Keystone Pipeline

The World’s Monetary Dead End

David Malpass wrote in the WSJ on January 21, 2015:

The European Central Bank embraces quantitative easing despite the sorry track record of ‘helicopter money.’

By 

DAVID MALPASS

Jan. 21, 2015 7:17 p.m. ET

228 COMMENTS

Central banks in the U.S., Japan and Europe are trapped in a loop. They are fully invested in the theory that zero rates and bond buying are stimulative and add to inflation, yet growth, inflation and median incomes keep going down.

On Thursday the European Central Bank is likely to announce a bond-buying binge that could reach €50 billion ($58 billion) a month, yet many bond yields in Europe are already negative. Buying low-yielding bonds is a dead end for growth. The Bank of Japan has already bought bonds worth more than 50% of its gross domestic product with no growth impact. And ECB bond-buying will be a major new political negative if it gives European governments a further excuse to avoid economic reforms.

Central bankers should be forcefully urging their governments to pursue practical growth-oriented solutions that encourage private investment and hiring. Instead, they’ve allowed the focus to be on them and their decisions to prolong quantitative easing—even though QE hasn’t worked.

Central-bank liabilities have grown by an extraordinary $7 trillion since the 2008 crisis, yet many parts of the world are in or near recession, including Japan, Latin America, Eastern Europe and most of the eurozone. The World Bank and International Monetary Fund have just lowered their 2015 global growth forecasts, and the IMF is expected to knock more than $5 trillion off its October estimate of 2015 world GDP due to recent declines in commodities and currencies and the slide toward deflation.

Central bankers apparently believe deflation can still be halted by what Milton Friedman called a “helicopter drop” of money, but it isn’t clear they have the right tools. Bank reserves are already in massive excess. Adding more, as the ECB is expected to do, won’t add growth or stop the price declines because there’s no longer any link from central-bank reserves to private-sector money. To “helicopter” money into private enterprises would require regulators giving a green light to banks to take on more leverage (unlikely given past bank errors) or central banks taking on credit risk, not a wise course.

A better approach would be growth the old-fashioned way through robust after-tax profits at small businesses, investment in startups and more jobs. In most of the developed world, that kind of growth has been on hold, waiting to find a path through regulatory obstacles.

The risk, as inflation rates fall into negative territory, is that central banks will double down on their current set of ineffective policies, making matters worse and allowing recessions and deflation to spread. The U.S. consumer-price index fell 0.4% in December and is on track for another large decline in January. As a result, the Federal Reserve is sending signals that it may delay rate hikes, though six years of near-zero rates haven’t produced satisfactory growth or price stability.

These signals are self-defeating. If the public sees prices declining and senses further delay in interest-rate hikes, why buy a house or business now? The same reluctance to change policy stalled the Fed’s 2013 plan to taper its bond purchases, but when the Fed finally moved forward a year ago, bank lending and growth surged.

Near-zero rates channel credit to the safest borrowers—the government, corporations and the wealthy—at the expense of small savers, small businesses and median incomes. In a market system, credit is allocated based on the price of credit and the riskiness of the borrower.

In our current system, however, the government is setting the price through zero rates and bond buying. It’s also controlling the amount of bank credit through regulatory policy and leverage standards. The result is a channeling of credit to the safest borrowers, which are seldom the best job creators. Even some banks get crowded out because the zero-rate policy has put the interbank market into a deep freeze—there’s less reason for one bank to lend to another with rates this low.

The ECB is facing its own low-rate trap. To make up for antigrowth government policies, the ECB pushed interest rates below zero, creating new problems for growth and lending. It’s now planning to buy low-yielding government bonds, offering the sellers a bank deposit at the ECB that pays a negative interest rate. With bank leverage controlled by regulators, the banks won’t have more assets but simply a different, less growth-oriented mix of assets that includes fewer loans to small businesses and more deposits at the ECB. To fund the Fed’s QE, the U.S. banking system has had to devote nearly 20% of total bank assets to the Fed’s bond purchases, mostly at the expense of other lending.

Forcing Europe’s bank assets to pass through the ECB into government bonds can’t restore Europe’s growth, especially with many bond yields already negative. Observing these problems, Switzerland last week broke its three-year alliance with the eurozone. The Swiss National Ban k had been buying large quantities of euro-denominated assets—stocks, bonds and bills—as needed to keep the Swiss franc linked to the euro. That made sense in 2011-13 when it seemed that Germany and the ECB were working together to promote structural reforms that might repair Europe’s economy and maintain the euro’s value.

But the ECB is now using QE to promote the devaluation of the euro as a way to make up for Europe’s uncompetitive tax and regulatory policies, much like the Bank of Japan has done with the yen without causing growth. Germany’s representatives on the ECB board may vote against the ECB’s bond-buying scheme and have challenged its usefulness, concerns that made Switzerland uncomfortable investing more in the euro.

To his credit, ECB President Mario Draghi has been vocal about the need for governments to reduce both spending and taxes. It would go a long way toward quelling deflation fears and restoring Europe’s growth if he used bond buying to gain structural reforms rather than merely following Japan’s lead into no-growth QE.

Mr. Malpass is president of Encima Global LLC. He served as deputy assistant Treasury secretary in the Reagan administration and deputy assistant secretary of state in the George H.W. Bush administration.

'Diversity' in Action'

Thomas Sowell wrote on January 20, 2015 in RealClear Politics:

Islamic terrorist attacks in Europe, and European governments' counter-attacks are more than just a passing news story.
Europe is currently in the process of paying the price for years of importing millions of people from a culture hostile to the fundamental values of Western culture. And this is by no means the last of the installments of that price, to be paid in blood and lives, for smug elites' Utopian self-indulgences in moral preening and gushing with the magic word "diversity."

Generations yet unborn will still be paying the price, whether in large or small installments, depending on how long it takes for the West to jettison Utopianism and come to grips with reality.
Meanwhile, in the United States, no one seems to be drawing any lessons about the dangers of importing millions of people from fundamentally different cultures across our open border. In America, "diversity" has still not yet lost its magical ability to stop thought in its tracks and banish facts into the outer darkness.
Perhaps here, as in Europe, that verbal magic can only be washed away in the blood of innocent victims, many of them yet unborn.
To cross our open border with Mexico, you don't have to be Mexican or even from Central America. You can be from Iran, Syria or other hotbeds of Middle Eastern terrorism.
It is one of the monumental examples of political irresponsibility that the southern border has not been secured during administrations of either party, despite promises and posturing.
Many fine people have come here from Mexico. But, as with any other group, some are just the opposite. With open borders, however, we don't even know how many people who cross that border are Mexican, much less anything more relevant, like their education, diseases, criminal records or terrorist ties.
There are some politicians -- both Democrats and Republicans -- who just want to get the issue behind them, and are prepared to leave the consequences for others to deal with in the future, just as they are leaving a staggering national debt for others to deal with in the future.
These consequences include irreversible changes in the American population. Ethnic "leaders" and welfare state goodies guarantee the fragmentation of the population, with never-ending strife among the fragments. People who enter the country illegally will get, not only equal benefits with the American people who created those benefits, they will get more than many American citizens, thanks to affirmative action.
We cannot simply let in everyone who wants to come to America, or there will be no America to come to. Cultures matter -- and not all cultures are mutually compatible, as Europeans are belatedly learning, the hard way. And "assimilation" is a dirty word to multiculturalists.
State and local officials who blithely violate their oath to uphold the law, and indulge themselves in the moral posturing of declaring their domains to be "sanctuaries" for people who entered the country illegally, are unlikely to reconsider until disastrous consequences become far too big to ignore -- which is to say, until it is too late.
Meanwhile, harsh punishments are reserved for people in business who fail to carry out the law-enforcement duties that elected officials openly declare they are not going to carry out.
To many in the media, the only question seems to be whether we are going to be "mean-spirited" toward people who want to come here -- especially children who were brought here, or sent here, "through no fault of their own."
It is as if those children had some pre-existing right to be in the United States, which they could lose only if they did something bad themselves. But those children had no more right to be here than children in India, Africa or other places with millions of children living in poverty.
Surely we can think ahead enough to realize that children living in this country illegally are going to grow up and have children of their own, with cultures and values of their own -- and ethnic "leaders" to promote discontent and hostility if they don't get as good results as people who have the prevailing American culture, beginning with the English language.
You can't wish that away by saying the magic word "diversity" -- not after we have seen what "diversity" has led to in Europe. 

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Climate Change’s Instructive Past

 George F. Will Opinion writer January 7 at 8:01 PM wrote in the Washington Post:

We know, because they often say so, that those who think catastrophic global warming is probable and perhaps imminent are exemplary empiricists. They say those who disagree with them are “climate change deniers” disrespectful of science.

Actually, however, something about which everyone can agree is that of course the climate is changing — it always is. And if climate Cassandras are as conscientious as they claim to be about weighing evidence, how do they accommodate historical evidence of enormously consequential episodes of climate change not produced by human activity? Before wagering vast wealth and curtailments of liberty on correcting the climate, two recent books should be considered.

In “The Third Horseman: Climate Change and the Great Famine of the 14th Century,” William Rosen explains how Europe’s “most widespread and destructive famine” was the result of “an almost incomprehensibly complicated mixture of climate, commerce, and conflict, four centuries in gestation.” Early in that century, 10 percent of the population from the Atlantic to the Urals died, partly because of the effect of climate change on “the incredible amalgam of molecules that comprises a few inches of soil that produces the world’s food.”

In the Medieval Warm Period (MWP), from the end of the ninth century to the beginning of the 14th, the Northern Hemisphere was warmer than at any time in the past 8,000 years — for reasons concerning which there is no consensus. Warming increased the amount of arable land — there were vineyards in northern England — leading, Rosen says, to Europe’s “first sustained population increase since the fall of the Roman Empire.” The need for land on which to grow cereals drove deforestation. The MWP population explosion gave rise to towns, textile manufacturing and new wealthy classes.

Then, near the end of the MWP, came the severe winters of 1309-1312, when polar bears could walk from Greenland to Iceland on pack ice. In 1315 there was rain for perhaps 155 consecutive days, washing away topsoil. Upwards of half the arable land in much of Europe was gone; cannibalism arrived as parents ate children. Corpses hanging from gallows were devoured.

Human behavior did not cause this climate change. Instead, climate warming caused behavioral change (10 million mouths to feed became 30 million). Then climate cooling caused social changes (rebelliousness and bellicosity) that amplified the consequences of climate, a pattern repeated four centuries later.

In “Global Crisis: War, Climate Change and Catastrophe in the Seventeenth Century,” Geoffrey Parker, a history professor at Ohio State University, explains how a “fatal synergy” between climatological and political factors produced turmoil from Europe to China. What he calls “the placenta of the crisis” of that century included the Little Ice Age (LIA), between the 1640s and the 1690s. Unusual weather, protracted enough to qualify as a change in climate, correlated so strongly with political upheavals as to constitute causation.

Whatever caused the LIA — decreased sunspot activity and increased seismic activity were important factors — it caused, among other horrific things, “stunting” that, Parker says, “reduced the average height of those born in 1675, the ‘year without a summer,’ or during the years of cold and famine in the early 1690s, to only 63 inches: the lowest ever recorded.”

In northerly latitudes, Parker says, each decline of 0.5 degrees Celsius in the mean summer temperature “decreases the number of days on which crops ripen by 10 percent, doubles the risk of a single harvest failure, and increases the risk of a double failure sixfold,” For those farming at least 1,000 feet above sea level, this temperature decline “increases the chance of two consecutive failures a hundredfold.”

The flight from abandoned farms to cities produced the “urban graveyard effect,” crises of disease, nutrition, water, sanitation, housing, fire, crime, abortion, infanticide, marriages forgone and suicide. Given the ubiquity of desperation, it is not surprising that more wars took place during the 17th-century crisis “than in any other era before the Second World War.”

By documenting the appalling consequences of two climate changes, Rosen and Parker validate wariness about behaviors that might cause changes. The last 12 of Parker’s 712 pages of text deliver a scalding exhortation to be alarmed about what he considers preventable global warming. Neither book, however, supports those who believe human behavior is the sovereign or even primary disrupter of climate normality, whatever that might be. With the hands that today’s climate Cassandras are not using to pat themselves on the back for their virtuous empiricism, they should pick up such books.

http://wapo.st/1BNjqtp