The European Central Bank unexpectedly lowered all its interest rates to fresh record lows and took its rate on bank deposits further into negative territory, in an effort to keep ultralow inflation rates from undermining the eurozone’s fragile recovery.
The Bundesbank promptly responded that the rate cuts will have a “negligible” impact, and the BUBA is almost certainly right about that as well. No matter how low a rate, borrowing makes no sense if there is little underlying demand for a businessman’s product. Nor does it makes sense for a consumer with a stagnant income and tenuous employment prospects to take on yet more debt.
Which is why Draghi ventured into the realm of fiscal policy last week at Jackson Hole. He knows that at a basic level, spending=income and if the private sector isn’t yet ready to do the spending (because it is repairing its collective balance sheets), then this has to be undertaken by the government.…In addition, I think that the expectation is that a lower interest rate will effectively devalue the euro somewhat, thereby stimulating external demand from outside the EZ. So the plan is still to use the external sector as an offset rather than fiscal policy. This is a reason that Germany is applauding a weakening of the euro, being an export-driven economy that can no longer rely on the EZ to import its products due to austerity.
Macrobits by Marshall Auerback
Draghi Surprises With Rate Cuts; Will It Matter?
Marshall Auerback
5 comments:
"Draghi ventured into the realm of fiscal policy last week at Jackson Hole. He knows that at a basic level, spending=income and if the private sector isn’t yet ready to do the spending (because it is repairing its collective balance sheets), then this has to be undertaken by the government.…"
I'm not convinced of this when the financial journalist Joe Wiesenthal makes the following comment in one of his articles about Draghi's recent speech at the Jackson Hole Symposium:-
"Early on in the speech, when introducing austerity, he drops this line:
'The necessary fiscal consolidation had to be frontloaded to restore investor confidence, creating a fiscal drag and a downturn in public sector employment which added to the ongoing contraction in employment in other sectors.'
This line about how fiscal consolidation had to be frontloaded (i.e. the cuts had to happen right away) in order to restore confidence, is, to use a term of economics, BS."
http://www.businessinsider.com/mario-draghis-speech-at-jackson-hole-2014-8
According to neoclassical economics, the #1 cause of drag is lack of confidence by business, curtaining investment, and wage inflexibility, where workers demand more than their marginal product, is #2.
Neoclassical theory attributes both of these, as well as other factors that reduce economic efficiency and effectiveness, to government policy.
Draghi is just reciting the neoliberal playbook.
Keynes also thought lack of confidence was a major factor: he called confidence, more wittily, "animal spirits".
Yes, but
The neoclassical view is that lack of confidence that inhibits investment in downturns even with low interest is the result of government policy, which needs to be tightened to restore confidence, based on the erroneous belief that loose fiscal policy crowds out investment. This is the Treasury view based on loanable funds.
Keynes also held that business confidence was low in downturns, but he held that the reason was lagging effective demand resulting in slow sales and accumulation of unplanned inventory due to increased saving in the face of uncertainty and insufficient income to both save at the desired level and also spend.
Keynes also agreed that the issue was government policy, but instead of tightening he recommended loosening with fiscal stimulus to address lagging demand.
So similar analysis in a sense. Both neoclassicals and Keynes agree that the potential for firms to borrow in order to invest is still available in downturns and that firms do not take advantage of low cost borrowing owing to lack of confidence. But from that point the analysis diverges sharply.
Neoclassicals recommend "expansionary fiscal austerity" to bolster confidence that government is acting responsibly in a disciplined way and not competing with the private sector for funds, whereas Keynes held that the issue was really lack of demand sending a signal to firms to cut back production and not invest when they had spare capacity already. He recommended that fiscal policy be used to stimulate demand to send a signal to business to start investing again to take advantage of it.
So the issue hung on the Treasury view, which became discredited and now it is back and we are having the same fight again.
Lowering your prices works every time in the US...
I'm not sure the policy rate that is set by the ECB has anything to do with it... but the European firms have put their wares on sale this summer in USD terms, and the exchange rate is now reflecting this... they will sell more wares in the US because of this...
When (if ever?) the US starts to recover in earnest, they will start to move the prices of their wares back up...
It all is a function of what is happening in the US...
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