
There are different ways to guess. One of these is by looking at the Fed Fund futures markets, where investors essentially bet on what level the interest rate will be in upcoming months

What does the market “think”?
Probability of a range of interest rate outcomes based on Fed Fund future contract prices
Federal funds effective interest rate
96%4%92%8%88%11%86%13%1%81%17%1%76%21%2%62%32%6%1%Mar 16 2016Apr 27 2016Jun 15 2016Jul 27 2016Sep 21 2016Nov 01 2016Dec 14 2016
Source: CME Group
Updated hourly

What does the Fed say?
Interest rate predictions from December 2015 meeting; median values highlighted
Interest rate predictions: median values
012342015201620172018Longer Run0.375%1.375%2.375%3.25%3.5%
Source: Federal Reserve

What do economists think?
Economists have downgraded their expectations of the US central bank’s ability to tighten policy this year, with their median forecast coming in halfway between two and three 25 basis point rate rises in 2016. Half of those surveyed by the Financial Times in January said the Fed would lift two or fewer times.

How will this affect me?
and other frequently asked questions

US economy
What is at stake if the Fed raises rates?
Why is the Fed considering raising interest rates now?
Why have rates in the US been held so low for so long?
Is the US economy ready to cope with interest rate rises?
How fast are rates likely to rise?
Will they return to pre-crisis levels?
How does a rise in central bank interest rates get transmitted to the wider economy?

US business
Are businesses ready for an increase in borrowing costs?
What are zombie companies and why are we concerned about them?

US consumers
What will a rate rise mean for my personal finances?
Are US consumers in general prepared for rates to rise?

Financial Markets
How will investors react to higher US interest rates?
How are currency traders positioning themselves in the anticipation of rate rises?
What investments are most sensitive to interest rate rises?

What about the UK?
Will the UK automatically follow the US in raising rates?
What are we expecting from UK interest rate rises?

The rest of the world
Are all major central banks around the world thinking of raising interest rates?
Why would a rate rise in the US impact the emerging market countries?

Jargon buster
What is tightening and loosening?
What is monetary policy?
Who makes the rate decisions within the Federal Reserve?

What is at stake when the Fed raises rates?
A lot. The effects of a Fed rate rise is transmitted not just through to banks and businesses in the US, but also has an impacct on the global economy.
video

Why is the Fed raising interest rates now?
America has seen its longest private sector hiring spurt on record, and unemployment has halved since its peak. The Fed thinks the hot jobs market could spur a pickup in inflation and wages. Given it is tasked with keeping inflation low, it is considering raising the cost of borrowing to keep the economy on an even keel.

Unemployment has halved since its peak in 2009
%20000204060810121416180246810
Source: Bloomberg

Why have rates in the US been held so low for so long?
The US was hit by the crash in its housing market and banking sector between 2007-09. The Fed felt it needed to pull out all of the stops to prevent the economy from collapsing into a new Great Depression. One way of keeping things afloat was by cutting the cost of borrowing to rock-bottom levels.

Federal funds effective interest rate
%1950607080902000102005101520
Source: Bloomberg

Is the US economy ready to cope with interest rate rises?
That is the trillion dollar question – and opinions vary widely. To optimists, the Fed has managed to engineer a respectable recovery that is outshining many other economies. They say a quarter-point increase, as the Fed has announced, would have a negligible impact but is a sensible first step to ensure the Fed stays ahead of inflation. Sceptics warn that inflation remains on the floor and the Fed risks roiling world markets and pushing up the dollar if it acts too soon.

How fast are rates likely to rise?
Not fast at all – if the Fed is to be believed. One of the mantras adopted by Chair Janet Yellen this year has been that rate rises will be gradual. The pace of increases is expected to be less than half the tempo of the Fed’s last round of rate rises, which started in 2004. And the ultimate rate they stop at is likely to be very low too, at less than 4 per cent.

Will they return to pre-crisis levels?
Not for the foreseeable future, according to Fed policymakers’ own projections. The Fed believes the rate compatible with stable growth and prices has sunk sharply because of the lingering effects of the crisis and will increase only gradually. In this subdued post-crisis world, the central bank will need to keep its foot on the accelerator for some time to come.

How does a rise in central bank interest rates get transmitted to the wider economy?
Adjusting the federal funds rate – the rate banks charge each other for short-term loans – affects other short term rates paid by firms and households. These movements also have knock-on effects on long-term rates, including mortgages and corporate bonds. Changes in long-term rates will have an influence on asset prices, including the equity market.
During the crisis the Fed also purchased longer-term mortgage backed securities and Treasury bonds to lower the level of long-term rates. These purchases could now make the mechanics of raising rates more complicated for the Federal Reserve. Read more about why this is the case.

US business

Are businesses ready for an increase in borrowing costs?
Many corporations have taken advantage of the low rate environment to borrow money via the bond markets. Most companies say they are relaxed about the impact of a small rate hike, believing the market has already priced their bonds or such an event. However, some economists say the interest payments for companies who have issued low-grade debt could rise more quickly.

What are zombie companies and why are we concerned about them?
Zombie companies are enterprises that have been able to stay in business primarily because of the persistence of ultra-low interest rates, and which would be unable to survive a rate hike. Many of these companies will go under when their borrowing costs rise, but some, such as “bond king” Bill Gross, think this could be a good thing. They argue that when weak companies file for bankruptcy, their owners and employees often go on to work for more successful ventures, which is ultimately a good thing for the economy.

US consumers

What will a rate rise mean for my personal finances?
An upward move in short-term interest rates will be positive for savers who have been missing out on interest on their deposits. But the change could also be transmitted to a range of other interest rates, including car loans, credit cards and mortgages, which would make them more costly.

Are US consumers in general prepared for rates to rise?
The burden of household debt has fallen since the crisis, reaching 114 per cent of net disposable income last year, according to OECD statistics, suggesting consumers are better prepared for higher borrowing costs. In addition, a quarter-point hike would still leave rates at historically low levels.

Financial Markets

How are investors reacting to higher US interest rates?
Investors’ immediate reaction to the first rate rise in nearly a decade was generally one of relief that it is finally happening. The end of the Fed’s “zero interest rate policy” has been anxiously anticipated by investors for more than a year, but policymakers have worked hard to stress that the coming monetary tightening cycle will be exceptionally gentle, to avoid a repeat of the market “taper tantrum” that erupted when they announced the end of quantitative easing. From the intial market movements after the rate rise decision was announced, it seems they have succeeded.

How are currency traders positioning themselves?
Currency markets are fickle, but differences in interest rates tend to drive movements in the longer-run. For example, if a European investor can borrow cheaply in Berlin and buy a higher-yielding US bond, then all else being equal the dollar will rise versus the euro. As a result, the dollar started the year in rip-roaring fashion, with an index measuring the US currency against a basket of its peers rocketing to a 12-year high, as investors bet on the Fed tightening monetary policy and bond yield differences widened.
Since then it has continued to beat up emerging market currencies but the broad rally has fizzled out as the euro and the Japanese yen have regained their footing. However, many analysts and fund managers expect the greenback to continue to climb higher in the coming years, as the Fed raises interest rates further.

What investments are most sensitive to interest rate rises?
Almost every asset class on the planet exhibits some evidence of frothiness these days, but some seem more vulnerable to higher interest rates. Normally, higher interest rates indicates that economic growth is firm, and that is good for listed companies. Gold typically loses its shine when interest rates climb, as the metal doesn’t pay any interest like a bank account will, but has already been beaten up heavily recently.
The bond market looks more exposed. Highly rated debt is trading with very low yields, which means they are vulnerable to even a modest rise in Fed interest rates, while bonds issued by companies rated “junk” could suffer if more expensive borrowing tips some weaker groups into bankruptcy.

What about the UK?

Will the UK automatically follow the US in raising rates?
There is no automatic or formal link between US and UK interest rates but the widespread expectation is that the Bank of England will be the next central bank after the US to raise rates. The UK’s economic recovery is well on track, with solid growth and a strong labour market.

The Bank of England typically follows the Federal Reserve’s lead
%Fed target rateBoE base rate1910203040506070809020001020051015
Source: Bloomberg

Historically, US and UK market interest rates, as measured by government bond yields, have also moved in tandem. These are the rates, set by the financial markets that feed down into the real costs of borrowing for households and companies.

Bond yields move in tandem
%10yr US bond yield10yr UK bond yield196070809020001020051015
Source: Bloomberg

What are we expecting from UK interest rate rises?
Bank of England governor Mark Carney has stressed that while the next move in rates is likely to be upwards, the path of increases will be “limited and gradual”.
While refusing to be drawn on precise timing, Mr Carney said the decision of whether to start lifting rates was likely to come into “sharper relief” around the turn of the year. Analysts are not predicting the first rise until February at the earliest, with many pushing the timing back into the late spring.

The rest of the world

Are all major central banks around the world thinking of raising interest rates?
No. The Bank of England is widely expected to follow the Fed and raise rates, most likely some time in the new year. But as the prolonged weakness in oil prices continues to keep inflation low, many central banks in the rich world are expected to loosen monetary policy further, for example expanding their programmes of quantitative easing.
Mario Draghi, president of the European Central Bank, paved the way for an extension of QE and the Bank of Japan cut its rates to negative territory in January. In China, the central bank may also cut rates further to stimulate growth. The outlook for emerging markets is harder to gauge: were a Fed hike to trigger turmoil across Africa, Asia and Latin America, countries there may choose to cut rates to help the economy, or increase them in order to dissuade investors from taking their money abroad.

Why would a rate rise in the US impact the emerging market countries?
We have already seen one of the main impacts: a stronger US dollar, backed by higher US interest rates, tends to depress the values of emerging market currencies at a time when many EM economies are already weakening and their currencies have already slumped against the greenback. The Fed’s rate rise could exacerbate the EM currency turmoil, and even help precipitate a full-blown crisis.

video

Jargon buster

What is tightening and loosening?
When a central bank “loosens” or “eases” policy it essentially increases the supply of money in the economy and pushes down the cost of borrowing. This could be by lowering interest rates, or buying more assets with the aim of putting more money into circulation and encouraging greater economic activity.
“Tightening” is the opposite. If policymakers worry that an economy is begin to overheat, potentially generating too much inflation, they can tighten policy – such as raising the interest rate they charge banks to borrow from them, to make the cost of credit more expensive.
Changes to interest rates can take-up to 18 months to feed through into the real economy.

What is monetary policy?
Central bankers control more than just interest rates. “Monetary policy” is a broad brush term for a whole range of actions, including things like selling or buying assets such as government bonds, raising or reducing the amount of capital banks need to hold against liabilities, and raising or lowering interest rates.
All of these actions impact the cost and supply of money in an economy which are the main levers central banks use to try and keep inflation at its target level and the economy growing at a sustainable speed.
Changes in monetary policy can take-up to 18 months to feed through into the real economy.

Who makes the rate decisions within the Federal Reserve?
The Federal Open Market Committee, sometimes called the FOMC. This group of people are responsible for determining monetary policy, which means they decide whether rates will go up or down. The FOMC has 12 members: The seven people on the Fed’s board of governors, plus five of the 12 Reserve Bank presidents.
The FOMC changed its look following the regular rotation of members at the beginning of 2016.

Who are these members? Come meet the FOMC.

In-depth analysis

Credibility on the line
Criticism grows over rate rise decision (Recently added)
Instead of soothing the markets, US policymakers are accused of fraying nerves and exacerbating outflows from emerging markets by purportedly clinging to a strategy that envisages further increases this year.

Initial reaction
Global markets show relief at smooth Fed lift-off
Investors did not recoil at the prospect of higher interest rates. Instead they appear to welcome the clarity brought by the Fed’s decision to raise rates.

Video
Is the US economy on the road to recovery?

EMs spooked
Emerging markets set to feel the wrath
Analysts warn the impact on already fragile emerging economies threatens to spill back into the US. Following the rate hike:
Accelerated capital outflows from China will threaten the country’s economic stability
Chinese holdings of US Treasury debt might fall
This would create potential funding shortfalls for the US government
video

Hot and cold
Why the Fed faced such a difficult decision
In the months leading up to its December decision to raise rates for the first time, the US central bank faced a fiendishly complex picture with economic hotspots emerging across the economy despite sluggish wage growth.
car sales are rising at the quickest pace in a decade
commercial real estate prices are going through the roof
unemployment is low again
but wage growth remains sluggish

Deepening conundrum
Low rates era challenges growth models
Inflation figures have stayed low even as the economy hits what the Fed believes is full employment.
After years of low rates and QE policy makers lament a disappointing recovery
While unemployment is declining, inflation is lower than the Fed target
Fears that asset price bubbles are appearing after years of easy money

United they stand
Will the UK follow if US raises interest rates?
After a sharp drop in the unemployment rate, the US Federal Reserve and the Bank of England are looking at the first increase in interest rates for nearly a decade.
With the Fed leading the way, policy makers and businessmen in the UK are wondering what a rate rise means for them.
A stronger USD likely to make British exports to the US cheaper
But Mark Carney, BoE governor, has dismissed the widely held conviction that the BoE will mechanically follow the Fed

Corporate hangover
Turning point looms for US debt binge
With a $4tn mountain of debt maturing over the next five years, corporate America’s reliance on cheap cash is about to get tested.
US corporate treasurers have rushed to refinance more than $1tn each year since 2012 to lock in cheap borrowing costs in advance of the expected rate rise
Energy sector most vulnerable to rate rises given lower oil prices
Corporate defaults are likely to increase in the coming years

Just do it Some emerging markets called on Fed to raise rates
Indonesia, Peru, Mexico and India central bank officials called on the Fed to make a move
The uncertainty is worse than a US rate rise
Contrasts with IMF and World Bank warnings

Expert view

Gillian Tett (Recently added)
Janet Yellen will need skill and luck
While the initial market reaction to the Fed’s rate rise has been calm, the real test for the wider financial system has barely begun, writes the FT’s US managing editor.
Three areas investors need to watch:
Ultra-loose policy has created credit bubbles that could now deflate
The now longer “duration” of investors’ bond portfolios
Stealthy shifts in the opaque world of money markets

John Authers (Recently added)
Janet Yellen has passed her first big parenting test
The challenge of raising rates without triggering a market spasm that would endanger financial stability and the economy could be likened to removing an iPad from a child’s grip without a meltdown.
Janet Yellen has achieved it, writes the FT’s Senior Investment Commentator.

Lloyd Blankfein
The Fed should delay raising rates
The chief executive of Goldman Sachs warned the Fed that the decision based on “soft” factors rather than hard data evaluation might be dangerous for the economy.
“The consequences of going too soon and hurting the recovery are vastly disproportionate to the consequences of taking a little bit more incremental inflation risk”

Currency Strategist, Citi
Fed up with waiting
Steven Englander of Citigroup tells Roger Blitz why central banks around the world are all waiting on the US to act first
Listen to the Podcast (Hard Currency)

World Bank
Rate rise risks triggering “panic and turmoil” in emerging markets
World Bank chief economist highlights the mounting concern outside the US over the Fed’s potential “lift-off”
Warns that a rate rise could yield a “shock” and a new crisis in emerging markets
The World Bank’s June forecast of 2.8 per cent growth for the global economy was now under threat from the slowdown in emerging economies such as China and Brazil

Richard Fisher
Monetary policy timing means Fed must act
The former president of the Federal Reserve Bank of Dallas argued in September that the Fed should not wait any longer to raise rates.
Headline and core inflations are flawed at showing medium-term inflation trends
A third measure, ‘Trimmed mean inflation’, has been running at 1.6 per cent
This is much closer to the Fed’s stated 2 per cent inflation target
Since monetary policy operates with a time lag, the Fed should act now

Comment

John Authers (Recently added)
US rate rise harder to justify nine years on
The last time the Federal Reserve raised its target interest rate was in 2006. Nine years on, the economic conditions in the US are very different
video

FT View
US Fed should keep rates on hold
“…after so long with no serious signs of inflation, there is no compulsion to move now

Martin Wolf
Keep US interest rates low: the world is still abnormal
“…central banks should continue to focus on stabilising the real economy, though more needs to be done to curb financial excesses

The Big Read
Higher interest rates are supposed to boost lenders, but do they?
Rising rates might prove to be a mixed bag for banks, as not all of them were created equal. Impacts to consider:
banks with deposits will benefit more than those with loans
bank borrowers might struggle with the rise that will lead to bad debt
banks’ book values could be affected

Global impact

Mexico
… while Mexican companies’ mounting pile of dollar debt is concerning, and rising peso costs threaten to increase consumer prices and inflation, Mexico is also positioned to weather wider emerging market storms

Brazil
Brazilian companies that issued billions of dollars of US debt are no less gloomy about the prospect of the dollar rising further due to higher US rates – especially as China’s slowing economy has already pushed down commodity prices

Indonesia
Compared with the so-called “taper tantrum” two years ago, when the decisions of the US Federal Reserve last sent shock waves through emerging markets, the Indonesian economy is said to be better prepared for a rise in US rates

China
Overall, most economists believe the direct impact on China will be minor

Japan
Inflation in Japan is still running close to zero, and in January its central back made a surprise decision to cut interest rates to negative territory.

South Africa
For more than two years, South Africa’s central bank has been flagging the complex policy dilemma it is challenged with when considering whether to raise interest rates. And the recent spate of global market turbulence looks to have made it all the more complicated

Turkey
With a Fed interest rate hike looming on the horizon, more bad news may be in store for the lira – and for Turkish companies facing a growing pile of foreign debt

Gulf
With Gulf currencies pegged to the dollar, central banks generally track Fed interest rate rises

Russia
For Russia’s central bank, a stronger dollar, almost inevitably the result of a rate hike in the US, would make it even more difficult to rebuild its international reserves

Hungary
… overall, analysts appear sanguine about Hungary’s direct exposure to the Fed decision

Eurozone
…higher interest rates in the US could damage Europe’s economy if a Fed rate rise sows the seeds for more market turbulence

Switzerland
If the US Federal Reserve raises interest rates, perhaps even later this month, the world might quake. In Switzerland, there will be sighs of relief

volatility in financial markets http://www.ft.com/intl/cms/s/0/51ca24e6-bf5a-11e5-9fdb-87b8d15baec2.html#axzz3xhw17Wuv
not rush to judgement http://www.ft.com/intl/cms/s/0/c0b03570-c091-11e5-846f-79b0e3d20eaf.html
growing criticism http://www.ft.com/intl/cms/s/0/3c9e2bd6-c639-11e5-808f-8231cd71622e.html
downgraded their expectations http://www.ft.com/intl/cms/s/0/da2ed38a-c6bd-11e5-b3b1-7b2481276e45.html
Read more http://www.ft.com/cms/s/2/30f6a3ba-9d14-11e5-b45d-4812f209f861.html?segid=0100320#
meet the FOMC https://ig.ft.com/sites/profiles/fomc/
Credibility on the line Criticism grows over rate rise decision http://www.ft.com/intl/cms/s/0/3c9e2bd6-c639-11e5-808f-8231cd71622e.html
Global markets show relief at smooth Fed lift-off http://www.ft.com/intl/cms/s/0/9561727e-a4e1-11e5-a91e-162b86790c58.html#axzz3uVzrvO9U
Emerging markets set to feel the wrath http://www.ft.com/cms/s/7edb6a0a-524d-11e5-b029-b9d50a74fd14.html
Why the Fed faced such a difficult decision http://www.ft.com/cms/s/7893c6c8-5262-11e5-8642-453585f2cfcd.html
Low rates era challenges growth models http://www.ft.com/cms/s/8a20f7d8-5624-11e5-a28b-50226830d644.html
Will the UK follow if US raises interest rates? http://www.ft.com/cms/s/e0a1ede4-554b-11e5-b029-b9d50a74fd14.html
Turning point looms for US debt binge http://www.ft.com/cms/s/25f138ce-5636-11e5-9846-de406ccb37f2.html
Some emerging markets called on Fed to raise rates http://www.ft.com/cms/s/e88abe7a-56e3-11e5-9846-de406ccb37f2.html
Janet Yellen will need skill and luck http://www.ft.com/intl/cms/s/0/b12df170-a429-11e5-873f-68411a84f346.html#axzz3uVzrvO9U
Janet Yellen has passed her first big parenting test http://www.ft.com/intl/cms/s/0/3a7b30b8-a42b-11e5-873f-68411a84f346.html
The Fed should delay raising rates http://www.ft.com/cms/s/0/e5c4b132-5c97-11e5-9846-de406ccb37f2.html#axzz3lommqBWv
Fed up with waiting http://podcast.ft.com/index.php?sid=57&pid=2956
urn:not-loaded:http://podcast.ft.com/download2/57/2956/hard_currency_20150910.mp3
Rate rise risks triggering “panic and turmoil” in emerging markets http://www.ft.com/cms/s/e5142190-5630-11e5-a28b-50226830d644.html
Monetary policy timing means Fed must act http://www.ft.com/cms/s/39c233fc-5556-11e5-8642-453585f2cfcd.html
US rate rise harder to justify nine years on http://www.ft.com/cms/s/0/ede88ebe-5c89-11e5-9846-de406ccb37f2.html#axzz3lommqBWv
US Fed should keep rates on hold http://www.ft.com/cms/s/0/2cb34a90-5874-11e5-a28b-50226830d644.html
Keep US interest rates low: the world is still abnormal http://www.ft.com/cms/s/b1ebac86-556b-11e5-9846-de406ccb37f2.html
Higher interest rates are supposed to boost lenders, but do they? http://www.ft.com/cms/s/49f8b480-525e-11e5-b029-b9d50a74fd14.html
Mexico http://www.ft.com/cms/s/2b5c96f0-4a42-11e5-b558-8a9722977189.html
Brazil http://www.ft.com/cms/s/a8022274-4a42-11e5-b558-8a9722977189.html
Indonesia http://www.ft.com/cms/s/811fc292-4a42-11e5-b558-8a9722977189.html
China http://www.ft.com/cms/s/5ec4422c-4a42-11e5-b558-8a9722977189.html
Japan http://www.ft.com/intl/cms/s/0/23ff8798-c63c-11e5-b3b1-7b2481276e45.html#axzz3ypQS9PS2
South Africa http://www.ft.com/cms/s/0f8185a4-4c08-11e5-9b5d-89a026fda5c9.html
Turkey http://www.ft.com/cms/s/50646038-4d9c-11e5-b558-8a9722977189.html
Gulf http://www.ft.com/cms/s/b8ae64fc-5154-11e5-8642-453585f2cfcd.html
Russia http://www.ft.com/cms/s/d1e7e306-5156-11e5-8642-453585f2cfcd.html
Hungary http://www.ft.com/cms/s/003ae31c-518d-11e5-b029-b9d50a74fd14.html
Eurozone http://www.ft.com/cms/s/fc2f2a42-5481-11e5-8642-453585f2cfcd.html
Switzerland http://www.ft.com/cms/s/a7d9c936-56e6-11e5-a28b-50226830d644.html


12 20160129 Federal Reserve: Credibility on the line
2016-03-20 08:38 PM
http://www.ft.com/intl/cms/s/2/3c9e2bd6-c639-11e5-808f-8231cd71622e.html
Federal Reserve: Credibility on the line
Sam Fleming in Washington
January 29, 2016 7:03 pm

Last month’s rate rise is drawing criticism. Some say it should abandon plans to increase again soon

As Janet Yellen, chair of the Federal Reserve, was preparing last month for the first increase in US interest rates for a decade, protesters in New York’s financial district were holding a candlelight vigil bemoaning the end of near-zero monetary policy.

In the crowd bearing illuminated signs saying “what recovery?” and “wage growth is good” was Mauricio Jimenez, a 44-year-old construction worker from Queens, who warned against the move as he stood outside the New York Fed.

“It was a mistake,” he said this week, arguing the central bank should have paid more attention to working families and minorities who had seen paltry wage growth, and that the Fed should reverse course. “We are the people most affected.”

Complaints about the prospect of higher rates had long been levelled by left-of-centre groups such as Fed Up, which arranged the protest, as well as Democratic politicians including Bernie Sanders, the presidential challenger, as a way to highlight the stagnating fortunes of millions of Americans.

This month, however, fears of a global slowdown and the crash in commodity prices have prompted a flurry of criticisms from a different constituency. Stung by brutal declines in the S&P 500 index, some Wall Street investors are accusing the Fed of failing to appreciate the dangers brewing overseas.

Instead of soothing the markets, US policymakers are accused of fraying nerves and exacerbating outflows from emerging markets by purportedly clinging to a strategy that envisages further increases this year.

“The market views tightening as a mistake now,” says Jordi Visser, chief investment officer at Weiss Multi-Strategy Advisers. “I don’t think 25 basis points matters much but the market clearly does. We’re now closer to a recession than we all realise.”

Having its policy decisions second-guessed is an occupational hazard for the Fed, and a failure to lift rates in December would have triggered no less irate criticisms from America’s political right, not to mention poorly positioned hedge fund managers.

The torrid opening to 2016, however, has thrown Ms Yellen and colleagues on to the defensive, coming so soon after they gambled on the rate increase. In its policy meeting on Wednesday, Fed officials said they were closely watching the gyrations in global markets.

A host of central banks, including the European Central Bank, the Bank of Japan and the Swedish Riksbank, have tightened policy only to reverse the decision. The BoJ on Friday adopted negative interest rates. It would be a painful blow to the Fed’s credibility if it turned out that it lifted rates on the cusp of a slowdown and was forced to backtrack.

Ms Yellen was initially praised for her handling of the rate rise, which came without a single voice of dissent in her policy committee. Yet the move was controversial even within the central bank.

Lael Brainard, a Fed governor, argued before the decision that the risks of tightening may be higher than sticking with near-zero rates because there would be little scope to stimulate the economy with further monetary easing if policymakers had to reverse course.

The question is whether these doubts will be confirmed by events. Perhaps sensing blood, senior investors, including bond manager Jeff Gundlach of DoubleLine Capital and Ray Dalio, the head of the world’s biggest hedge fund, Bridgewater Associates, have renewed criticism of the Fed, urging it to abandon the notion of raising rates any time soon.

Market expectations that rates could rise again as early as March have sunk, with September now seen as the earliest date.

Adam Posen, the president of the Peterson Institute for International Economics, says raising rates has been a mistake and that none of the developments in juddering global markets or China had changed the picture. Looking ahead, he says his gut instinct is that “they hold, they postpone, but they don’t reverse”.

Several factors have stoked worries about the merits of tighter policy, many driven by deteriorating global conditions at a time when other central banks continue to ease. The fall in demand for commodities that drove oil below $30 a barrel in mid-January is seen by some as an indicator of a worsening global downturn led by China, rather than simply a reflection of buoyant supply.

The US has turned out to be vulnerable to the fall in crude prices. The boost from cheap energy to consumer spending has not met expectations while the associated drop in investment in the sector hurts growth. Jim O’Sullivan of High Frequency Economics describes the oil price decline as “a wash” for the US economy instead of the lift that many had hoped to see.

Confirming concerns about the impact of the high dollar and oil price plunge on US industry, the first reading for fourth-quarter US gross domestic product yesterday showed a slowdown in growth to an annualised pace of 0.7 per cent, compared with an expansion of 2 per cent in the previous three months.

As growth in the US economy slows, inflation has stuck below the Fed target of 2 per cent. Narayana Kocherlakota, who was president of the Minneapolis Fed until December, is calling for a “hard U-turn” in monetary policy. He thinks the central bank is underestimating the risks of sinking inflation expectations and says the credibility of its target is under threat.

The dovish former policymaker says the world faces a “global demand shortfall” and tighter US monetary policy could exacerbate uncertainties outside the country.

“It is hard to know how much feedback from international weakness there will be to the US economy; as the Fed tightens, that tightens economic conditions throughout the world,” Mr Kocherlakota says.

That steep drop in inflation expectations is being watched by Fed policymakers, as is the effect of market volatility on corporate borrowing costs. Inflation has been lower than the Fed target for more than three years, and the pressures on the oil price and surge in the dollar could force the bank to again push back its forecasts for when price growth returns to its target.

Despite such challenges, some economists argue that those complaining about the Fed’s quarter-point increase have lost perspective, not least given how supportive policy remains after that increase.

Charles Plosser, who was president of the Philadelphia Fed until last year, dismisses arguments that the central bank has been partly responsible for the volatility in global markets, adding that it is much too soon to judge whether the December increase was merited.

The Fed needed to “disabuse” the markets of the notion that it would rush to investors’ aid whenever prices slid, he argues. As for the US economy, Mr Plosser says: “The data has come in mixed. There has been some volatility but if you look beyond the energy sector and beyond the financial markets, the economy is not doing too badly”.

The main reason for optimism is the labour market. In the face of chatter among analysts about the risk of a US recession, job growth has exceeded expectations, with payrolls growing by nearly 300,000 in December.

Ms Yellen placed the employment trend – which has seen 13.2m jobs added over 67 straight months – at the heart of her case for raising rates, arguing that it would be unwise to wait too long before responding to the erosion of spare capacity.

The central bank is not rushing to judgment about global developments. The Fed on Wednesday noted the jitters surrounding China, as well as the low rate of inflation and slower US growth in the fourth quarter. Its message was that even if there are risks ahead, it was too soon to decide the implications for future rate decisions. To many analysts, that circumspect approach is sensible.

An overly downbeat statement this week would have triggered a greater panic in markets. If investors calm down, the damage to the US economy could turn out to be minimal, as it was after the last China-induced bout of turbulence in August.

Tim Duy, a professor at the University of Oregon and close Fed watcher, says that December’s rise was not of the magnitude to “make or break the economy” and that talk in markets of a policy mistake was unhelpful.

He says the important aim now was for the Fed to avoid sending signals that it was hell-bent on tightening policy further. That meant downplaying last month’s forecasts from policymakers suggesting that there will be four rate increases in 2016, a bullish outlook that traders now see as divorced from reality.

The Fed has insisted it will be guided by the data and has made no commitment to tighten. Ms Yellen will give further clues in February when she addresses Congress in testimony on Capitol Hill.

A few weeks after the Fed lifted rates in a flurry of optimism, the ground has shifted beneath the feet of Ms Yellen and her policy committee. Whether or not their gamble on higher rates ends up being vindicated will depend heavily on global developments, many of them well beyond America’s control.

With reporting by Robin Wigglesworth

Extent of Fed’s dovishness roils markets http://www.ft.com/cms/s/0/28d5c5d6-ec0f-11e5-bb79-2303682345c8.html
US banking industry calls for rate rises http://www.ft.com/cms/s/0/88898858-eac7-11e5-bb79-2303682345c8.html
Economists expect Fed to remain on hold http://www.ft.com/cms/s/0/6eca5554-e703-11e5-bc31-138df2ae9ee6.html
Fed governor cautions on rate rise pace http://www.ft.com/cms/s/0/44295d22-dccc-11e5-8541-00fb33bdf038.html
China Inc – The quest for cash flow http://www.ft.com/cms/s/0/020b064c-ecfe-11e5-bb79-2303682345c8.html
EM debt – A trawl for yield http://www.ft.com/cms/s/0/61215bb0-ea9a-11e5-888e-2eadd5fbc4a4.html
How Italy fell out of love with the EU http://www.ft.com/cms/s/0/3d11a974-eab2-11e5-bb79-2303682345c8.html
Japan Inc – Heavy meddling http://www.ft.com/cms/s/0/0118e3a6-ea99-11e5-bb79-2303682345c8.html
Talk of Fed ‘policy error’ grows http://www.ft.com/intl/cms/s/0/fcb4202a-c04d-11e5-846f-79b0e3d20eaf.html#axzz3ybOOvFTL
Federal Reserve stands back amid market gyrations http://www.ft.com/cms/s/0/9eae35f4-c527-11e5-b3b1-7b2481276e45.htm
http://www.ft.com/intl/cms/s/0/e008078c-a592-11e5-a91e-162b86790c58.html
Pay attention to long-term debt cycle http://www.ft.com/cms/s/2/b41813dc-c028-11e5-846f-79b0e3d20eaf.html
Slowing China needs to support its economy http://www.ft.com/cms/s/0/bb22c454-be9f-11e5-846f-79b0e3d20eaf.html
buoyant supply (Oil: US shale’s big squeeze) http://www.ft.com/cms/s/0/2db96dae-c0eb-11e5-9fdb-87b8d15baec2.html
Fed meeting: What to watch out for http://www.ft.com/cms/s/0/652a0bb2-c4ed-11e5-808f-8231cd71622e.html


13 20160131 Economists see 20% chance of US recession
2016-03-20 08:48 PM
http://www.ft.com/cms/s/2/da2ed38a-c6bd-11e5-b3b1-7b2481276e45.html
Economists see 20% chance of US recession
Eric Platt in New York
January 31, 2016 1:48 pm

Leading global economists now see a 20 per cent chance of the US falling into recession this year, and a diminishing likelihood of the Federal Reserve raising rates as previously thought.

A Financial Times survey of 51 economists, conducted in the days after the Fed’s January meeting, underscores the impact of the past month’s severe market turbulence and a string of lacklustre economic reports out of the US and China.

The fear that the world’s largest economy – considered the lone engine of global growth – is on the verge of recession has intensified. In the FT’s December survey economists had put the odds of a US recession at 15 per cent during the next two years. Now, they see a one-in-five chance of recession in the next 12 months.

The concern about a possible global slowdown – which prompted the Bank of Japan to cut interest rates to negative territory on Friday – is likely to keep the Fed from fulfilling its forecast of lifting benchmark interest rates by 100 basis points this year, leading economists say.

The economists downgraded their expectations of the US central bank’s ability to tighten policy this year, with their median forecast coming in halfway between two and three 25 basis point rate rises in 2016. Half of those surveyed said the Fed would lift two or fewer times.

In December, the group of economists had expected 75 basis points of tightening. Nearly three-quarters then projected three or more rises.

“There’s no question that the risks have risen given the hit that financial conditions have taken, given the softness in various indicators,” said Peter Hooper, chief economist of Deutsche Bank.

Until recently, few economists entertained the notion that the US could tip into recession. The robust labour market, alongside a briskly expanding service sector was thought likely to offset declines in the country’s manufacturing sector, which has struggled with the strengthening dollar.

A slowdown in China has renewed fears that the US economy is vulnerable, with investors pointing to dislocations in credit markets and a spate of expected defaults in the energy sector. Lists compiled by Standard & Poor’s and Moody’s of companies most in danger of default have swelled.

Global stock markets have slid 6 per cent this year, including a 5 per cent drop in the US, while worldwide high-yield credit has declined almost 2 per cent. Strategists with Citigroup note that a “stunning” 31 per cent of S&P 500 companies have fallen more than 30 per cent from their 52-week highs.

Investors have pointed to sputtering capital markets as a sign that the credit cycle has turned. Large investment-grade groups have had to pay up to issue debt, while the door has been completely shut to low-rated energy companies.

“Investors are unsure if there is a systematic or spillover event coming out of the energy sector,” said Michael Gapen, US economist with Barclays.

Economists surveyed by the FT emphasised that while the odds of a recession had climbed, a large majority still expected the US to escape one. Several who have fielded increased investor calls on the subject said that the conversation had been skewed because of the near obsession with the price of oil – a point that they argued had more to do with supply than global demand.

Mr Gapen, who put the odds of a recession between 10 and 15 per cent, said that he still thought strong consumption trends would keep the US economy from contraction.

“If you look at corporate profits, look at the data on high yield spreads, those are being driven by the weakness abroad,” he said.

“You have to make a judgment if those are the signals you should be relying on or if you should be relying on the labour market.”

Japan to cut interest rates to negative territory http://www.ft.com/cms/s/0/23ff8798-c63c-11e5-b3b1-7b2481276e45.html


14 201602 Guess who’s spending again?
2016-03-20 08:53 PM
http://www.fidelity.com.au/insights-centre/investment-articles/guess-whos-spending-again/
Guess who’s spending again?
Michael Collins, February 2016

Nine years after the last increase, seven years after zero was reached and two years since quantitative easing was abandoned, recent history’s most awaited rate rise occurred. The Federal Reserve raised the US cash rate to all of 0.25% in December, and such is the importance of this central bank that the anticipated consequences of this decision were noticeable long beforehand. A looming Fed rate increase sucked in capital from the rest of the world, (thereby boosting the US dollar, the world’s reserve currency) and boosted shorter-dated US bond yields, which are the benchmark for global credit markets. It was even behind the “taper tantrum” of 2013. So why does the Fed (and the US dollar) loom over the world to such a great extent?

Part of the answer is that the US is the world’s biggest economy. The US’ output of US$17.4 trillion (A$24 trillion) in 2014 was about four times the size of Japan’s by way of comparison. But add the 28 EU members together and the EU economy is larger, at US$18.5 trillion in 2014. Yet the European Central Bank, which covers the 19 euro-using countries plus other EU members indirectly as they have currencies tied to the euro, is well behind the Fed on influence.[1] China’s economy is bigger than the US’ in purchasing-power-parity terms, which is the fairest way to compare countries. It’s US$18.01 trillion for China versus US$17.4 trillion for the US in 2014, yet there are far fewer People’s Bank of China watchers.[2] The complete answer to the question of why the Fed dominates over other central banks (and the US dollar over other currencies) is that the US citizen is the world’s “consumer of last resort”.

This term, which sounds silly taken literally, acknowledges the importance of the US consumer to the global economy ever since the US became the world’s largest economy in 1916.[3] US GDP is about 68% consumption, which is a bigger number than for other large economies. Chinese consumers, for instance, only power 37% of China’s economy, EU consumers only drive 57% of EU output while the ratio is 60% for Japan.[4] Given the size of the US economy to the world economy, the US consumer is responsible for about one-fifth of global output. Thus, US consumer spending is a key determinant of global growth.

The promising news for investors is that US consumers are spending for various reasons. That should encourage optimism that the world economy will expand for a while yet. Relying on the US consumer to drive the global economy is not without drawbacks, however. And it can’t go on forever.

To be sure, the US consumers are not as crucial to the world as they were. The US economy comprises a smaller part of the world economy these days – US economic output as a percentage of the world’s total slipped from 25.6% in 1980 to 22.5% by 2014.[5] Rising inequality (or stagnant median income growth to put in another way) has robbed the middle and lower classes of spending power. The rampant-consuming baby-boomer generation is moving onto a stage in life where it spends less. The other 32% of the US economy, especially business investment, is misfiring to the extent that some analysts warn of a US recession.[6] Not every survey of US consumers is upbeat and any global ructions could upset US consumer spending. But at a time when the eurozone, Chinese, Japanese and many emerging economies are struggling, investors can be thankful that the US consumer is poised to drive the world economy in coming years.

Can and able

The influence of the US consumer was evident once again in the most recent report on US GDP, which showed consumer spending expanded at 10-year high of 3.1% in 2015 (even if it did flatten out towards the end of the year). This outlay helped the US economy grow 2.4% over the year, its equal-fastest expansion in five years.[7] Household purchases of goods and services are expected to keep up this healthy pace of growth for the foreseeable future because US consumers have more money to spend and more capacity to spend.

US households have more ability to spend because the US is one of the few countries in the world where people reduced their debts after the global financial crisis intensified in 2008. Rather than taking on bigger mortgages and other debts Australian-style, US households cut their debt-to-GDP ratio by 18 percentage points from 2007 to 2014, the most among 47 major economies surveyed by McKinsey Global Institute.[8] (Over the same time, Australian households boosted their debt by 10 percentage points as a proportion of GDP.) While consumer debt in the US still amounts to 77% of GDP, that ratio compares with a worrying 113% for Australia. If nothing else were to change, this debt reduction alone has placed US consumers in a position whereby they can increase spending; they are making fewer repayments and even have scope to borrow to buy items.

These less-indebted US consumers don’t necessarily need to borrow more because they have more money to spend anyway. The most important source of extra money in the wallets of the US consumers is that the US economy has added more than 12 million jobs since 2009, helping the jobless rate to halve from a peak of 10% in October 2009 to an eight-year low of 4.9% in January.[9] While hidden unemployment is hovering at 9.9%, by the government’s reckoning, that is down from the post-crisis peak of 17.1% that was set across 2009 and 2010.[10]

More people in work boosts aggregate consumer firepower. Personal income in the US rose 4.5% in 2015, after jumping 4.4% in 2014, according to the US Bureau of Economic Analysis.[11] The other thing more people in work does is place upward pressure on wages. While wages have stagnated in recent years because of high unemployment, the shift of jobs to China, technology displacing people, the decline in union power and capital’s increased political influence, the improved jobs market is boosting US salaries above the 1%-to-2% snail’s pace of the past five years. Now that there are only 1.5 unemployed job seekers for every opening compared with 6.8 in 2009, average hourly earnings are rising at a 2.5% to 2.8% speed, well above the inflation rate of 0.5%. Consumer surveys show that more people expect pay increases than decreases.[12] Many analysts expect wages increases to top 3% in the coming year.

Another fillip for household budgets is that oil prices have plunged. Quirky as it might be, petrol prices are among the prices most monitored by consumers. (It’s why Australia’s retail giants bought petrol stations.) US consumers are reminded every time they fill up their cars that they have more money to spend on other items. The point is that the plunge in oil prices from US$115 a barrel in 2014 to under US$30 now not only gives motorists more money to spend on other items, they are constantly reminded that they have more money to spend. While US consumers appear to have saved much of the gains so far from lower oil prices, their spending power has risen nonetheless.

Greater spending power wouldn’t mean much if consumers were gloomy. Investors can be confident US consumers will spend because the opposite is true. Consumer confidence, as measured by the University of Michigan, averaged 92.9 in 2015, the highest since 2004, due largely to improvements in how people evaluated current conditions.[13]

Several forces are prompting US consumers to feel confident enough to release their pent-up demand, the force that drives economic recoveries. The first is that housing, after triggering the US sub-prime crisis, has recuperated. Fed data shows that, due to rising home prices and thrift, the equity of US homeowners reached 57% of home values in September last year, the highest level since 2006. This result compares with just 37% in 2009 when one in four households owed more on their homes than they could sell them for.[14] Another buzz for consumers is that the US dollar’s 22% climb on the Fed’s trade-weighted index in the two years to January has reduced import prices.[15] Bargains are everywhere! On top of this, low inflation means that consumers are not being put off shopping by jumps in prices, which promotes the opposite of the bargain effect. It denotes too that the Fed is not expected to raise the US cash rate too much too quickly, which will keep down the bond yields that determine mortgage rates.

The absence of self-inflicted distress helps too. For the first time in five years, Congress in December passed a budget without too much fuss. The budget is projected to be in a deficit worth just over 2% of GDP, which supports economic activity, and contained sweeteners for consumption. One, for example, was that Congress made permanent enhancements to working-class family tax credits, which are a subsidy for adults with children. Some estimate that these moves will lift 16 million people above or closer to the poverty line in 2018 and beyond.[16]

Help needed

Even if oil prices stay low, wages increase and political and economic conditions stay favourable for a while yet, US consumers can’t drive the world forever. The cyclical nature of economics means that beneficial forces create imbalances that eventually check them.

The first curb on ever-rising US consumption would be measures to counteract the inflation it would produce. If consumer spending drives economic growth enough and fans big enough wage increases, inflation could head beyond the Fed’s 2% limit. The Fed is well aware that wages unexpectedly surged when the US economy hit full employment in the late 1990s. Any annual increases beyond 3% would raise concerns about inflation.

Another impediment is that US consumption will enlarge the deficit on the current account that the US has run since every year since 1991. In theory, a widening of the current-account deficit from the 2.2% of GDP it set in 2014 should undermine the US dollar, make imports more expensive and thereby curb consumption. If the US current-account deficit heads towards its pre-2008 level above 5% of GDP that lasted from 2004 to 2007, such a shortfall paired with current-account surpluses elsewhere would reinstate the global imbalances that at played such a significant role in triggering the global financial crisis.[17] As it is, the IMF expects the US current-account deficit to head beyond 3% of output from 2017.[18]

The view that the world has entered a period of “secular stagnation” is partly based on a view that current-account surpluses will persist in countries such as China, Germany and Japan, which automatically means deficits elsewhere. Large countries running hefty current-account surpluses can destabilise the world because they must export capital to deficit countries. These capital flows sap growth in these countries by diverting consumer spending abroad and suppressing domestic investment opportunities. Germany’s current-account surplus was 7.4% of GDP in 2014 and is headed for a fresh record of 8.5% in 2015, which is expected to push the eurozone’s surplus to reach 3% of output. Japan is expected to post a surplus of 3% for 2015 and beyond. Thankfully, China’s current-account surplus is a more manageable 2% to 3% of GDP these days, well down from a peak of 10% in 2007. But it’s still a surplus.[19]

Investors should enjoy the US consumers’ coming contribution to global growth. They could have far more faith in the medium-term outlook for the world economy, however, if Chinese, German and Japanese consumers were to make such a bigger contribution to global demand that they too earned the title of “consumer of last resort”.

Financial information comes from Bloomberg unless stated otherwise.

[1] IMF. World Economic Outlook database. GDP at current prices in US dollars. http://www.imf.org/external/pubs/ft/weo/2015/02/weodata/index.aspx

[2] CIA. The Word Factbook. Economy section for the economies of China and the US. https://www.cia.gov/library/publications/the-world-factbook/index.html.

[3] Adam Tooze. “The deluge. The Great War and the remaking of global order 1916-1931” Pengiun, 2014. Page 13. The US economy overtook the economy of the British empire in this year.

[4] CIA. Op cit.

[5] IMF. Op cit. GDP in current prices in US dollars.

[6] Financial Times. “Economists see 20% chance of US recession.” 31 January 2016. http://www.ft.com/intl/cms/s/0/da2ed38a-c6bd-11e5-b3b1-7b2481276e45.html#axzz3yrs342E2

[7] US Department of Commerce. Bureau of Economic Analysis. Fourth quarter and annual 2015 (advance estimate) data. 29 January 2016. http://www.bea.gov/national/index.htm#gdp

[8] McKinsey Global Institute. Debt and (not much) deleveraging.” February 2015. http://www.mckinsey.com/insights/economic_studies/debt_and_not_much_deleveraging

[9] The US workforce has jumped from a post-crisis low of 138.0 million in December 2009 to 149.9 million in December 2015. United States Department of Labor. Bureau of Labor Statistics. http://data.bls.gov/cgi-bin/surveymost

[10] The US government’s measure of hidden unemployment is the U-6 measure produced by the Bureau of Labor Statistics. The measure tracks the unemployed plus people marginally attached to the labor force, plus total employed part time for economic reasons, as a percent of the civilian labor force plus all persons marginally attached to the labor force. http://www.bls.gov/news.release/empsit.t15.htm

[11] US Department of Commerce. Bureau of Economic Analysis. Pesonal income and outlays, December 2015. 1 February 2016. http://www.bea.gov/newsreleases/national/pi/pinewsrelease.htm

[12] The Conference board. “The Conference Board consumer confidence index improves in December.” 29 December 2015. In the coming months, the proportion of consumers expecting their incomes to increase declined from 17.3% to 16.3%. However, the proportion expecting a reduction in income decreased from 11.8% to 9.7%. https://www.conference-board.org/data/consumerconfidence.cfm

[13] Survey of consumers. University of Michigan. “Final results for December 2015.” http://www.sca.isr.umich.edu/

[14] Bloomberg News. “The end of the housing hangover.” 14 December 2015. http://www.bloombergview.com/articles/2015-12-14/the-end-of-the-housing-hangover

[15] Federal Reserve. Foreign exchange rates – H.10. Nominal index. Broad. http://www.federalreserve.gov/releases/h10/summary/

[16] Center on Budget and Policy Priorities, a left-leaning US think tank. “Tax deal makes permanent key improvements in working-family tax credits.” 16 December 2016. http://www.cbpp.org/research/federal-tax/tax-deal-makes-permanent-key-improvements-to-working-family-tax-credits

[17] The US current-account deficit was 5.2% in 2004, 5.7% in 2005, 5.8% in 2006 and 5.0% in 2007. IMF. World Economic Outlook Database. October 2015. http://www.imf.org/external/pubs/ft/weo/2015/02/weodata/index.aspx

[18] IMF. Op cit.

[19] IMF. Op cit.

04 20160206 Debt, defaults, and devaluations: why this market crash is like nothing we’ve seen before
2016-03-20 06:57 PM
http://www.telegraph.co.uk/finance/economics/12138466/when-is-the-next-financial-crash-coming-oil-prices-markets-recession.html
Debt, defaults, and devaluations: why this market crash is like nothing we’ve seen before
Mehreen Khan, 10:00AM GMT 06 Feb 2016

A pernicious cycle of collapsing commodities, corporate defaults, and currency wars loom over the global economy. Can anything stop it from unravelling?

A global recession is on the way. This truism of economics holds at any point in which the world is not in the grips of a contraction.

The real question is always when and how deep the upcoming downturn will be.

“The crash will come, but it would be nice if it came two years from now”, Thomas Thygesen, head of economics at SEB told over 200 commodity investors and analysts in London last month.

His audience was rapt with unusual attention. They could be forgiven for thinking the slump had not already arrived.

Commodity prices have crashed by two thirds since their peaks in 2014. Oil has borne the brunt of the sell-off, suffering the worst price collapse in modern history. Brent crude has fallen from $115 a barrel in the summer of 2014, to just $27.70 in mid-January.

Thomas Thygesen: We are in a very unusual situation where market sentiment is of a different nature to anything we’ve seen before

Plenty of investors sitting in the blue-lit, cavernous surrounds of Bloomberg’s London HQ would have had their fingers burnt by the price capitulation.

• Mapped: How the world became awash with oil

Global oil production (October 2015)
1-1.png

“They tell you should start your presentations with a joke, but making jokes at a commodities seminar is hardly appropriate these days,” Thygesen told his nervous audience.

Major oil price falls have a number of historical precedents. Today’s glutted oil market is often compared to the crash of 1986, the last major episode over global over-supply. Back in the late 90s, a barrel of Brent crude fell to as low as $10 in the wake of the Asian financial crisis.

Oil last fell close to $10 in 1998

A perfect storm

But is the current oil price collapse really like anything the world economy has ever experienced?

For many market watchers, a confluence of factors – led by oil, but encompassing China, the emerging world, and financial markets – are all brewing to create a perfect storm in a global economy that has barely come to terms with the Great Recession.

“We are in a very unusual situation where market sentiment is of a different nature to anything we’ve seen before,” says Thygesen.

Unlike previous pre-recessionary eras, the current sell-off has seen commodity prices, equities and credit conditions all move in dangerous lockstep.

The S&P 500 trading pit at the Chicago Mercantile Exchange

Although a 75pc oil price collapse should represent an unmitigated positive for the world’s fuel thirsty consumers, the sheer scale of the price rout is already imperiling the finances of producer nations from Nigeria to Azerbaijan, and is now threatening to unleash a wave of bankruptcies across corporate America.

It is the prospect of this vicious feedback loop – where low oil prices create financial tail risks that spill over into the real economy – which could now propel the world into a “full blown crisis” adds Thygesen.

So will it materialise?

The world economy is throwing up reasons to worry, as the globe’s largest emerging markets have shown signs of deterioration over the last six months, says Olivier Blanchard, the former long-serving chief economist of the International Monetary Fund.

Olivier Blanchard: My biggest fear is precisely that the dramatic shift in mood becomes self-fulfilling

“China’s growth is probably less than officially reported. Russia and Brazil are doing very badly. South Africa is flirting with recession. Even India may not be doing as well as was forecast,” says Blanchard, who left the Fund after seven years late last year.

As it stands however, he says market ructions still represent a classic case of “herd” behaviour.

“Investors worry that other investors know something bad, and so just sell, although they themselves have no new information.”

Blanchard spent seven years firefighting the worst financial crisis in history at the IMF

But a tipping point may well be approaching. According to Blanchard’s calculations, a 20pc decline in stock markets that persists for more than six months, will translate into a decline in consumption of between 0.5pc to 1.0pc.

“This would be a serious shock. My biggest fear is precisely that the dramatic shift in mood becomes self-fulfilling”.

The first domino to fall

For now, oil-induced financial stress is concentrated in the energy sector.

With Brent set to languish around $30-35 barrel for the rest of the year, prices will persist below the $40-60 barrel break-even point that renders the bulk of US oil and gas companies profitable.

Spreads on high yield US energy corporates have soared to unprecedented highs. “They make Lehman look like a walk in the park” says Thygesen.

More than a third of the entire US high yield bond index is now vulnerable to crude prices remaining low or falling even further, according to calculations from Oxford Economics.

Probability of company defaults in the US
2917-1454689948130653059.svg

As a result, 2016 is set to see the first wave of corporate bankruptcies in the oil and gas sector. Highly leveraged US shale companies will be the first be picked off. Should escalating defaults have a further depressant effect on oil prices, it could unleash a tidal wave of corporate bankruptcies in the world’s largest economy.

Oxford Economics: Conditions that usually pave the way for mounting defaults are currently met in the US

Indebtedness is not just the scourge of the US. Globally, the oil and gas industry has issued $1.4 trillion of bonds and taken out a further $1.6 trillion in syndicated loans, driving the sector’s combined debt to $3 trillion, according to the Bank of International Settlements. They warn of an “illusion of sustainability” that could quickly turn toxic as the credit cycle unravels.

The question exercising the minds of economists and investors is the extent to which this contagion could metastasize beyond the energy sector, as banks cut off credit access, loans turn bad, and financial conditions enter a critical tightening phase.

“Conditions that usually pave the way for mounting defaults – such as growing bad debt, tightening monetary conditions, tightening of corporate credit standards and volatility spikes – are currently met in the US”, says Bronka Rzepkowski at Oxford Economics.

Such levels of financial distress, more often than not, portend a global recession.

In every instance of the US high yield spread rising above its long-term average, a recession or financial crisis has been nigh, says Rzepkowski, who cites 2011 as the only time the markets sent out a false signal, lulled by the Federal Reserve’s mega quantitative easing programme.

US shale break-even prices remain closer to $60 a barrel

We are not there yet, but worryingly for market watchers, a series of other indicators are also flashing red.

Global equity markets have endured their worst start to a year since the dotcom crash. To paraphrase Nobel prize-winning US economist Paul Samuelson, Wall Street has predicted nine out of the last five recessions, but the current turbulence has an ominous precedent.

Over the last 45 years, the S&P500 has suffered a loss of more than 12.5pc on 13 occasions. Six of these have given way to a recession in the US, providing a near 50pc probability that a global downturn is just around the corner.

In Europe, stocks have now fallen by 10pc in the last six months.

“Of the 14 previous occasions equities have had a similar decline, seven have been associated with recession, with lacklustre returns thereafter,” says Dennis Jose at Barclays.

He notes investors have begun to pile into “defensive” stocks, such as healthcare and consumer industries.

“The weighting in defensives has increased to the highest levels seen since 1980 suggesting that investors may have already embraced the risk of a recession.”

Dollar danger

Macroeconomic indicators from the world’s largest economy are also beginning to turn sour. The US has already fallen prey to a manufacturing collapse. Service sector data for December showed the slowdown is spreading to the dominant driver of economic growth.

“The shine has come off the US”, says David Folkerts-Landau, chief economist at Deutsche Bank.

He notes the economy is “firing on one cylinder” with consumers the sole bright spot in an environment of still weak capital investment, and a crippling exchange rate that is hurting exporters and squeezing corporate profits.

“It is not a very healthy situation,” says Folkerts-Landau, who forecasts US growth will fall below 2pc this year. “That is a precarious number.”

A crucial part of the story has been the relentless appreciation of the US dollar. The greenback has risen by more than 22pc on a trade weighted basis since mid-2014.

The soaring US dollar

The effects have been felt far beyond the US. The soaring dollar has put record pressure on China’s exchange rate peg, forcing Beijing to burn through its reserves with interventions amounting to $140bn-a-month in December to protect the renminbi.

Meanwhile, China’s capital outflows have accelerated to $676bn, according to the Institute of International Finance.

This policy bind – known as the “Impossible Trinity” of managing a fixed exchange rate, maintaining independent monetary policy, and a open capital account – means a devaluation of some magnitude is all but inevitable.

• Has China lost control of its currency?

“It will definitely be in the double digits”, says Folkerts-Landau. “We will be lucky if the depreciation will be in the lower double-digits by the end of the year.”

“Once you anticipate that, and you are sitting in Indonesia or Latin America, it has an immediate impact on how you think about the world”.

2918-1454690051159766678.svg

A weaker renminbi would unleash a new wave of deflation in an already fragile global environment, and hasten the pressure on emerging market exchange rates as the world’s currency wars would renew apace.

Federal reverse?

What, if anything, could halt this pernicious cycle of events from unfolding?

In the short-term, analysts are unanimous: all eyes are on the US Federal Reserve. The central bank’s first rate hike in seven years last December has come to look frighteningly premature in the space of just eight weeks.

Olivier Blanchard: I have no doubt that the Fed would expand QE

Events have forced the Fed’s policymakers to take to the airwaves and soothe fears that another four rate hikes are on the way this year. It is a welcome sign for jittery markets, but may not be enough to convince them that the Fed will be nimble enough to reverse course and begin easing should financial conditions worsen.

Others, like Blanchard, are more sanguine about the ability of central banks to ride to the rescue again.

“I have no doubt that, if there was such a decrease in consumption, or if the strong dollar proved to affect net exports more than is forecast, or any other adverse event for that matter, the Fed would wait to do further increases” he says.

“And if things got really bad, I have no doubt that the Fed would expand QE.”

Oil prices meanwhile are widely expected to rebound from their depths by the second half of the year, as dwindling investment and the buckling of the vulnerable shale players begins to bite on production levels.

This in itself presents its own set of challenges. The lower oil prices fall, the faster buyers are expected to flood back in, with violent upward movements already in evidence over the last ten days.

In the longer term, even the postponement of the next global recession will do little to assuage fears that world could find itself defenceless against another round of mania, panics or crashes.

Two of the world’s three major central banks have slashed interest rates in to negative territory. Monetary tools will need to be deployed more creatively, perhaps going as far as injecting stimulus directly into the veins of the economy.

Should the world manage to ride out the perfect storm of 2016, next time round, answers will be difficult to find.

• Mapped: How the world became awash with oil http://www.telegraph.co.uk/finance/oilprices/11998370/Mapped-How-the-world-became-awash-with-oil.html
fell to as low as $10 http://www.telegraph.co.uk/finance/oilprices/12094394/Oil-price-could-fall-to-10-a-barrel-warn-investment-bank-bears.html
imperiling the finances of producer nations from Nigeria to Azerbaijan, http://www.telegraph.co.uk/finance/economics/12130181/Oil-price-crash-Saudis-told-to-embrace-austerity-as-debt-defaults-loom.html
Olivier Blanchard http://www.telegraph.co.uk/finance/economics/11919355/fiscal-union-eurozone-emu-olivier-blanchard-imf.html
who left the Fund after seven years late last year. http://www.telegraph.co.uk/finance/economics/11919355/fiscal-union-eurozone-emu-olivier-blanchard-imf.html
Bank of International Settlements http://preview.telegraph.co.uk/finance/oilprices/12143304/Oil-market-spiral-threatens-to-prick-global-debt-bubble-warns-BIS.html
chief economist at Deutsche Bank http://www.telegraph.co.uk/finance/economics/12122506/Devastating-Brexit-will-consign-Europe-to-a-second-rate-world-power-warns-Deutsche-Bank.html
“Impossible Trinity” http://www.telegraph.co.uk/finance/economics/12086754/Has-China-lost-control-of-its-currency.html
• Has China lost control of its currency? http://www.telegraph.co.uk/finance/economics/12086754/Has-China-lost-control-of-its-currency.html
first rate hike in seven years http://www.telegraph.co.uk/finance/economics/12054011/Federal-Reserve-rate-rise-takes-US-economy-into-new-era.html

WEF Davos 2016: Optimism in Indonesia Inside RGE http://www.inside-rge.com/WEF-Davos-Indonesia-Lunch-Dialogue?utm_source=OB&utm_medium=OB&utm_campaign=OB201602LD


06 20160201 NK-The Potential Power of Negative Nominal Interest Rates
2016-03-20 07:25 PM
https://sites.google.com/site/kocherlakota009/home/policy/thoughts-on-policy/2-1-16
The Potential Power of Negative Nominal Interest Rates
N. Kocherlakota
Rochester, NY, February 1, 2016

(Very Long – But You Can Skip the Postscript if You Want)

Last week, the Bank of Japan (BOJ) lowered its marginal bank deposit rate below zero. Its action followed similar moves by many European central banks. In this post, I’ll discuss how negative nominal interest rates can be a useful tool of monetary policy. I’ll argue that central banks can only achieve the full power of this new tool if they treat it as completely standard, as opposed to a temporary emergency measure.

Why might negative nominal interest rates be desirable to a central bank? The general thinking in economics is that the incentives to spend, rather than save, are shaped by the real (that is, net of inflation) interest rate. Negative nominal interest rates allow a central bank to achieve lower real interest rates, without raising inflation expectations.

For example, suppose a central bank is unwilling or unable to raise medium-term inflation expectations much above 2%. Suppose too that it faces a zero lower bound on the nominal interest rate. Then, the central bank cannot lower the real interest rate much below -2%. In contrast, if the central bank can lower the nominal interest rate to -1%, it can lower the real interest rate to -3%.

In this sense, a negative nominal interest rate gives more policy space to the central bank. It has much the same benefits as raising the inflation target, without the costs associated with higher inflation.

There have to be limits on how negative nominal interest rates can go. Households and businesses always have the option to switch to cash, which has an apparent nominal yield of zero. But cash is relatively bulky and is not always easy to store or transport safely. These costs mean that the true nominal yield to cash is less than zero. The experience in Europe has suggested that cash’s costs allow central banks to lower nominal interest rates much further below zero than might have been thought.

So, negative nominal interest rates give a central bank more policy space. My second – and main point – is that this space will be of little use unless negative nominal interest rates are deployed in conjunction with the right central bank communication.

Here’s the wrong way to communicate: keep saying that negative is a purely emergency setting that will be abandoned shortly. The impact of policy depends on the expected path of interest rates over the medium and longer term. The central bank’s communication means that its expanded policy space will have little influence on those medium and longer term expectations. Note that even if the central bank actually keeps rates negative for many years, this ongoing communication will systematically rob the policy of its effectiveness (as well as hurting central bank credibility).

Here’s the right way to communicate: keep saying that all available tools, including negative interest rates, will be used as is needed to return employment and inflation to desirable levels as rapidly as possible. This communication means that the public and markets know that the new policy space can be used to buffer the economy against any adverse shock.

To sum up: I see negative nominal interest rates as a potentially powerful tool for central banks. But negative rates will only be an effective form of stimulus if they are treated as being fully conventional, as opposed to an unconventional emergency measure.

Postcript

Here are responses to some questions that I’ve been asked about negative nominal interest rates.
* Can the Fed achieve a negative target for the fed funds rate, given its existing statutory authorities? I’m not a lawyer. But see Vice-Chair Fischer’s comments about negative nominal interest rates in his January 3, 2016 speech. He does not mention any concerns on this dimension.
* What are the financial stability costs of negative nominal interest rates? It has been argued that low nominal and real interest rates may be a source of financial instability (like bubbles and undue risk-taking). I’ve discussed this issue here. But I don’t see anything special in this regard about slightly negative nominal interest rates (like -0.5% or -1%), as opposed to zero nominal interest rates. (There may be other resource distortions related to negative nominal interest rates – see Rognlie (2015).)
* You predicted that the FOMC would use negative interest rates in 2016. How do you feel about that prediction now? Actually, I’ve never made such a prediction. I did say in October 2015 that it would be appropriate monetary policy to lower the fed funds rate target range below zero, in order to facilitate a more rapid return of inflation and employment to desirable levels. (I still feel that the current macroeconomic situation requires a U-turn in monetary policy.) I didn’t anticipate that the FOMC would actually take such a policy step. My overarching concern is that the FOMC will only use negative nominal interest rates in what it would characterize as an emergency situation. As discussed above, this kind of approach would mean that negative nominal interest rates would not be of much use in the US.

Please address media enquiries and non-academic speaking requests to Monique Patenaude (monique.patenaude@rochester.edu and 585-276-3693).

January 3, 2016 speech http://www.federalreserve.gov/newsevents/speech/fischer20160103a.htm
here https://www.minneapolisfed.org/news-and-events/presidents-speeches/low-real-interest-rates-20140605
Rognlie (2015) http://economics.mit.edu/files/11174
October 2015 https://www.minneapolisfed.org/news-and-events/presidents-speeches/still-room-for-improvement
U-turn https://sites.google.com/site/kocherlakota009/home/policy/thoughts-on-policy/1-21-16


05 20160209 NK-Negative Rates: A Gigantic Fiscal Policy Failure
2016-03-20 07:23 PM
https://sites.google.com/site/kocherlakota009/home/policy/thoughts-on-policy/2-9-16
Negative Rates: A Gigantic Fiscal Policy Failure
N. Kocherlakota
Rochester, NY, February 9, 2016

Since October 2015, I’ve argued that the Federal Open Market Committee (FOMC) should reduce the target range for the fed funds rate below zero. Such a move would be appropriate for three reasons:
1. It would facilitate a more rapid return of inflation to target.
2. It would help reduce labor market slack more rapidly.
3. It would slow and hopefully reverse the ongoing and dangerous slide in inflation expectations.

So, going negative is daring but appropriate monetary policy. But it is a sign of a terrible policy failure by fiscal policymakers.

The reason that the FOMC has to go negative is because the natural real rate of interest r* (defined to be the real interest rate consistent with the FOMC’s mandated inflation and employment goals) is so low. The low natural real interest rate is a signal that households and businesses around the world desperately want to buy and hold debt issued by the US government. (Yes, there is already a lot of that debt out there – but its high price is a clear signal that still more should be issued.) The US government should be issuing that debt that the public wants so desperately and using the proceeds to undertake investments of social value.

But maybe there are no such investments? That’s a tough argument to sustain quantitatively. The current market real interest rate – which I would argue is actually above the natural real rate r* – is about 1% out to thirty years. This low natural real rate represents an incredible opportunity for the US. We can afford to do more to ensure that all of our cities have safe water for our children to drink. We can afford to do more to ensure that our nuclear power plants won’t spring leaks. We can afford to do more to ensure that our bridges won’t collapse under commuters.

These opportunities barely scratch the surface. With a 30-year r* below 1%, our government can afford to make progress on a myriad of social problems. It is choosing not to.

If the government issued more debt and undertook these opportunities, it would push up r*. That would make life easier for monetary policymakers, because they could achieve their mandated objectives with higher nominal interest rates. But, more importantly, the change in fiscal policy would make life a lot better for all of us.

I don’t think that Chair Yellen will say the above in her Humphrey-Hawkins testimony tomorrow – but I also think that it would be great if she did.

Please address media enquiries and non-academic speaking requests to Monique Patenaude (monique.patenaude@rochester.edu and 585-276-3693).

October 2015 https://www.minneapolisfed.org/news-and-events/presidents-speeches/still-room-for-improvement
We can afford to do more to ensure that all of our cities have safe water for our children to drink. http://www.nytimes.com/2016/02/09/us/regulatory-gaps-leave-unsafe-lead-levels-in-water-nationwide.html
We can afford to do more to ensure that our nuclear power plants won’t spring leaks. http://www.nytimes.com/2016/02/08/nyregion/federal-specialist-to-inspect-elevated-radiationat-indian-point.html
We can afford to do more to ensure that our bridges won’t collapse under commuters. http://www.nytimes.com/2007/08/02/us/02bridge.html


02 20160210 BlackRock: Negative rates ‘new toy’ around world
2016-03-20 06:06 PM
http://www.cnbc.com/2016/02/10/blackrock-negative-rates-new-toy-around-world.html
BlackRock: Negative rates ‘new toy’ around world
Matthew J. Belvedere | @Matt_Belvedere
Wednesday, 10 Feb 2016 | 8:47 AM ET

BlackRock’s Rick Rieder said Wednesday he does not believe the Federal Reserve is contemplating negative interest rates, which have become all the rage in the euro zone and Japan.

“The new toy in the world of monetary policy is we’re going to negative rates,” Rieder told CNBC’s “Squawk Box” ahead of day one of Fed Chair Janet Yellen’s semiannual congressional testimony on the economy. “I don’t think the Federal Reserve is in a thought process of negative rates today.”

The Fed may not be thinking about negative rates for the U.S., but wants to be prepared just in case. The central bank’s annual stress test is asking banks to examine the possibility of negatively yielding Treasury rates. The yield on the 10-year Treasury was about 1.765 percent in early Wednesday trading.

Read More From ZIRP to NIRP: What’s the Fed’s next move?

Yellen is expected to try to balance the Fed’s stated goal of raising interest rates against the risks of a weaker global economy. She appears before the House Financial Services Committee at 10 a.m. ET, and before the Senate Banking Committee on Thursday morning.

In written remarks, released ahead of the hearing, Yellen said the future for rates depends on the economic data, and that a lower rate path would be appropriate if the economy falters.

Conditions were likely to warrant gradual rate hikes, she said, acknowledging the risk of China’s slowdown could pose for the U.S. economy.

When the Fed increased rates from near zero percent for the first time in December in more than nine years, policymakers projected four more hikes in 2016. But the dismal start of 2016 on Wall Street, plunging oil prices and concerns about China’s economy have tempered market expectations for such an aggressive path higher.

“The U.S. economy is slowing,” said Rieder, BlackRock’s global fixed income CIO. “Clearly the global economy is slowing. I think it’s going to be hard for the Fed to go many times this year, if at all.”

“I think we’ve seen the best of U.S. growth,” he continued. “[But] I think people understated how the U.S. economy did for the last three or four years. It created 8 million jobs in three years [and] 18 million car [sales]. The homes sales were pretty solid.”

The Fed should have started raising rates two years ago, he argued.

Looking forward, Rieder handicapped whether June might be on the table for a rate hike.

“If you think about the next press conference is June, there are four pieces of employment data to come out. There are four pieces of CPI. There are four pieces of core PCE,” he continued. “There’s an awful lot of data.”

From ZIRP to NIRP: What’s the Fed’s next move? http://www.cnbc.com/2016/02/09/from-zirp-to-nirp-whats-the-feds-next-move.html


03 20160215 Mapped: Negative central bank interest rates now herald new danger for the world
2016-03-20 06:16 PM
http://www.telegraph.co.uk/finance/economics/12149894/Mapped-Why-negative-interest-rates-herald-new-danger-for-the-world.html
Mapped: Negative central bank interest rates now herald new danger for the world
Mehreen Khan, 1:30PM GMT 15 Feb 2016

Sub-zero rates are becoming the “new abnormal” in a shaky world economy. With fresh panic hitting markets, are we finally hitting the limits of what monetary policy can achieve? Click on the countries to find out

The world’s tentative experiment with negative interest rates got off to an unremarkable start.

Sweden’s Riksbank – the world’s oldest central bank – became the first major monetary authority to cross the rubicon and take its main policy rate into the red exactly a year ago to the month (see map above).

The Riksbank’s move followed the likes of Switzerland and Denmark, who had turned negative in a bid to stimulate flagging inflation and halt the punishing appreciation of their currencies.

How Sweden went sub-zeroSource: Riksbank

But the introduction of sub-zero rates caused no immediate panic that central bankers were “losing control”.

Neither did they seem to produce deleterious economic effects in their host countries, as savers continued to keep their money deposited in banks rather than fleeing for the safety of cash. Commercial lenders, meanwhile, adjusted their business models to help maintain profitability.

• How Sweden’s negative rates turned economics on its head

In September, Andy Haldane, chief economist at the Bank of England, joined a chorus of influential thinkers in positing that negative rates could be necessary to protect the UK and the other advanced economies from the next global recession.

The “new abnormal”

But recessionary fears have crept up on the world much faster than the likes of Mr Haldane may have anticipated.

• Why this market crash is like nothing we’ve seen before

Global markets have crashed into bear market territory. A cocktail of fears, including the collapsing price of oil, the creaking health of the world’s biggest banks and China’s competence in managing its economic slowdown, have ignited fears that investor panic may lead the world into a new downturn.

Bank shares have been in the eye of the selling storm, concentrating minds on just what negative interest rates mean for the financial system.

Jitters were set off by the Bank of Japan’s shock decision to join the negative rate club at the end of January. One year into the negative rates experiment, it seemed monetary authorities were getting desperate in their attempts to stimulate growth and inflation with their limited policy tools (see map above).

Like its counterparts in northern Europe, Japan’s sub-zero rates were intended to drive down the value of its currency, the yen. It didn’t work.

The yen has now risen by 10pc against the US dollar since the Bank of Japan’s negative interest rate decision on January 30.

Negative rates have not had the desired effect on the yen

• AEP: Bank of Japan loses control as QE hits the limits

Sweden soon followed suit in the competitive devaluation cycle, slashing its already negative repo rate to -0.5pc to generate inflation by weakening the value of the krona.

With the ECB expected to head further into negative territory next month, the world has entered a “new abnormal” of negative rates, says Scott Mather at Pimco, the world’s biggest bond fund.

Taxing the banking system

One of the unintended consequences of global central banks’ race to the bottom (which seemingly has no bottom) is that negative interest rates act as a tax on the banking system.

JP Morgan: Banks seem unable or unwilling to pass negative deposit rates to their retail customers

By penalising commercial lenders for parking their reserves at the central bank, it erodes the profit margin they make on charging already low interest rates while raising the cost of capital.

So far, “banks seem unable or unwilling to pass negative deposit rates to their retail customers, leaving them with few options to offset costs”, note analysts at JP Morgan.

They also highlight that, should banks start imposing higher lending costs on their customers, this would have the reverse effect of easy monetary policy, crimping credit creation and tightening financial conditions.

Time for fiscal dominance

All of this begs the question of whether the world has hit the limits of what monetary policy can achieve, as the distortions produced by sub-zero rates overwhelm its stimulatory benefits.

Mario Draghi: Monetary policy has been the only truly stimulative policy in the last four years

The current global recovery has been one of the most deflationary in modern times. Over the last six-and-a-half years, the nominal GDP of the advanced world – or the total cash value of their economies – has grown by just 11pc, according to Bank of America Merrill Lynch.

Meanwhile, more than $8 trillon of high grade sovereign debt is trading at a negative yield.

Distortions such as this have led prominent monetary policymakers to dub the move into negative interest rates a “gigantic fiscal policy failure”.

Eight years on the from the financial crisis, central banks have done all the heavy lifting to get the world out of its low growth morass. Monetary policymakers have cut interest rates 637 times and purchased $12.3?trillion (£8.5? trillion) of assets since March 2008.

Mario Draghi, president of the European Central Bank, bemoans that his institution has provided the sole source of stimulus to the eurozone over the last six years. He renewed his calls for governments to finance mass public investment schemes and cut tax burdens to reflate their economies this week.

So although negative interest rates may herald new danger for financial markets, they could well be the catalyst jolting politicians and governments into finally making use of powerful fiscal policy tools to rescue the world from the grips of another slump.

first major monetary authority http://www.telegraph.co.uk/finance/economics/11408950/Sweden-cuts-rates-below-zero-as-global-currency-wars-spread.html
central bankers were “losing control”. http://preview.telegraph.co.uk/finance/economics/11378193/How-central-banks-have-lost-control-of-the-world.html
deleterious economic effects http://www.telegraph.co.uk/finance/economics/11895084/How-Swedens-negative-interest-rates-experiment-has-turned-economics-on-its-head.html
adjusted their business models http://www.ft.com/cms/s/0/0d2c32a4-ca66-11e5-a8ef-ea66e967dd44.html#axzz40EYNOrq4
• How Sweden’s negative rates turned economics on its head http://www.telegraph.co.uk/finance/economics/11895084/How-Swedens-negative-interest-rates-experiment-has-turned-economics-on-its-head.html
negative rates could be necessary to protect the UK http://www.telegraph.co.uk/finance/bank-of-england/11874061/Negative-interest-rates-could-be-necessary-to-protect-UK-economy-says-Bank-of-England-chief-economist.html
• Why this market crash is like nothing we’ve seen before http://www.telegraph.co.uk/finance/economics/12138466/when-is-the-next-financial-crash-coming-oil-prices-markets-recession.html
crashed into bear market territory. http://www.telegraph.co.uk/finance/economics/12138466/when-is-the-next-financial-crash-coming-oil-prices-markets-recession.html
shock decision to join the negative rate club http://www.telegraph.co.uk/finance/economics/12128832/Bank-of-Japan-slashes-interests-rates-into-negative-territory.html
• AEP: Bank of Japan loses control as QE hits the limits http://www.telegraph.co.uk/finance/economics/12153032/Bank-of-Japan-loses-control-as-QE-hits-the-limits.html
“new abnormal” https://www.pimco.com/insights/viewpoints/viewpoints/negative-interest-rate-policies-may-be-part-of-the-problem
“gigantic fiscal policy failure”. https://sites.google.com/site/kocherlakota009/home/policy/thoughts-on-policy/2-9-16


07 20160215 NK-Staying Positive About Going Negative
2016-03-20 07:27 PM
https://sites.google.com/site/kocherlakota009/home/policy/thoughts-on-policy/2-15-16
Staying Positive About Going Negative
N. Kocherlakota
Rochester, NY, February 15, 2016

Just over two weeks ago, the Bank of Japan (BOJ) cut the (marginal) deposit rate that it pays to banks from zero to negative one-tenth of one percent. Following the BOJ’s change in policy, Japanese equity indices fell and the yen appreciated against a number of other currencies. In this post, I suggest that these effects are, at least in part, due to the BOJ’s prior negative communications about negative rates. I argue that, in light of the BOJ’s experience, the Federal Reserve should immediately begin to communicate more positively about negative rates.

In a press conference in early December 2015, Governor Kuroda said that the BOJ was not intending to use negative rates, even though many observers were concerned about the low Japanese inflation outlook. On January 21, 2016, Governor Kuroda told the Japanese parliament that the BOJ was not planning to go negative, pointing to unstated “cons” of such a move. Eight days later, the BOJ did in fact go (slightly) negative. The BOJ’s monetary policy statement communicated that it had made this move in order to forestall general risks from abroad, and from the Chinese economy in particular.

I see the combination of these negative messages as at least partly responsible for the outsized and adverse changes in Japanese financial conditions over the past two weeks. Even as late as January 21, the BOJ’s words and actions communicated a clear distaste for negative rates. Given that apparent distaste, the Bank’s highlighting of international risks in its monetary policy statement suggested that those risks were, in fact, quite dire. The decision to go negative also seemed to carry a latent message that the BOJ had lost at least some confidence in the efficacy of expanding its quantitative easing program.

To be clear: my intention is not to engage in (pointless) second-guessing of the BOJ’s communication strategy. (Indeed, I would argue that a number of Policy Board members are among the best communicators in global central banking.) My goal is to suggest that the BOJ’s experience has some key lessons for the Federal Open Market Committee (FOMC) here in the US.

The FOMC is currently targeting a range of a quarter to a half percent for the fed funds rate. In response to a sufficiently adverse shock, it can cut this range by twenty-five basis points To provide further accommodation beyond this twenty-five basis point cut, the Committee has to turn to other tools. There have to be plausible scenarios in which the FOMC would, in fact, very much want to turn to negative interest rates.

But its prior communication has to set up that decision. The Committee can’t convey that it sees big costs or concerns with negative rates. These kinds of communications create the risk that any decision to go negative would carry the signals I’ve discussed above (that is, the macroeconomic situation is more dire than previously communicated and the Committee lacks confidence in its other methods of providing stimulus).

How then should the FOMC communicate about negative rates? The messaging from Committee leaders should be relentlessly positive. It is reasonable to highlight that Federal Reserve staff are studying whether negative rates would in fact stimulate aggregate demand in the US, given the ability of banks and others to substitute into cash. (After all, most of us thought until about two years ago that going negative would have essentially no effect on aggregate demand given those substitution possibilities.) But FOMC leaders should be clear that, as long as negative rates do have a stimulative effect, the Federal Reserve is more than willing to use them as a monetary policy tool.

There is room for considerable improvement on this dimension in the current FOMC communications about negative interest rates. For example, Vice-Chair Dudley said on Friday that it was “extraordinarily premature” to discuss negative interest rates as a tool. The Vice-Chair largely accomplished his primary short-run goal of signaling confidence in the strength of the US economy. But the subtext of his remarks – which was probably text to many – is that negative rates are not a desirable tool. If not corrected soon, that message could well come back to haunt the Committee.

P. S. My conclusion from this WSJ article was that the Fed does have the ability, under existing statute, to implement a negative target range for the fed funds rate. I agree with the author of the article that such a move would not be without controversy. Of course, that is not new ground for the Fed – for example, the Volcker fight to contain inflation was met with a great deal of criticism.

Please address media enquiries and non-academic speaking requests to Monique Patenaude (monique.patenaude@rochester.edu and 585-276-3693).

early December 2015 http://www.reuters.com/article/us-japan-economy-kuroda-idUSKBN0TQ0E720151207
January 21, 2016 http://www.reuters.com/article/us-japan-economy-boj-idUSKCN0UZ0AN
extraordinarily premature http://www.foxbusiness.com/markets/2016/02/12/feds-dudley-talk-negative-rates-extraordinarily-premature.html
WSJ article http://blogs.wsj.com/economics/2016/02/10/four-legal-questions-the-fed-would-face-if-it-decided-to-go-negative/

01 20160216 The consequences of negative interest rates
2016-03-20 06:02 PM
http://www.cnbc.com/2016/02/16/the-consequences-of-negative-interest-rates-commentary.html
The consequences of negative interest rates
Christopher Swann, 20160216

How low can central banks go? Until recently, it was assumed that policy makers had to stop once they had cut nominal interest rates to zero.

But negative interest rates – charging commercial banks for the privilege of holding reserves with the central bank – are being more widely deployed. Countries accounting for almost a quarter of global GDP now have sub-zero interest rates – including the euro zone, Switzerland, and most recently Japan.

Janet Yellen, Chairwoman of the Federal Reserve Board of Governors
Samuel Corum | Andolu Agency | Getty Images

Even in the U.S., where 100 basis points (one percentage point) of rate hikes were priced in at the end of 2015, markets now attach a 10-percent chance (four times higher than the start of this year) that the Federal Reserve will impose negative rates over the next 12 months, in response to softer current economic activity indicators.

Those central banks that have gone negative believe it could boost growth and markets in several ways.
Janet Yellen
How negative rates can crush average investors

First, the policy should encourage commercial banks to make loans to avoid charges on cash in excess of mandatory reserves.

Second, sub-zero rates also have the potential to weaken a nation’s currency, making exports more competitive and boosting inflation as imports become more expensive.

Third, by lowering short-dated government bond yields, negative rates should increase the relative appeal of equities, helping that market.

Fourth, negative rates may complement other easing measures (like quantitative easing), and signal central bank resolve to tackle persistently below-target inflation.
Janet Yellen, chair of the U.S. Federal Reserve, speaks during a Senate Banking Committee hearing in Washington, Feb. 11, 2016.
A Fed negative-rate move would hurt Wall St banks

That is the theory. But the brief history of negative rates shows things haven’t always gone according to plan. So what are the limits of the policy and its possible unintended consequences?

Credit conditions might actually tighten. For negative rates to boost bank lending, commercial banks must become willing to lend more, and/or at lower costs. A sticking point is that negative rates tend to squeeze bank profits – trimming the gap between the rates at which they borrow and offer loans. If profits suffer too much, banks may even scale back lending. Difficulties in imposing negative rates on depositors may mean debt costs rise for other consumers; Swiss and Danish banks have hiked borrowing costs for homeowners since negative rates were introduced.

Equities don’t always respond. Negative rates can promote a shift from bonds to stocks. But this effect has not been clear recently. Since banks form a large proportion of equity market capitalization, as in the U.S. and Japan, shrinking bank profitability may drag on stock indices.

Foreign-exchange rates aren’t playing ball. Negative rates should lead to currency depreciation. This link, too, appears to have broken recently. The yen has appreciated 5.4 percent against the U.S. dollar since Japan’s policy move, with rising risk aversion overriding interest rate differentials.

Central banks may go too far. European Central Bank President Mario Draghi has said there are no limits to the ECB’s potential easing. But there is a limit to how negative rates can go. At a certain point, commercial banks could be forced to charge clients to hold deposits, which could lead many to convert savings into physical cash.
Bank of Canada
Next country with negative rates could be… Canada?

Central banks are determined to do what it takes to boost growth and inflation. With interest rates already at zero, more central banks have been resorting to negative interest rates to fulfill their objective. But as policy becomes more unorthodox, investors will need to monitor potential unintended consequences more closely.

Commentary by Christopher Swann, a strategistin the Chief Investment Office at UBS Wealth Management, which oversees the investment strategy for $2 trillion in assets. Follow UBS on Twitter @UBS.

How negative rates can crush average investors http://www.cnbc.com/2016/02/12/what-negative-interest-rates-can-do-to-us-stock-market.html
A Fed negative-rate move would hurt Wall St banks http://www.cnbc.com/2016/02/12/a-yellen-rate-reversal-would-hurt-wall-street-banks.html
Next country with negative rates could be… Canada? http://www.cnbc.com/2016/02/12/next-country-with-negative-rates-could-be-canada.html
Why negative Fed rates have everyone worried http://www.cnbc.com/2016/02/10/why-talk-of-negative-fed-rates-has-everyone-worried.html
BlackRock: Negative interest rates ‘new toy’ around world http://www.cnbc.com/2016/02/10/blackrock-negative-rates-new-toy-around-world.html


08 20160216 NK-Monetary Policy and Ending Too-Big-To-Fail
2016-03-20 07:29 PM
https://sites.google.com/site/kocherlakota009/home/policy/thoughts-on-policy/2-16-16
Monetary Policy and Ending Too-Big-To-Fail
N. Kocherlakota
(very snowy) Rochester, NY, February 16, 2016

My successor as Minneapolis Fed President, Neel Kashkari, gave his first speech in his new role today. I congratulate him on a well-worded and stimulating set of remarks. He argued passionately in favor of imposing much tighter restrictions on the nation’s largest financial institutions, including possibly requiring them to hold a lot more capital or breaking them up.

In this post, I’ll comment on two monetary policy aspects of his proposals. The first is how they would interact with the effective lower bound on nominal interest rates. The second is that monetary policymakers need to get even better at “cleaning up” after crises, given how hard crises are to prevent.

My first comment is that adopting President Kashkari’s proposals when interest rates remain near their lower bound would have adverse macroeconomic consequences. Almost by design, higher capital standards mean that banks face higher financing costs (in part because debt is subsidized by the tax code). At least some of those higher financing costs would be passed along in the form of lower rates of return to savers and higher interest rates to borrowers.

To compensate for these effects, the Fed would have to target a lower range for the fed funds rate. That would not be a problem if the fed funds rate were well into positive territory. But it could create distinct macroeconomic challenges when the Fed is constrained in terms of the stimulus that it can provide. (Admittedly, judicious fiscal policy could be used instead of monetary policy to offset the macroeconomic effects that I’ve described.)

I’ve focused on the idea of higher capital standards. But, to the extent that we believe that there are returns to scale in the US, breaking up the banks would also generate higher intermediation costs. The consequences for monetary policy would be the same.

My second comment has to do with “cleaning up” after crises using monetary policy. I completely agree with President Kashkari that policymakers should work to reduce the probability of financial crises. But I’m skeptical of their ability to eliminate such crises entirely (not that President Kashkari suggested that they had such an ability). I am sure that, at some point in the future, the public, lenders, and governments will again become convinced that “This Time Is Different,” in Reinhart and Rogoff’s evocative phrase. And that “different” time will be followed by a financial crisis.

In contrast, I do think that policymakers have become considerably better at responding to financial crises. Thus, the Federal Reserve’s response to the 2007-09 crisis was, in my estimation, a big improvement on its response to the events of 1929-33.. (It is worrisome, though, that Congress has taken away so many of the Fed’s crisis response tools since 2009. Puzzlingly, both sides of the aisle seem to feel that it would have been better for the world to have suffered through a much deeper financial crisis.)

But there is certainly room for further improvement in the policy response to crises. The financial crisis of 2007-09 began over eight years ago. Yet, monetary policymakers are still struggling to deal with its aftermath. The fraction of Americans aged 25 to 54 with a job remains well below its level in 2007. Perhaps even more tellingly, Inflation remains unduly low relative to the Federal Open Market Committee’s 2% target (and seems likely to stay low for several more years).

In my view, and with the benefit of hindsight, I think that the FOMC’s monetary policy response was constrained by its strong desire to normalize the level and form of accommodation as rapidly as possible. Going forward, the Committee needs to develop a monetary framework that automatically leads to a more appropriate degree of patience in the removal of accommodation.

President Kashkari was right to emphasize financial regulation in his first speech – it does matter a lot for all of us. I see my point as complementary to his: the ultimate impact of financial regulation on the macro-economy is shaped in important ways by the constraints on monetary policy – both actual and self-imposed – faced by central banks.

Please address media enquiries and non-academic speaking requests to Monique Patenaude (monique.patenaude@rochester.edu and 585-276-3693).

speech https://www.minneapolisfed.org/news-and-events/presidents-speeches/lessons-from-the-crisis-ending-too-big-to-fail
I think https://www.minneapolisfed.org/news-and-events/presidents-speeches/monetary-policy-renormalization


15 20160317 The appearance of disappearance: the CIA’s secret black sites
2016-03-20 08:55 PM
http://www.ft.com/cms/s/2/90796270-ebc3-11e5-888e-2eadd5fbc4a4.html
The appearance of disappearance: the CIA’s secret black sites
Edmund Clark and Crofton Black
March 17, 2016 1:44 pm

Photographer Edmund Clark and journalist Crofton Black on the CIA’s covert detention facilities
http://im.ft-static.com/content/images/68a497ac-ebdb-11e5-bb79-2303682345c8.img

The windowless warehouse built by the CIA in Antaviliai, a quiet hamlet surrounded by lakes and woods, 20km from the Lithuanian capital, Vilnius; photographed in 2011. Work began on the prison facility in 2004. By the time of its closure, in March 2006, the existence of the CIA’s secret detention programme had been widely publicised, although not yet officially acknowledged.

Twelve years ago, in a village on the edge of a pine forest not far from Lithuania’s elegant capital Vilnius, workmen constructed an unusual warehouse. It was the size of an Olympic swimming pool with no windows, many air vents and no stated purpose. The site had formerly been a riding stables and a paddock. It had also served as a local watering hole – a welcome one since the village lacked a bar or restaurant. The new building was shiny and modern, incongruous amid the tumbledown farm buildings and Soviet-era housing blocks. The convivial atmosphere of the riding club was replaced, in the words of one local inhabitant, by “this certain emptiness”.

Naturally, the neighbours were curious. They speculated about the new building’s function. Was it a military listening post? A drug factory? A ­clandestine organ transplant lab? None of them guessed that it might be a key facility in the US Central Intelligence Agency’s Rendition, Detention and Interrogation programme, one of a secret network of “black sites”, set up in half a dozen countries to house undisclosed prisoners out of reach of lawyers, the Red Cross or other branches of the US government. Why should they? Lithuania was a long way from the front lines of the war on terror, and the village of Antaviliai, although only 20 minutes by car from the capital, was known for summer lake swims rather than for covert operations.

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Lithuania. Satellite view of a former riding stables in the village of Antaviliai, annotated by a local resident to show building works, 2004

The secret detention programme, as it was grad­ually uncovered, stretched across the globe. The network of sites we have documented encompasses Antaviliai and Kabul, North Carolina and Skopje, Columbia County, Milan, Tripoli and Bucharest. In our journeys through this material, we have sought to portray the appearance of disappearance.

Sceptics like to invoke the power of photography, its ability to show what is real. Three years ago, at a hearing for a European Parliament civil liberties committee inquiry into complicity in illegal detentions, one MEP asked if he could see a photograph of a prisoner on a plane. Failing that, he would remain convinced of the fictional world in which it didn’t happen. In the same way, Valdas Adamkus, a former president of Lithuania, when asked during a visit to London in 2011 about CIA prisoners being held in his country, stated firmly that: “Nobody proved it, nobody showed it.”

In unveiling the form and structure of the network, journalists and investigators pieced together elements in many countries. Police identified names of rendition crews from phone and hotel records. We compiled dossiers with material accumulated from plane movements, government archives, NGO and media investigations, contractual paperwork and invoices. A summary of a 6,000-page report by the US Senate Intelligence Committee, partially and belatedly released in 2014, confirmed much that had by then already become public, but held a fig leaf over the names of participating countries. Last year, US government lawyers, long loath to admit to the programme’s existence, admitted to the existence of 14,000 photographs of prisoners being transported on planes and held in secret locations. Nonetheless, across Europe, officials still deny that there is any evidence of their countries’ involvement with the secret detention network.

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Macedonia. The room in the Skopski Merak hotel where Khaled el-Masri was held by Macedonian officials in January 2004; May 2015. Khaled el-Masri was detained by Macedonian police, who confused his name with that of an al-Qaeda suspect and handed him over to the CIA. He was held in a secret prison in Afghanistan for four months before the CIA acknowledged its mistake. He later sued CIA director George Tenet for imprisonment and torture but the US dismissed the case under state secrets privilege. He later won a case for compensation in the European Court

So far, the Obama administration has refused to disclose its 14,000 photographs, and as a result we cannot show them. We can show, however, a swimming pool in a hotel in Mallorca where a flight crew relaxed for a couple of days between dropping off one piece of human cargo and picking up another. We can show a bed in a hotel room in Macedonia, where a man was tied up for 23 days before being flown to a facility in Afghanistan because he had the same name as someone else. We can show the bland fronts of offices, large and small, where the transport was organised. We can show paperwork linking a multinational service provider – a blue-chip company with thousands of employees that was formerly a contractor for Transport for London – to an aviation brokerage, a mom-and-pop affair in upstate New York. And we can show documents from the court case that ensued when two logistics firms fell out over how many hours had been flown and how much money had been earned – documents that, on close inspection, laid out the history and blueprint of the US’s most secret post-9/11 government programme.

http://im.ft-static.com/content/images/d27c7e2c-ebe2-11e5-bb79-2303682345c8.img
A page from the CIA’s Special Review: Counterterrorism Detention and Interrogation Activities (September 2001-October 2003), dated May 7 2004. In 2004, after complaints by government officials, the CIA’s inspector-general conducted a review of the first two years of the agency’s detention and interrogation activities. It examined the range of ‘enhanced interrogation techniques’, including ways in which interrogators had exceeded authorised methods. Much of the report was redacted on its eventual declassification and publication in 2009

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El-Masri’s sketch of the layout of the hotel room during his detention. (El-Masri vs Tenet, Court of Appeals for Fourth Circuit, Exhibit F)

. . .

Looking for meaning in unexpected areas began with the weak points of business accountability: the traceable bureaucracy of invoices, documents of incorporation and billing reconciliations from companies using the familiar paths and carriages of executive travel and global exchange. These pieces of paper bear the traces of small- and medium-enterprise America seeking profit from the outsourcing of prisoner trans­portation. The documents and the locations to which they refer are the everyday façades behind which global, public-private partnership operated. The photographs show only banal surfaces, unremarkable streets, furnishings, ornaments and detritus. Look at them and they reveal nothing. Look into them and they are charged with significance. They are veneers of the everyday under which the purveyors of detention and interrogation operated in plain sight.

The process of investigating these events ­proceeds in a puzzling order: revelations are veiled, significance emerges in retrospect, the central shifts to the peripheral, paradoxes and contra­dictions solidify and dissolve. It is an experience that, by turn, sheds light and acknowledges impenetrability. The act of photographing becomes not one of witnessing but an act of testimony, recreating parts of this network.

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Mallorca. Swimming pool in the Hotel Gran Meliá Victoria, Palma de Mallorca; September 2014. The rendition team and crew from N313P relaxed in the hotel in January 2004 after the transfers of Binyam Mohamed from Morocco to Afghanistan and of Khaled el-Masri from Macedonia to Afghanistan. Binyam Mohamed was held in Guantánamo Bay between 2004 and 2009, when he was released without charge

In piecing together evidence of rendition, our account includes locations where nothing happened and people who never existed. A flight crew, enjoying a rest and recuperation stop in Palma de Mallorca, travelled under false names with no addresses other than anonymous PO boxes. A plane filed a flight plan for Helsinki but never arrived there, going instead to Lithuania, then recorded its onward destination as Portugal while travelling to Cairo. A company registered in Panama and Washington DC gave power of attorney to a man whose address turned out to be a student dormitory where no one of that name was known. A series of letters, purportedly from the US State Department, accrediting air crew to give “global support to US Embassies worldwide”, were all signed by Terry A Hogan – one name with many differing signatures.

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Billing reconciliation document, N308AB, Prime Jet and BaseOps, August 2004. (Document on file with Reprieve) In 2003, Computer Sciences Corporation (CSC), an IT support company, acquired DynCorp Systems and Solutions, a private military company, and with it a government aviation contract to organise flights at short notice for US government personnel. CSC made use of trip-planning companies to take care of arrangements such as overflight permissions, landing and handling fees. Here, trip planner BaseOps invoices operating company Prime Jet for services rendered to its aircraft N308AB between August 23 and August 25 2004. This plane carried black site prisoner Laid Saidi from Afghanistan, where he had been imprisoned by the CIA for 15 months, to Algeria, where he was released without charge

These are all masks, obscuring by design and revealing by accident. The most common form in which the appearance of disappearance is found, however, is the simple black line: the redaction or strikeout. Sometimes this can be applied to entire paragraphs, pages. From these black lines many things can be perceived. Every black line has to hide something.

. . .

While contemplating these abstractions, we should remember that principally what disappeared here is people. They remained disappeared for between half a dozen and 1,600 days, as far as records – eventually released in 2014 by the Senate Intelligence Committee, in a form that was almost entirely redacted but still susceptible to interpretation – can determine. What also disappeared is the law. In the US, Europe, in almost all the world, the law is very clear: no secret detention, no torture. But sometimes the law is a mirage. The law can determine – has determined, indeed – which firm owes how much money to which other firm for performing prisoner transport flights. But who set up and ran the secret prisons, where, how? Who was responsible? Even as the answers become increasingly well attested, these questions remain beyond the law’s vanishing point. The documents and photographs that we have excavated are physical artefacts of extraordinary rendition. At a time when one US president has failed to close the Guantánamo Bay detention camps after two terms, and one of his prospective successors wants to “bring back a hell of a lot worse than waterboarding”, the negative publicity evoked by these images is an indication of how the law vanished.

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New York. Richmor Aviation’s office at Columbia County Airport, New York; February 2013. In early 2005, Richmor Aviation’s Gulfstream jet N85VM was publicly implicated in the CIA’s 2003 abduction of the Egyptian cleric Abu Omar from Milan, Italy. A year and a half after the jet’s role was publicised, Richmor’s president Mahlon Richards wrote to aircraft brokerage firm Sportsflight. Despite the re-registration of the plane, it would, he said, ‘always be linked to renditions’. Shortly afterwards he took Sportsflight to court for money owed. In this section of the court transcript, Richards describes how N85VM flew to Italy, Afghanistan, Guantánamo Bay, ‘to every place’. The purpose was to pick up ‘a bad guy’. The court clerk has corrected the misheard ‘theorists’ to ‘terrorists’. The judge agreed with Richmor’s assessment that the context of renditions was ‘irrelevant and immaterial’ to the case. Sportsflight was ordered to compensate Richmor for its lost earnings

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Transcript of the cross-examination of Mahlon Richards, Richmor Aviation Inc vs Sportsflight Air Inc, Supreme Court of the State of New York, County of Columbia, Index No 07-2171, July 2 2009

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Afghanistan. Site in north-east Kabul, now obscured by new factories and compounds, believed to have been the location of the Salt Pit; October 2013. The Salt Pit is the name commonly given to the CIA’s first prison in Afghanistan, which began operating in September 2002. Dozens of prisoners were held there over the next 18 months. Gul Rahman, a young Afghan detainee, died of hypothermia there in November 2002. He was buried in an unmarked grave. The US Senate’s report on the CIA programme described how detainees ‘were kept in complete darkness and constantly shackled in isolated cells with loud noise or music and only a bucket to use for human waste’. Members of a visiting delegation from the Federal Bureau of Prisons commented that they had ‘never been in a facility where individuals are so sensory deprived’. The site was closed in 2004 and replaced by a purpose-built facility

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Sketches by Mohammed Shoroeiya, a Libyan opposed to the Gaddafi regime, of two of the torture devices used on him in a CIA prison in Afghanistan, where he was kept for a year in 2003-04. They show a small wooden box in which he was locked, and a waterboard to which he was strapped. Other drawings showed a narrow windowless box in which he was held naked for one and a half days. According to the US Senate report, Shoroeiya was ‘walked for 15 minutes every half hour through the night and into the morning’ to prevent him from sleeping. He said: ‘They wouldn’t stop until they got some kind of answer from me.’ In August 2004 he was flown by a CIA-contracted jet to Libya, where he was imprisoned. He was finally released in February 2011. (©Mohammed Shoroeiya from Human Rights Watch report, Delivered Into Enemy Hands: US-Led Abuse and Rendition of Opponents to Gaddafi’s Libya, 2012)

‘Negative Publicity: Artefacts of Extraordinary Rendition’, by Edmund Clark and Crofton Black, is published by Aperture/the Magnum Foundation, £50; aperture.org/flowers gallery.com.

The authors will be in conversation with Julian Stallabrass at the Courtauld Institute on Wednesday March 23, admission free; courtauld.ac.uk.

Images from ‘Negative Publicity’ will be included in an exhibition of Edmund Clark’s work at the Imperial War Museum, London, from July 28 2016 to August 28 2017

Photographs: Edmund Clark, Courtesy of Flowers Gallery London and New York


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