Deflatie : Vloek of Zegen?

Transcription

1 Deflatie : Vloek of Zegen? Presentatie VBA Heiko de Boer 29 April 2015

2 Agenda Current Situation Keynes Theory Austrian School Theory ECB Policy Summary

3 Long term Inflation

4 BIS Report

5 BIS on Japan

6 BIS Conclusion Doubts about costs of deflation (even if persistent) Little evidence of debt deflation hypothesis (negative impact of increasing debt burden ) Evidence of property/asset deflation following surges, alongside strong credit Suggestions: 1. Constrain the build up of financial booms 2. Especially in the form of credit and property price increases ( being the main cause of the bust ) 3. Address nexus of debt and poor asset quality head-on, rather than relying on overly aggressive and prolonged macroeconomic accommodation

7 Keynes Current Situation Keynes Theory Austrian School Theory ECB Policy Summary

8 Keynes : Markets do not work Capitalistic structure does not work The free market will never be in equilibrium Savers and investors are 2 separate groups, not finding each other easily Wall Street = Stupid. It s (just..) a game to outsmart each other Private market participants do not know what they are doing. They assume what happened in the recent past will continue to happen Look to the State for Economic Leadership Government should allocate capital

9 Keynes: Interest rates are too high Interest rate determined by psycological factors and too high Fetish of Liquidity interest rate rises if demand for money is higher than supply of money Wealth owners may find lower rates unacceptable and block new investments High interest rates cause unemplyoment and poverty Solution: Centralisation, pushing interest rates to 0% ( possible within a generation ) If interest pushed to 0% all money will be supplied for funds ( aim is to increase capital ) Income to investors is 0 and to labor 100% full and fair employment

10 Keynes: Capital is Static Total Profits is difference between current receipts and current expenditure Profit = money rate of efficiency earnings of factors of production = E (Total Income)/ O (Total Output) Separates adding of new capital (investments) and reproduction of old capital (production)

11 Keynes: Stimulate Demand in crisis In crisis demand is lacking 1. Savings lie idle 2. Sudden collapse in profits (Marginal efficiency of capital) Consume more! Spend your way out of recession Hope is for millionaires to stop saving For natural disasters (earthquakes/wars increase wealth by using up savings) Economy improves and taxes will increase Wages cannot decrease need for monetary solution ( which effectively does the same )

12 Austrian School Current Situation Keynes Theory Austrian School Theory ECB Policy Summary

13 Classical vs Austrian Economists

14 Austrian Subjective Value Purpose of human action is to accomplish goals We chose by ranking goals based on preferences/utility/welfare Relative prices matter Ranking our values is a subjective process It is NEVER possible to measure utility The utility of the second unit of a good is less than of the first unit Money is an economic good, with supply and demand

15 Money Creation Process Money creation takes place primarily in banks, major control rests with central banks Mediaval Goldsmiths discovered they could make more loans by giving promises to pay to borrowers Currency and deposits held at CB count as Bank Reserves Central banks influence bank policies by varying total reserves and required reserve ratios CB purchases securities for X in open market from Dealer CB pays with electronic check drawn on itself amount X The Dealer s Bank Account (at Bank A) is credited X Payment for securities adds X to bank reserves of Bank A

16 Fractional Bank Reserves Excess Reserves MAY be used to increase earning assets (Loans/Investments) Vice versa, shortage of reserves WILL be used to reduce earning assets

17 Austrians: Money creation is not neutral Money is issued in credit Banks benefit Purchasing power of citizens furthest away from money creation source goes down Impact money creation on individual prices unknown 3 people each owning 2 of money Person 1 Person 2 Goldsmith 1 bread: 1 ½ bread ½ wine: 1 ½ bread ½ wine: 1 Goldsmith lends 2 to person 2

18 What is an interest rate? Austrians: Discount of future goods compared to current goods a category of human action Supply and demand of all individuals together is the time market Equilibrium is natural interest rate and also applies to Production Structure

19 Austrians: Money Growth Destablises Savers can always withdraw money, the bank issues long term loans Money growth is made possible though by our fractional banking system Additional loans are issued at lower interes rates This happens, even without monetary policies

20 Austrians: Boom - Bust Due to low discount rate, expected returns are overstated This causes mal-investments in the production structure At first there is a BOOM, followed by a bust Illiquid investments are written off, prices are correcting downwards End result: Welfare and Opportunity losses Austrians: a correction is fine and inevitable ECB is correcting the correction

21 Austrian View On Deflation Austrians on belief that with deflation consumers postpone (stop) consumption, prices fall further, wages/investments fall, etc: If prices go down 10%: rational to postpone consumption, mistakes have been made by entrepreneurs and producers People act upon relative prices and relative changes If prices go down, marginal utility of real money goes down people will spend more If prices go down, this WILL impact supply There is no evidence Deflation is fine A growing economy due to productivity increases and cost-efficiencies would be increasing the available resources for an expanding output.

22 Austrians on Keynes Markets do work, role of entrepreneur (including investor) is crucial Interest rate depends on time preference Maintaining a stable price level through credit expansion could bring about an imbalance between savings and investment Production structure is dynamic: it takes TIME to produce goods/services Only by saving (more) and by properly investing we can increase our welfare

23 Garrison s Framework* Stages of Investments * Figure bottom left added by presenter.

24 ECB Current Situation Keynes Theory Austrian School Theory ECB Policy Summary

25 ECB on Inflation The main purpose of the ECB and central banks in general is to maintain price stability Very important for maintaining our welfare Price stability to the ECB means inflation rates below but close to 2% over the medium term In order to achieve price stability, interest rates have to be kept low and money growth high. ECB: The short term impact of expansionary policies on the economy is unclear, because the transmission process is complex. On the short term there is a stimulating impact Unclear which prices go up In the long run prices will have gone up, but there is no impact on the real economy, employment and on our welfare.

26 ECB on Price Stability 2. ECB: If creditors can be sure that prices will remain stable in the future, they will not demand an extra return premium, to compensate them for the inflation risks associated withholding nominal assets over the longer term. By reducing such risk premia, thereby bringing about lower nominal interest rates, price stability contributes to the efficiency with which the capital markets allocate resources and therefore increases the incentives to invest. This again fosters job creation and, more generally, economic welfare.

27 ECB on Price Stability 5. Inflation can be interpreted as hidden tax on holding cash. In other words, people who hold cash (or deposits which are not remunerated at market rates) experience a decline in their real money balances and thus in their real financial wealth when the price level rises, just as if part of their money had been taxed away.

28 ECB Long run In the long run a change in the quantity of money supplied by the central bank (all things being equal) will only be reflected in a change in the general level of prices and will not cause permanent changes in real variables, such as real output or unemployment. A change in the quantity of money in circulation brought about by the central bank is ultimately equivalent to a change in the unit of account (and thereby in the general price level), which leaves all other variables stable, in much the same way as changing the standard unit used to measure distance (e. g. switching from kilometres to miles) would not alter the actual distance between two locations.

29 Summary Current Situation Keynes Theory Austrian School Theory ECB Policy Summary

30 Is deflation a problem? Austrians: no Keynes/ECB: yes Summary Are low interest rates good? Keynes/ECB: Yes, stimulates investments and demand Austrians: No, keeping interest very low causes instability What is the best policy approach? Keynes/ECB: HICP 2% Austrians: Accepting price deflation

31 Thank You