...Cheap and abundant money perpetuates overcapacity, which exceeds 25% in the main economies of the OECD, by keeping highly indebted, low-productivity sectors “zombified” through perennial refinancing of non-performing loans. Money is cheap, and many sectors that generate returns well below cost of capital simply survive thanks to cheap debt, but fundamentals remain poor. Additionally, weak growth comes from the combination of excess debt, which has soared to 225% of global GDP according to the IMF; while consumption, commerce and internal demand remain disappointing because the tax burden has risen to all-time highs, according to the OECD....
The first unintended consequence of excess liquidity and cheap money is an indirect subsidy for low-productivity and high-debt economic agents. That is why money velocity collapses and productivity growth is extremely poor in almost every developed economy....
...The second unintended consequence is that the failed policy of creating inflation in the real economy has in fact generated a worryingly high inflation in financial assets.
As low rates and high liquidity perpetuate overcapacity and financial repression burdens potential growth, the extreme liquidity is directed to liquid financial assets. Bond yields are at the lowest seen in history, with the so-called higher risk “high-yield” bonds issued at the lowest rate in 40 years. In the meantime, stock market valuations have reached bubble-type multiples, surpassing fundamental levels using any metric, including Shiller’s price-to-earnings ratio....
....The idea that imbalances created by central-bank policy are not an issue because they can be covered by even more extreme policies is simply incorrect...financial repression does not force economic agents to invest and consume more in the real economy, and long-term it makes them more cautious, focusing on short-term liquid assets...
...an escape from this central-bank trap, ... The key is to normalize monetary policy while at the same time promoting a growth-oriented fiscal policy. When I mention growth-oriented fiscal policy, this by no means entails deficit spending and even more white elephants under the disguise of “infrastructure”. An effective fiscal policy has to focus on rebuilding the middle class, increasing disposable income by lowering the tax burden, and for companies, supporting the development of high-productivity and technology industries.
...while yields in government and corporate bonds have collapsed due to monetary policy, debt-servicing capabilities have not improved, and in cases have markedly deteriorated...
...The focus of governments and central banks must be to prevent the next crisis by returning to sound money and fiscal policies that support the middle class as well as small and medium enterprises...Increasing the tax burden is not solving the fiscal problem, and will not do so if policymakers persist in penalising the productive to finance the indebted ...
No comments:
Post a Comment