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Three economic crises, cutting rates and banning cash – The Economist 09-18-15

Salient to Investors:

Andy Haldane at the Bank of England said:

  • Inflationary reputation is hard-earned and easily lost central bank promises to re-anchoring the rate at some future point is damaging to macro-economic stability.
  • Further QE, especially making it permanent, risks blurring the boundary between monetary and fiscal policy and hurts central bank independence.
  • The “Anglo-Saxon” crisis of 2008-09, the “Euro-Area” crisis of 2011-12 and the potential “Emerging Market” crisis of 2015 onwards are all caused by huge global liquidity, inflated then deflating capital flows, credit, asset prices and growth in different markets and regions. The emerging market growth cycle has turned decisively – The IMF forecasts growth will slow to below 4% in 2015.
  • The risk to UK growth and to UK inflation at the two-year horizon is significantly to the downside, so raising UK interest rates is a ways off.

The average central bank rate decrease in a recession is 3%- 5%, currently not possible, so central banks have 3 options. A) Increase the inflation target, say from 2% to 4% – acceptable because economists believe only double-digit rates are damaging – to try to get workers to demand higher wages to compensate and so create inflationary pressures. B) More QE. C) Impose negative interest rates on commercial bank reserves, which would result in consumers keeping their money out of banks.

Read the full article at http://www.economist.com/blogs/buttonwood/2015/09/economics-and-monetary-policy

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