First, a bit of background information: Over the past decade, the European Central Bank, the Bank of Japan and central banks in Denmark, Switzerland and Sweden have been experimenting with negative interest rates. In other words, banks are forced to pay surplus money to their park at the central bank.
Once unthinkable, negative interest rates are now an accepted practice, even if they have a spotty track record in achieving their stated policy goals. In addition, negative interest rates are entrenched, with only Sweden succeeding in stripping its economy of stimulus and bringing interest rates back into positive territory.
The pandemic has increased the need for monetary stimulus, and with further interest rate cuts, central banks have responded to negative interest rates by buying huge numbers of bonds and other assets to support their economies. The US Federal Reserve and the Bank of England, which have long resisted negative interest rates, are now under tremendous pressure to follow the course of Europe and Japan.
The Bank of England has been flirting with going negative for a while. Policymakers gave banks another six months on Thursday to prepare for negative interest rates, insisting they should not be seen as inevitable. Ultimately, the biggest drop in production in centuries could force UK interest rates into negative territory, making the US Federal Reserve the only major central bank not to take the plunge.
The pandemic is also pushing government spending around the world to its limits. According to Capital Economics, the combined fiscal response is 12% of global GDP, compared to 2% of global GDP after the 2008 financial crisis. Stimulus spending helped push the US fiscal 2020 deficit to $ 3.1 trillion, and the country’s debt was $ 21 trillion – the largest share of the economy since 1946, when it came out of World War II.
There are a number of reasons why most economists are not overly concerned about shortages right now. The first is that government spending is needed to prevent economies from going even deeper into recession. The second is that low interest rates mean it is cheaper for governments to borrow to finance the stimulus.
Neil Shearing, group economist at Capital Economics, said deficits become a problem if they remain high, either due to persistently high spending or significantly lower tax revenues. But the economy can recover relatively quickly once the pandemic is over. Looking even further ahead, low interest rates will help keep public debt from spiraling out of control.
All this is not to say that some countries will not have to undergo a period of fiscal austerity once the pandemic is over. But most governments, especially those whose central banks can back their bond markets, have time to assess the extent of the damage. and determine an appropriate response, ”Shearing said.
But there are still risks. The sheer amount of stimulus unleashed by governments has obscured some of the economic trauma caused by the pandemic, especially in Europe, where job support programs have kept companies afloat and workers in employment. There is a chance that when the health crisis recedes and aid is withdrawn, unemployment and bankruptcy will rise dramatically.
“If there is really large-scale, long-term damage to the economy’s production potential, it will affect your ability to increase tax revenues in the future, and your chances of running large deficits now are markedly less as the damage becomes more permanent” said David Miles, a professor of financial economics at Imperial College Business School.
In the face of mass unemployment and bankruptcy, most governments have put aside concerns about the deficit for the time being. The same is true for monetary policy concerns, suggesting that ultra-low interest rates will remain for the time being.
“A world where unemployment is rising to significantly higher levels is probably one where inflationary pressures are not building up much at all, and that’s a world where central banks will not rush to raise interest rates,” said Miles, of 2009. was a member of the Bank of England’s Monetary Policy Committee until 2015.
One problem: Keeping interest rates low limits the ability of central banks to respond to the next crisis, just as the global financial crisis and eurozone debt saga kept interest rates low in the run-up to the pandemic. But central bankers must face the current crisis before returning to more conventional policies.
“You’d cut your nose off to keep your face off if you thought, let’s get interest rates up to 3% so that if things get worse in the future, we can bring them down to zero,” Miles said. .
“You go into the next problem, if something like this happens, with limited ammunition on the monetary policy side, but that doesn’t mean there is an easy answer,” he added.
The man who could shake up the gig economy
Marty Walsh may not seem like the person to review the gig economy. He’s advocated for construction workers for years and spent less time on the intricacies of on-demand work at billion dollar tech companies.
Millions of Americans have lost their jobs because the health crisis sparked an economic crisis. And many turned to companies like Uber, Instacart and DoorDash as a backstop for their livelihoods.
At the same time, these companies are trying to defend a controversial business model, one in which they treat their employees as independent contractors rather than employees who would be entitled to traditional benefits and protections such as work accidents, unemployment insurance, family leave, sick leave, or the right to associate.
“Right now, we are at a crossroads,” said Shannon Liss-Riordan, a Boston labor attorney who has challenged Uber and Lyft over the classification of workers for seven years in several lawsuits. “If he rises to the challenge, Marty Walsh could have one of the biggest impacts on labor in this country since Frances Perkins,” she said, referring to Franklin D. Roosevelt’s labor secretary, who was the lead architect behind the New Deal.
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Friday: UK GDP; Market holiday in China, South Korea, Singapore
Correction: An earlier version of this story incorrectly stated US debt. It stands at $ 21 trillion.