forward guidance

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pages: 361 words: 97,787

The Curse of Cash by Kenneth S Rogoff

Andrei Shleifer, Asian financial crisis, bank run, Ben Bernanke: helicopter money, Berlin Wall, bitcoin, blockchain, Boris Johnson, Bretton Woods, business cycle, capital controls, Carmen Reinhart, cashless society, central bank independence, cryptocurrency, debt deflation, disruptive innovation, distributed ledger, Edward Snowden, Ethereum, ethereum blockchain, eurozone crisis, Fall of the Berlin Wall, fiat currency, financial exclusion, financial intermediation, financial repression, forward guidance, frictionless, full employment, George Akerlof, German hyperinflation, illegal immigration, inflation targeting, informal economy, interest rate swap, Isaac Newton, Johann Wolfgang von Goethe, Johannes Kepler, Kenneth Rogoff, labor-force participation, large denomination, liquidity trap, Modern Monetary Theory, Money creation, money market fund, money: store of value / unit of account / medium of exchange, moral hazard, moveable type in China, New Economic Geography, offshore financial centre, oil shock, open economy, payday loans, price stability, purchasing power parity, quantitative easing, RAND corporation, RFID, savings glut, secular stagnation, seigniorage, The Great Moderation, the payments system, The Rise and Fall of American Growth, transaction costs, unbanked and underbanked, unconventional monetary instruments, underbanked, unorthodox policies, Y2K, yield curve

The basic idea is one we have already discussed earlier in this chapter: if the central bank cannot reduce the nominal interest rate at the zero bound, it can try to lower real interest rates by manipulating inflation expectations.34 The problem is that such policies are not necessarily credible if they involve allowing future inflation to drift above target, especially if the public believes that central banks have a strong aversion to inflation. The idea of forward guidance is to find practical ways to make the promise of inflation more concrete and easier to understand, and perhaps therefore more credible. Crudely put, forward guidance has the central bank telling markets, “We might not be able to lower interest rates now because of the zero bound, but we promise not to raise them later until our output and inflation projections become substantially stronger. Even then we won’t raise them as fast as we usually would.” Ideally, this reassurance is accompanied by concrete guideposts. This type of forward guidance is sometimes referred to as data-dependent forward guidance, because it basically aims to specify a reaction function to the data.

This type of forward guidance is sometimes referred to as data-dependent forward guidance, because it basically aims to specify a reaction function to the data. There is also calendar-based forward guidance, where the central bank says, “We promise not to raise policy rates for at least 6 months” or, as in 2015, many Fed officials insisted, “Rates will begin rising away from the zero bound before the end of this year,” as in fact they did in December 2015.35 The main practical problem with both types of forward guidance is that it is hard for the central bank to credibly make promises in a world where there is regular turnover of policy board members, not to mention of the politicians who ultimately oversee central banks.

Some have argued that the zero bound hasn’t really turned out to be all that important, because central banks have found pretty good ways to get around it, using unconventional tools such as “forward guidance” and “quantitative easing.” The first involves telling investors that the monetary authorities intend to elevate inflation in the future, even if they cannot do it now. When it works, forward guidance succeeds in bringing down the real interest rate, even if the nominal interest rate is stuck at zero, since of course the real interest rate is the nominal interest rate minus the expected rate of inflation.


pages: 466 words: 127,728

The Death of Money: The Coming Collapse of the International Monetary System by James Rickards

Affordable Care Act / Obamacare, Asian financial crisis, asset allocation, Ayatollah Khomeini, bank run, banking crisis, Bear Stearns, Ben Bernanke: helicopter money, bitcoin, Black Swan, Bretton Woods, BRICs, business climate, business cycle, buy and hold, capital controls, Carmen Reinhart, central bank independence, centre right, collateralized debt obligation, collective bargaining, complexity theory, computer age, credit crunch, currency peg, David Graeber, debt deflation, Deng Xiaoping, diversification, Edward Snowden, eurozone crisis, fiat currency, financial innovation, financial intermediation, financial repression, fixed income, Flash crash, floating exchange rates, forward guidance, G4S, George Akerlof, global reserve currency, global supply chain, Growth in a Time of Debt, income inequality, inflation targeting, information asymmetry, invisible hand, jitney, John Meriwether, Kenneth Rogoff, labor-force participation, Lao Tzu, liquidationism / Banker’s doctrine / the Treasury view, liquidity trap, Long Term Capital Management, mandelbrot fractal, margin call, market bubble, market clearing, market design, Modern Monetary Theory, Money creation, money market fund, money: store of value / unit of account / medium of exchange, mutually assured destruction, Nixon triggered the end of the Bretton Woods system, obamacare, offshore financial centre, oil shale / tar sands, open economy, Plutocrats, plutocrats, Ponzi scheme, price stability, quantitative easing, RAND corporation, reserve currency, risk-adjusted returns, Rod Stewart played at Stephen Schwarzman birthday party, Ronald Reagan, Satoshi Nakamoto, Silicon Valley, Silicon Valley startup, Skype, sovereign wealth fund, special drawing rights, Stuxnet, The Market for Lemons, Thomas Kuhn: the structure of scientific revolutions, Thomas L Friedman, too big to fail, trade route, undersea cable, uranium enrichment, Washington Consensus, working-age population, yield curve

The criteria on which the Fed might change its mind were unclear, and so the impact of forward guidance was muted. A debate raged within the Fed about whether forward guidance should be converted from an ever-changing series of dates to a set of hard numeric goals that were more easily observed. This debate was captured in historic and analytic detail in a paper presented by Michael Woodford of Columbia University at the Fed’s Jackson Hole Symposium at the end of August 2012. While Woodford’s argument is nuanced, it boils down to one word—commitment. His point was that forward guidance is far more effective in changing behavior today if that guidance is clear and framed in such a way that the central bank will not repudiate the guidance in the future: A . . . reason why forward guidance may be needed . . . is in order to facilitate commitment on the part of the central bank. . . .

While the Fed is focused on the intended effects of its policies, it seems to have little regard for the unintended ones. ■ The Asymmetric Market In the Fed’s view, the most important part of its program to mitigate fear in markets is communications policy, also called “forward guidance,” through which the Fed seeks to amplify easing’s impact by promising it will continue for sustained periods of time, or until certain unemployment and inflation targets are reached. The policy debate over forward guidance as an adjunct to market manipulation is a continuation of one of the most long-standing areas of intellectual inquiry in modern economics. This inquiry involves imperfect information or information asymmetry: a situation in which one party has superior information to another that induces suboptimal behavior by both parties.

Bernanke’s logic is deeply flawed because it supposes that the agency that reduces uncertainty does not also add to uncertainty by its conduct. When the Fed offers forward guidance on interest rates, how certain can investors be that it will not change its mind? When the Fed says it will raise interest rates upon the occurrence of certain conditions, how certain can investors be that those conditions will ever be satisfied? In trying to remove one type of uncertainty, the Fed merely substitutes a new uncertainty related to its ability to perform the first task. Uncertainty about future policy has been replaced with uncertainty about the reliability of forward guidance. This may be the second derivative of uncertainty, but it is uncertainty nonetheless, made worse by dependence on planners’ whims rather than the market’s operation.


pages: 354 words: 105,322

The Road to Ruin: The Global Elites' Secret Plan for the Next Financial Crisis by James Rickards

"Robert Solow", Affordable Care Act / Obamacare, Albert Einstein, asset allocation, asset-backed security, bank run, banking crisis, barriers to entry, Bayesian statistics, Bear Stearns, Ben Bernanke: helicopter money, Benoit Mandelbrot, Berlin Wall, Bernie Sanders, Big bang: deregulation of the City of London, bitcoin, Black Swan, blockchain, Bonfire of the Vanities, Bretton Woods, British Empire, business cycle, butterfly effect, buy and hold, capital controls, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, cellular automata, cognitive bias, cognitive dissonance, complexity theory, Corn Laws, corporate governance, creative destruction, Credit Default Swap, cuban missile crisis, currency manipulation / currency intervention, currency peg, Daniel Kahneman / Amos Tversky, David Ricardo: comparative advantage, debt deflation, Deng Xiaoping, disintermediation, distributed ledger, diversification, diversified portfolio, Edward Lorenz: Chaos theory, Eugene Fama: efficient market hypothesis, failed state, Fall of the Berlin Wall, fiat currency, financial repression, fixed income, Flash crash, floating exchange rates, forward guidance, Fractional reserve banking, G4S, George Akerlof, global reserve currency, high net worth, Hyman Minsky, income inequality, information asymmetry, interest rate swap, Isaac Newton, jitney, John Meriwether, John von Neumann, Joseph Schumpeter, Kenneth Rogoff, labor-force participation, large denomination, liquidity trap, Long Term Capital Management, mandelbrot fractal, margin call, market bubble, Mexican peso crisis / tequila crisis, Money creation, money market fund, mutually assured destruction, Myron Scholes, Naomi Klein, nuclear winter, obamacare, offshore financial centre, Paul Samuelson, Peace of Westphalia, Pierre-Simon Laplace, Plutocrats, plutocrats, prediction markets, price anchoring, price stability, quantitative easing, RAND corporation, random walk, reserve currency, RFID, risk free rate, risk-adjusted returns, Ronald Reagan, Savings and loan crisis, Silicon Valley, sovereign wealth fund, special drawing rights, stocks for the long run, The Bell Curve by Richard Herrnstein and Charles Murray, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, theory of mind, Thomas Bayes, Thomas Kuhn: the structure of scientific revolutions, too big to fail, transfer pricing, value at risk, Washington Consensus, Westphalian system

This did not mean public relations or press liaison. The communications role meant Faust was consigliere and chief wordsmith with respect to forward guidance. Forward guidance is a central bank’s main monetary tool in a world of zero or low rates. The Fed uses forward guidance to manipulate market expectations. Manipulation allows the Fed to tighten or ease policy without changing rates. Instead the Fed changes expectations about rates. This is done with words in speeches, statements, minutes, and press leaks. Those words are forward guidance, and Faust wrote the words. Although not a board member, Faust was arguably the third most powerful figure at the Fed after the chairman and William C.

Other market crashes included the burst dot-com bubble in 2000, and the market break after the 9/11 attacks. What was new was that none of these crises involved widespread bank defaults or closures. Without a gold standard, money was now elastic. There was no limit to the liquidity central banks could provide through money printing, guarantees, swap lines, and promises of extended ease called forward guidance. Money was free, or nearly free, and available in unlimited quantities. This new system was not always neat and tidy. Investors suffered losses on the real value of their principal in the 1970s and 1980s. Still, the system itself stayed afloat. The Latin American debt crisis was solved with Brady bonds, named after U.S. treasury secretary Nicholas Brady.

Although not a board member, Faust was arguably the third most powerful figure at the Fed after the chairman and William C. Dudley, president of the Federal Reserve Bank of New York. The fact that he was unknown outside the Fed only enhanced the power of his hidden hand, used to move markets with a few choice words. In spy novel parlance, Faust was the “man without a face.” Wordsmithing forward guidance is not done from the sidelines. Providing precise phrases for use in public disclosures required intimate knowledge of FOMC inner workings, and the private views of Bernanke and Yellen. Faust sat in the Fed’s ornate, high-ceilinged boardroom at almost every FOMC meeting during his time there, which included the Fed’s largest program of money printing called QE3, Bernanke’s threat to reduce money printing in a May 2013 speech, and the actual reduction in money printing beginning in December 2013.


pages: 1,242 words: 317,903

The Man Who Knew: The Life and Times of Alan Greenspan by Sebastian Mallaby

"Robert Solow", airline deregulation, airport security, Andrei Shleifer, anti-communist, Asian financial crisis, balance sheet recession, bank run, barriers to entry, Bear Stearns, Benoit Mandelbrot, bond market vigilante , Bretton Woods, business cycle, central bank independence, centralized clearinghouse, collateralized debt obligation, conceptual framework, corporate governance, correlation does not imply causation, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency peg, energy security, equity premium, fiat currency, financial deregulation, financial innovation, fixed income, Flash crash, forward guidance, full employment, Hyman Minsky, inflation targeting, information asymmetry, interest rate swap, inventory management, invisible hand, James Carville said: "I would like to be reincarnated as the bond market. You can intimidate everybody.", Kenneth Rogoff, Kickstarter, Kitchen Debate, laissez-faire capitalism, Long Term Capital Management, low skilled workers, market bubble, market clearing, Martin Wolf, Money creation, money market fund, moral hazard, mortgage debt, Myron Scholes, new economy, Nixon shock, Nixon triggered the end of the Bretton Woods system, Northern Rock, paper trading, paradox of thrift, Paul Samuelson, Plutocrats, plutocrats, popular capitalism, price stability, RAND corporation, rent-seeking, Robert Shiller, Robert Shiller, rolodex, Ronald Reagan, Saturday Night Live, Savings and loan crisis, savings glut, secular stagnation, short selling, The Great Moderation, the payments system, The Wealth of Nations by Adam Smith, too big to fail, trade liberalization, unorthodox policies, upwardly mobile, WikiLeaks, women in the workforce, Y2K, yield curve, zero-sum game

“Bankers are willing to take on more risk than I have heard them admit to in recent years,” added Governor Mark Olson, who was himself a former banker. Vice Chairman Roger Ferguson pushed the argument further, linking the financial exuberance with the Fed’s forward guidance about future interest rates. “Perhaps we are anchoring the yield curve more than we’d like,” he suggested. “The fixed-income markets in particular are not in fact doing the appropriate job of pricing risks.” He was suggesting that the Fed’s forward guidance had made life too predictable, lulling speculators into complacency. “We need in some sense to remove the anchor that we have placed on those markets,” he concluded.

Perhaps not surprisingly, traders in the markets sensed these risks more viscerally than monetary experts. Although he had laid out the problem with forward guidance, Timothy Geithner stopped short of demanding a tougher monetary policy. He had been at the Fed for just over a year, and like everybody there, he deferred to Greenspan’s record of success over almost two decades. Besides, as Geithner himself conceded, there were risks in being tough: even if the Fed’s forward guidance lulled traders into taking too much risk, it seemed perverse to address the problem of a potential future shock by shocking markets preemptively.60 As a result, nobody around Greenspan really challenged his thinking; and at successive FOMC meetings through the rest of the year, Greenspan persisted serenely with his “measured” strategy.

In these circumstances, the Fed’s goal was to “continue to convey to the marketplace where our priorities are.” Forward guidance would ensure “as little reaction to our post-meeting statement as possible.”61 In the space of eighteen months, Greenspan had fretted that Wall Street was “reaching for yield,” anticipating that “untoward things” might happen. He had objected to an explicit inflation target, musing that a future FOMC might come to regard asset prices as “a relevant consideration.” He had listened to colleagues’ concerns about the risks in forward guidance, and had come close to embracing their anxiety by diagnosing a “conundrum.”


pages: 318 words: 77,223

The Only Game in Town: Central Banks, Instability, and Avoiding the Next Collapse by Mohamed A. El-Erian

activist fund / activist shareholder / activist investor, Airbnb, balance sheet recession, bank run, barriers to entry, Bear Stearns, break the buck, Bretton Woods, British Empire, business cycle, capital controls, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, carried interest, collapse of Lehman Brothers, corporate governance, currency peg, disruptive innovation, Erik Brynjolfsson, eurozone crisis, financial innovation, Financial Instability Hypothesis, financial intermediation, financial repression, fixed income, Flash crash, forward guidance, friendly fire, full employment, future of work, Hyman Minsky, If something cannot go on forever, it will stop - Herbert Stein's Law, income inequality, inflation targeting, Jeff Bezos, Kenneth Rogoff, Khan Academy, liquidity trap, Martin Wolf, megacity, Mexican peso crisis / tequila crisis, moral hazard, mortgage debt, Norman Mailer, oil shale / tar sands, price stability, principal–agent problem, quantitative easing, risk tolerance, risk-adjusted returns, risk/return, Second Machine Age, secular stagnation, sharing economy, sovereign wealth fund, The Great Moderation, The Wisdom of Crowds, too big to fail, University of East Anglia, yield curve, zero-sum game

Because their “analysis does suggest that the unconventional monetary policies, including QE and forward guidance, create hazards by encouraging certain types of risk-taking that are likely to reverse at some point.”5 Similar worries have also been expressed by the BIS, and not just on unusually low interest rates and exceptional large-scale balance sheet operations by central banks. In a March 2014 paper in the BIS Quarterly Review, Andrew Filardo and Boris Hofmann warned that “if financial markets become narrowly focused on certain aspects of a central bank’s forward guidance, a broader interpretation or recalibration of the guidance could lead to disruptive market reactions.”6 Reacting that month to a change in forward guidance, Narayana Kocherlakota, president of the Minnesota Federal Reserve, lamented publicly that such an approach could not only damage the central bank’s credibility but also contribute to undermining the economic recovery.7 These are also issues that former Fed governor Jeremy Stein took up several times, most pointedly in his powerful May 2014 speech to the Money Marketeers Club of New York University.

In a March 2014 paper in the BIS Quarterly Review, Andrew Filardo and Boris Hofmann warned that “if financial markets become narrowly focused on certain aspects of a central bank’s forward guidance, a broader interpretation or recalibration of the guidance could lead to disruptive market reactions.”6 Reacting that month to a change in forward guidance, Narayana Kocherlakota, president of the Minnesota Federal Reserve, lamented publicly that such an approach could not only damage the central bank’s credibility but also contribute to undermining the economic recovery.7 These are also issues that former Fed governor Jeremy Stein took up several times, most pointedly in his powerful May 2014 speech to the Money Marketeers Club of New York University. Respected for bringing to the Fed a comprehensive understanding of financial developments—one that I characterized as combining “practical market and theoretical economic assessments with insights from both the efficient market literature and behavioral finance”8—he pointed to the inherent complexities associated with three realities: “the fact that the market is not a single person, the fact that the Committee is not a single person either, and the delicate interplay between the Committee and the market.”

El-Erian, “Big Money vs Bernanke: Who’s Right About the Economy,” Atlantic, July 3, 2013, http://www.theatlantic.com/business/archive/2013/07/big-money-vs-bernanke-whos-right-about-the-economy/277548/. 5. Joshua Zumbrun, “Fed Hears Warning That Tightening Policy May Spark Market Tumult,” Bloomberg News, February 28, 2014, http://www.bloom berg.com/news/2014-02-28/fed-hears-warning-that-tightening-policy-may-spark-market-tumult.html. 6. Andrew Filardo and Boris Hofmann, “Forward Guidance at the Zero Lower Bound,” BIS Quarterly Review, March 2014, Bank for International Settlements, http://www.bis.org/publ/qtrpdf/r_qt1403f.htm. 7. Robin Harding, “Federal Reserve Dissenter Kocherlakota Attacks New Guidance,” Financial Times, March 21, 2014, http://www.ft.com/intl/cms/s/0/1607d9b8-b105-11e3-bbd4-00144feab7de.html. 8.


pages: 261 words: 86,905

How to Speak Money: What the Money People Say--And What It Really Means by John Lanchester

asset allocation, Basel III, Bernie Madoff, Big bang: deregulation of the City of London, bitcoin, Black Swan, blood diamonds, Bretton Woods, BRICs, business cycle, Capital in the Twenty-First Century by Thomas Piketty, Celtic Tiger, central bank independence, collapse of Lehman Brothers, collective bargaining, commoditize, creative destruction, credit crunch, Credit Default Swap, crony capitalism, Dava Sobel, David Graeber, disintermediation, double entry bookkeeping, en.wikipedia.org, estate planning, financial innovation, Flash crash, forward guidance, Garrett Hardin, Gini coefficient, global reserve currency, high net worth, High speed trading, hindsight bias, income inequality, inflation targeting, interest rate swap, Isaac Newton, Jaron Lanier, joint-stock company, joint-stock limited liability company, Kodak vs Instagram, liquidity trap, London Interbank Offered Rate, London Whale, loss aversion, margin call, McJob, means of production, microcredit, money: store of value / unit of account / medium of exchange, moral hazard, Myron Scholes, negative equity, neoliberal agenda, New Urbanism, Nick Leeson, Nikolai Kondratiev, Nixon shock, Nixon triggered the end of the Bretton Woods system, Northern Rock, offshore financial centre, oil shock, open economy, paradox of thrift, Plutocrats, plutocrats, Ponzi scheme, purchasing power parity, pushing on a string, quantitative easing, random walk, rent-seeking, reserve currency, Richard Feynman, Right to Buy, road to serfdom, Ronald Reagan, Satoshi Nakamoto, security theater, shareholder value, Silicon Valley, six sigma, Social Responsibility of Business Is to Increase Its Profits, South Sea Bubble, sovereign wealth fund, Steve Jobs, survivorship bias, The Chicago School, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, Tragedy of the Commons, trickle-down economics, two and twenty, Washington Consensus, wealth creators, working poor, yield curve

However, the unprecedented recent years of crazy-low interest rates and kooky new policies such as QE have made the markets very anxious about what happens when there’s a change in direction; this in turn has led to a demand for something resembling forward guidance. In effect, the markets are asking for a bit of notice before the banks turn off the money hose. So both the Federal Reserve and the Bank of England have started to adopt a policy of forward guidance, and have both immediately run into the main problem with it. This is that markets know a central bank will in the event of difficulties always do what it feels needs to be done, and this fact will always trump whatever guidance has been given in advance. Forward guidance therefore ends up being a bit like that thing where children make their parents promise to do something, and the parents promise that they will, and then add, “unless we change our minds, forget, or can’t be bothered.”

, an hour’s estate planning with a lawyer, and, amusingly/annoyingly, a year at Harvard.36 In 2012, the CLEWI went up 2.6 percent but the CPI went up only 1.4 percent. That means the gap is narrowing! Oh wait, no it doesn’t. The net worth of the 400 richest people in America went up by 11 percent, from $1.53 trillion to $1.7 trillion. forward guidance A policy in which central banks say in advance what they are going to do, as a way of introducing greater levels of confidence into the market. This might not sound like a big deal, but central banks, perhaps because they’re acutely aware how many things aren’t under their control, highly prize the few things that are—so the act of binding themselves in advance to a particular course of action upsets them.


pages: 479 words: 113,510

Fed Up: An Insider's Take on Why the Federal Reserve Is Bad for America by Danielle Dimartino Booth

Affordable Care Act / Obamacare, asset-backed security, bank run, barriers to entry, Basel III, Bear Stearns, Bernie Sanders, break the buck, Bretton Woods, business cycle, central bank independence, collateralized debt obligation, corporate raider, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, diversification, Donald Trump, financial deregulation, financial innovation, fixed income, Flash crash, forward guidance, full employment, George Akerlof, greed is good, high net worth, housing crisis, income inequality, index fund, inflation targeting, interest rate swap, invisible hand, John Meriwether, Joseph Schumpeter, liquidity trap, London Whale, Long Term Capital Management, margin call, market bubble, Mexican peso crisis / tequila crisis, money market fund, moral hazard, Myron Scholes, natural language processing, negative equity, new economy, Northern Rock, obamacare, price stability, pushing on a string, quantitative easing, regulatory arbitrage, Robert Shiller, Robert Shiller, Ronald Reagan, selection bias, short selling, side project, Silicon Valley, tail risk, The Great Moderation, The Wealth of Nations by Adam Smith, too big to fail, trickle-down economics, yield curve

Fisher, who believed that, while the Committee should be patient in beginning to normalize monetary policy, improvement in the U.S. economic performance since October has moved forward, further than the majority of the Committee envisions, the date when it will likely be appropriate to increase the federal funds rate; Narayana Kocherlakota, who believed that the Committee’s decision, in the context of ongoing low inflation and falling market-based measures of longer-term inflation expectations, created undue downside risk to the credibility of the 2 percent inflation target; and Charles I. Plosser, who believed that the statement should not stress the importance of the passage of time as a key element of its forward guidance and, given the improvement in economic conditions, should not emphasize the consistency of the current forward guidance with previous statements.” Yet another convoluted FOMC statement that made little sense. All three dissenters—Plosser, Kocherlakota, and Fisher—would soon be gone from the Fed. CHAPTER 22 Culture Shock If it were possible to take interest rates into negative territory, I would be voting for that.

For the next five years, the FOMC released a statement only if a change was made. In May 1999, responding to pressure for further transparency, the Fed pivoted and decided to release a statement after each FOMC meeting, regardless of action, to specify the target level of the fed funds rate, and to provide “forward guidance” regarding the balance of risks. But the biggest change was the decision to release lightly edited but otherwise—at least theoretically—complete transcripts of every meeting, with a delay of five years. In some ways transparency backfired. Previously, the FOMC meetings had been unscripted exchanges.

“The gas tank is full”: Binyamin Appelbaum, “Q&A: An Advocate for a Quicker Taper,” New York Times, January 27, 2014, economix.blogs.nytimes.com/2014/01/27/qa-an-advocate-for-a-quicker-taper/. “You can’t go from Wild Turkey to cold turkey”: FRBD: Richard Fisher, “Comments on Tailored Regulation and Forward Guidance (With Reference to Dr. Seuss, Strother Martin in Cool Hand Luke and Other Serious Economists)” (speech, Louisiana Bankers Association, New Orleans, Louisiana, May 9, 2014), www.dallasfed.org/assets/documents/news/speeches/fisher/2014/fs140509.pdf. Even during her swearing-in: FRB: Janet Yellen, “Remarks at the Ceremonial Swearing-In,” March 5, 2014, www.federalreserve.gov/newsevents/speech/yellen20140305a.htm.


pages: 327 words: 90,542

The Age of Stagnation: Why Perpetual Growth Is Unattainable and the Global Economy Is in Peril by Satyajit Das

"Robert Solow", 9 dash line, accounting loophole / creative accounting, additive manufacturing, Airbnb, Albert Einstein, Alfred Russel Wallace, Anton Chekhov, Asian financial crisis, banking crisis, Bear Stearns, Berlin Wall, bitcoin, bond market vigilante , Bretton Woods, BRICs, British Empire, business cycle, business process, business process outsourcing, call centre, capital controls, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, Clayton Christensen, cloud computing, collaborative economy, colonial exploitation, computer age, creative destruction, cryptocurrency, currency manipulation / currency intervention, David Ricardo: comparative advantage, declining real wages, Deng Xiaoping, deskilling, disintermediation, disruptive innovation, Downton Abbey, Emanuel Derman, energy security, energy transition, eurozone crisis, financial innovation, financial repression, forward guidance, Francis Fukuyama: the end of history, full employment, gig economy, Gini coefficient, global reserve currency, global supply chain, Goldman Sachs: Vampire Squid, happiness index / gross national happiness, Honoré de Balzac, hydraulic fracturing, Hyman Minsky, illegal immigration, income inequality, income per capita, indoor plumbing, informal economy, Innovator's Dilemma, intangible asset, Intergovernmental Panel on Climate Change (IPCC), Jane Jacobs, John Maynard Keynes: technological unemployment, Kenneth Rogoff, knowledge economy, knowledge worker, light touch regulation, liquidity trap, Long Term Capital Management, low skilled workers, Lyft, Mahatma Gandhi, margin call, market design, Marshall McLuhan, Martin Wolf, Mikhail Gorbachev, mortgage debt, mortgage tax deduction, new economy, New Urbanism, offshore financial centre, oil shale / tar sands, oil shock, old age dependency ratio, open economy, passive income, peak oil, peer-to-peer lending, pension reform, Plutocrats, plutocrats, Ponzi scheme, Potemkin village, precariat, price stability, profit maximization, pushing on a string, quantitative easing, race to the bottom, Ralph Nader, Rana Plaza, rent control, rent-seeking, reserve currency, ride hailing / ride sharing, rising living standards, risk/return, Robert Gordon, Ronald Reagan, salary depends on his not understanding it, Satyajit Das, savings glut, secular stagnation, seigniorage, sharing economy, Silicon Valley, Simon Kuznets, Slavoj Žižek, South China Sea, sovereign wealth fund, TaskRabbit, The Chicago School, The Great Moderation, The inhabitant of London could order by telephone, sipping his morning tea in bed, the various products of the whole earth, the market place, the payments system, The Spirit Level, Thorstein Veblen, Tim Cook: Apple, too big to fail, total factor productivity, trade route, transaction costs, uber lyft, unpaid internship, Unsafe at Any Speed, Upton Sinclair, Washington Consensus, We are the 99%, WikiLeaks, Y2K, Yom Kippur War, zero-coupon bond, zero-sum game

In February 2015, Yellen abandoned “patient,” simultaneously warning that this did not mean the Fed would be impatient. Forward guidance from the other side of the Atlantic confirmed John Maynard Keynes's fear that “confusion of thought and feeling leads to confusion of speech.”23 On July 4, 2013, European Central Bank president Mario Draghi announced that “key European Central Bank rates [will] remain at present or lower levels for an extended period of time.” On July 5, 2013, the governor of the Bank of Finland, Erkki Liikanen, stated: “Everything depends on the development of the economy.” On July 6, 2013, European Central Bank board member Benoît Cœuré observed: “[forward guidance is] a change in communication but not in monetary policy strategy.”

Unelected and largely unaccountable central bankers were left with the responsibility but not the power to deal with an increasingly difficult situation, a position described by the satirical British TV show Yes, Prime Minister's Sir Humphrey Appleby as “the prerogative of the eunuch throughout the ages.”21 With their limited and ineffective policy options, central bankers resorted to “forward guidance”—a tautology, as any guidance must be about future events. They would henceforth communicate commitments on future interest rates, liquidity provision, or QE over a medium- to long-term horizon. The US Fed committed to keeping rates low until the unemployment rate fell below 6 percent. In early 2014, it changed the unemployment target to a non-binding indicator.

In March 2015, even before the program had actually commenced, Draghi pronounced it a complete success. The increase in length and complexity of central bank statements has paralleled the rise in the size of their balance sheets. With fiscal policy constrained and monetary policy losing potency, forward guidance drew attention to the lack of options. The increasingly shrill utterances of central bankers sounded like the Wizard of Oz claiming superior, supernatural powers. But as in the film, the central bankers were revealing themselves as old men hidden behind drapes, pulling frantically at the levers to maintain an illusion.


pages: 108 words: 27,451

Magic Internet Money: A Book About Bitcoin by Jesse Berger

barriers to entry, bitcoin, blockchain, Bretton Woods, capital controls, carbon footprint, correlation does not imply causation, cryptocurrency, diversification, diversified portfolio, Ethereum, ethereum blockchain, fiat currency, Firefox, forward guidance, Fractional reserve banking, George Gilder, inflation targeting, invisible hand, Johann Wolfgang von Goethe, liquidity trap, litecoin, Marshall McLuhan, Metcalfe’s law, Money creation, money: store of value / unit of account / medium of exchange, moral hazard, Network effects, Nixon shock, Nixon triggered the end of the Bretton Woods system, oil shale / tar sands, price mechanism, Ralph Waldo Emerson, rent-seeking, reserve currency, ride hailing / ride sharing, risk tolerance, Robert Metcalfe, Satoshi Nakamoto, the medium is the message

3.5 Fiat Functionality 3.6 Bitcoin on Point 3.7 Bitcoin Functionality Chapter 4: Growth 4.1 The Root of All Growth 4.2 The Value of Price 4.3 Time Is Money 4.4 Calculated Risk 4.5 Divestment Advice Chapter 5: Innovation 5.1 Evolution & Revolution 5.2 The Smart Money 5.3 Blockchain 101 Chapter 6: Resilience 6.1 An Unstoppable Force 6.2 Teamwork Makes the Dream Work 6.3 An Immovable Object 6.4 Harder, Better, Faster, Stronger Chapter 7: Scarcity 7.1 Limited Edition 7.2 $€¥£: A Sea of Fiat 7.3 Setting a Precedent 7.4 Pushing Limits 7.5 Making a Statement 7.6 No Second Chance for First Impressions Chapter 8: Competition 8.1 A New Frontier 8.2 Bitcoin Versus Fiat 8.3 Bitcoin Versus Gold 8.4 Bitcoin Versus Crypto 8.5 Bitcoin Versus Forks 8.6 Bitcoin Versus Stablecoins Chapter 9: Governance 9.1 Fair Is Rare 9.2 Tilted 9.3 Balanced 9.4 Ground Rules 9.5 Lead by Example Chapter 10: Freedom 10.1 The Golden Rule 10.2 The Dependency Trap 10.3 Home of the Brave 10.4 Capital Control 10.5 Moral Hazard 10.6 Amoral Safeguard 10.7 Unchained Chapter 11: Drawbacks 11.1 Mind the Gap 11.2 Ease of Use 11.3 Speed & Scale 11.4 Full Custody 11.5 Dark Mode 11.6 Mining 11.7 On Apathy & Atlas 11.8 Upset the Setup Chapter 12: Outlook 12.1 Monopoly Money 12.2 The Debtor’s Dilemma 12.3 From Sapling to Sequoia 12.4 Forward Guidance 12.5 The Bottom Line Resources Endnotes Key Terms Acknowledgments What Is Money? “Fix the money and you fix the world.” Marty Bent, Tales from the Crypt Podcast Money is always and everywhere a social phenomenon in the sense that any change to its value or usefulness affects our behavior, because it constitutes half of every transaction that perpetuates society.

If we accept it as a truth that money and society are intertwined, then we should be extremely concerned with what we agree to use as money, for its ramifications are exhaustive. We should carefully evaluate all aspects of money to ensure that our chosen medium efficiently coordinates resources and promotes social prosperity, and we should consider the possibility that Magic Internet Money – Bitcoin – might just be best suited for this. 12.4 Forward Guidance “If we command our wealth, we shall be rich and free. If our wealth commands us, we are poor indeed.” Edmund Burke, UK Member of Parliament & Philosopher For far too long, it has been taboo to criticize our monetary system, despite it being one of the most crucial issues of all time. Control over money is an immense source of power – a de facto lever of control over the economy and, therefore, over all human action.


pages: 464 words: 139,088

The End of Alchemy: Money, Banking and the Future of the Global Economy by Mervyn King

"Robert Solow", Andrei Shleifer, Asian financial crisis, asset-backed security, balance sheet recession, bank run, banking crisis, banks create money, Berlin Wall, Bernie Madoff, Big bang: deregulation of the City of London, bitcoin, Black Swan, Bretton Woods, British Empire, business cycle, capital controls, Carmen Reinhart, Cass Sunstein, central bank independence, centre right, collapse of Lehman Brothers, creative destruction, Credit Default Swap, crowdsourcing, Daniel Kahneman / Amos Tversky, David Ricardo: comparative advantage, distributed generation, Doha Development Round, Edmond Halley, Fall of the Berlin Wall, falling living standards, fiat currency, financial innovation, financial intermediation, floating exchange rates, foreign exchange controls, forward guidance, Fractional reserve banking, Francis Fukuyama: the end of history, full employment, German hyperinflation, Hyman Minsky, inflation targeting, invisible hand, John Maynard Keynes: Economic Possibilities for our Grandchildren, John Meriwether, joint-stock company, Joseph Schumpeter, Kenneth Arrow, Kenneth Rogoff, labour market flexibility, large denomination, lateral thinking, liquidity trap, Long Term Capital Management, manufacturing employment, market clearing, Martin Wolf, Mexican peso crisis / tequila crisis, Money creation, money market fund, money: store of value / unit of account / medium of exchange, moral hazard, Myron Scholes, Nick Leeson, North Sea oil, Northern Rock, oil shale / tar sands, oil shock, open economy, paradox of thrift, Paul Samuelson, Ponzi scheme, price mechanism, price stability, purchasing power parity, quantitative easing, rent-seeking, reserve currency, Richard Thaler, rising living standards, Robert Shiller, Robert Shiller, Satoshi Nakamoto, savings glut, secular stagnation, seigniorage, stem cell, Steve Jobs, The Great Moderation, the payments system, The Rise and Fall of American Growth, Thomas Malthus, too big to fail, transaction costs, Tyler Cowen: Great Stagnation, yield curve, Yom Kippur War, zero-sum game

But the publication of transcripts of meetings can inhibit free and open discussion, and the style of meetings of the Federal Open Market Committee has undoubtedly changed since such transcripts were first disclosed in 1994; prepared formal statements are read out, while the important private discussions take place at earlier, often bilateral, meetings.26 In any policy setting, there has to be room for private conversations. There are limits to the desirable degree of transparency. It is also important for central banks to be honest about what they do not know. A case in point was the recent, and rather short-lived, experiment in ‘forward guidance’ adopted by the Federal Reserve and the Bank of England in 2013. Both central banks wanted to provide more information about the likely future path of official interest rates. In the first instance, this was a laudable attempt to reduce uncertainty about how they might respond to developments in the economy.

It is that monetary policy runs into diminishing returns; although continually falling real interest rates encourage households to bring forward spending from the future to the present, there comes a point when they are reluctant to sacrifice more and more future spending to increase current spending. I shall return to this quandary in Chapter 9. Now that official interest rates are virtually at zero, an even more extreme version of forward guidance has been proposed by some economists as a way of stimulating the economy.32 The idea is that central banks should promise to allow inflation to go above their normal target at some point in the medium term so that real interest rates – nominal rates less expected inflation – can fall to more negative levels, so stimulating spending.

Willetts, David (2010), The Pinch: How the Baby Boomers Took Their Children’s Future – And How They Can Give it Back, Atlantic Books, London. Wolf, Martin (2010), ‘The Challenge of Halting the Financial Doomsday Machine’, Financial Times, 20 April 2010. —— (2014), The Shifts and the Shocks, Penguin, London. Woodford, Michael (2003), Interest and Prices, Princeton University Press, Princeton, New Jersey. —— (2013), ‘Forward Guidance by Inflation-Targeting Central Banks’, mimeo, Columbia University. Woollcott, Alexander (1934), While Rome Burns, Viking Press, New York. Yermack, David (2013), ‘Is Bitcoin a Real Currency?’, National Bureau of Economic Research Working Paper 19747, Cambridge, Massachusetts. Zweig, Stefan (1943) The World of Yesterday, Viking Press, New York.


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Rethinking Capitalism: Economics and Policy for Sustainable and Inclusive Growth by Michael Jacobs, Mariana Mazzucato

balance sheet recession, banking crisis, basic income, Bear Stearns, Bernie Sanders, Bretton Woods, business climate, business cycle, Carmen Reinhart, central bank independence, collaborative economy, complexity theory, conceptual framework, corporate governance, corporate social responsibility, creative destruction, credit crunch, Credit Default Swap, crony capitalism, David Ricardo: comparative advantage, decarbonisation, deindustrialization, dematerialisation, Detroit bankruptcy, double entry bookkeeping, Elon Musk, endogenous growth, energy security, eurozone crisis, factory automation, facts on the ground, fiat currency, Financial Instability Hypothesis, financial intermediation, forward guidance, full employment, G4S, Gini coefficient, Growth in a Time of Debt, Hyman Minsky, income inequality, information asymmetry, Intergovernmental Panel on Climate Change (IPCC), Internet of things, investor state dispute settlement, invisible hand, Isaac Newton, Joseph Schumpeter, Kenneth Rogoff, Kickstarter, knowledge economy, labour market flexibility, low skilled workers, Martin Wolf, mass incarceration, Modern Monetary Theory, Money creation, Mont Pelerin Society, neoliberal agenda, Network effects, new economy, non-tariff barriers, paradox of thrift, Paul Samuelson, Post-Keynesian economics, price stability, private sector deleveraging, quantitative easing, QWERTY keyboard, railway mania, rent-seeking, road to serfdom, savings glut, Second Machine Age, secular stagnation, shareholder value, sharing economy, Silicon Valley, Steve Jobs, the built environment, The Great Moderation, The Spirit Level, Thorstein Veblen, too big to fail, total factor productivity, Tragedy of the Commons, transaction costs, trickle-down economics, universal basic income, very high income

Fiscal headwinds were on the horizon, and there was growing pressure on the Fed to do more. Columbia University’s Michael Woodford led the charge with his presentation at Jackson Hole in August 2012.37 Woodford gained notoriety for insisting that ‘forward guidance’, rather than a renewed round of quantitative easing, was the way to gain traction at the zero lower bound (ZLB). On 13 September 2012, the Fed went all-in, announcing the open-ended bond-buying programme known as QE3, along with ‘forward guidance’ to reassure market participants that the Fed was likely to keep the federal funds interest rate near zero at least through 2015.38 The Fed continued its elevated bond-buying programme for more than a year before it began tapering its purchases by $10 billion per month in December 2013.

Yet growth picked up, accelerating from an annual rate of 2 per cent in 2012 to 2.6 per cent in 2013. How could that be? Were the fiscal headwinds exaggerated? Was this proof that austerity worked? Had Bernanke been too pessimistic about the relative efficacy of monetary policy? Did doubling down with QE3 and forward guidance at the end of 2012 not only prevent a slowdown but also so juice the economy that growth actually accelerated in 2013? Scholars will undoubtedly debate these questions for a while yet. At present, economic opinion appears to be coalescing around the following narrative. First, experience demonstrates that monetary policy can counteract fiscal tightening, even at the ZLB, provided it is carried out by a sufficiently credible and committed central bank.


EuroTragedy: A Drama in Nine Acts by Ashoka Mody

"Robert Solow", Andrei Shleifer, asset-backed security, availability heuristic, bank run, banking crisis, Basel III, Bear Stearns, Berlin Wall, book scanning, Bretton Woods, call centre, capital controls, Carmen Reinhart, Celtic Tiger, central bank independence, centre right, credit crunch, Daniel Kahneman / Amos Tversky, debt deflation, Donald Trump, eurozone crisis, Fall of the Berlin Wall, financial intermediation, floating exchange rates, forward guidance, George Akerlof, German hyperinflation, global supply chain, global value chain, hiring and firing, Home mortgage interest deduction, income inequality, inflation targeting, Irish property bubble, Isaac Newton, job automation, Johann Wolfgang von Goethe, Johannes Kepler, Kenneth Rogoff, Kickstarter, liberal capitalism, light touch regulation, liquidity trap, loadsamoney, London Interbank Offered Rate, Long Term Capital Management, low-wage service sector, Mikhail Gorbachev, mittelstand, money market fund, moral hazard, mortgage tax deduction, neoliberal agenda, offshore financial centre, oil shock, open borders, pension reform, premature optimization, price stability, purchasing power parity, quantitative easing, rent-seeking, Republic of Letters, Robert Gordon, Robert Shiller, Robert Shiller, short selling, Silicon Valley, The Great Moderation, The Rise and Fall of American Growth, too big to fail, total factor productivity, trade liberalization, transaction costs, urban renewal, working-age population, Yogi Berra

Coming after a “stunning” 150-​basis-​point cut by the Bank of England (BOE) earlier that day, the ECB’s limited move disappointed financial markets. December 16, 2008: Fed reduces interest rates to near zero, begins forward guidance, and announces quantitative easing. The Fed lowered its interest rate to the 0.0–​0.25 percent range, publicly committed itself to keeping interest rates low for “some time” (forward guidance), and initiated quantitative easing (QE), which is the purchase by the central bank of long-​ term bonds and other securities to bring down long-​term interest rates. March 5, 2009: BOE reduces interest rates and launches QE.

node_code=prc_hicp_midx. 10 Jun Aug Oct Dec Feb 2007 07 07 07 08 Apr 08 Jun Aug Oct Dec Feb 08 08 08 08 09 Apr 09 Jun Aug Oct Dec 09 09 09 09 5 0 –5 –10 –15 –20 –25 Aug. 9, 2007: BNP Paribas halts withdrawal from mortgagebased funds March 14, 2008: Dec. 17, Rescue 2007: First of Bear “Term Stearns Auction Facility” auction Sept. 15, 2008: July 3, Lehman 2008: Brothers ECB bankruptcy raises Dec. 16, 2008: Federal policy Reserve lowers rate to rates May 7, 2009, Release of near zero and begins US banks’ stress-test quantitative easing and results “forward guidance” United States Euro Area Figure 5.4b. Euro-​area industrial production growth falls behind. (Annual growth rates, percent; three-​quarter moving averages) Note: The three-​month average of growth over the same three months in the previous year. Source: World Trade Monitor, https://www.cpb.nl/en/data.

The Fed—​although unwilling to raise its inflation target to 5-​6 percent—​made the big move, thus setting the benchmark for the others. On Tuesday, December 16, the Fed slashed its policy rate by 75 basis points down to 0–​0.25 percent.133 With no more room to lower rates, the Fed also began “forward guidance,” a promise to keep its policy interest rate at “exceptionally low levels for some time.”134 But the most ambitious policy the Fed announced that day was its quantitative easing (QE) program. The Fed would start buying long-​term bonds and other securities to help bring down long-​term interest rates right away, making it more attractive for households and businesses to borrow and, hence, to spend.135 Bloomberg Businessweek commented: “It’s a measure of the severity of the financial crisis that there were no dissenters from the Fed vote.


pages: 453 words: 117,893

What Would the Great Economists Do?: How Twelve Brilliant Minds Would Solve Today's Biggest Problems by Linda Yueh

"Robert Solow", 3D printing, additive manufacturing, Asian financial crisis, augmented reality, bank run, banking crisis, basic income, Bear Stearns, Ben Bernanke: helicopter money, Berlin Wall, Bernie Sanders, Big bang: deregulation of the City of London, bitcoin, Branko Milanovic, Bretton Woods, BRICs, business cycle, Capital in the Twenty-First Century by Thomas Piketty, clean water, collective bargaining, computer age, Corn Laws, creative destruction, credit crunch, Credit Default Swap, cryptocurrency, currency peg, dark matter, David Ricardo: comparative advantage, debt deflation, declining real wages, deindustrialization, Deng Xiaoping, Doha Development Round, Donald Trump, endogenous growth, everywhere but in the productivity statistics, Fall of the Berlin Wall, fear of failure, financial deregulation, financial innovation, Financial Instability Hypothesis, fixed income, forward guidance, full employment, Gini coefficient, global supply chain, Gunnar Myrdal, Hyman Minsky, income inequality, index card, indoor plumbing, industrial robot, information asymmetry, intangible asset, invisible hand, job automation, John Maynard Keynes: Economic Possibilities for our Grandchildren, joint-stock company, Joseph Schumpeter, laissez-faire capitalism, land reform, lateral thinking, life extension, low-wage service sector, manufacturing employment, market bubble, means of production, mittelstand, Money creation, Mont Pelerin Society, moral hazard, mortgage debt, negative equity, Nelson Mandela, non-tariff barriers, Northern Rock, Occupy movement, oil shale / tar sands, open economy, paradox of thrift, Paul Samuelson, price mechanism, price stability, Productivity paradox, purchasing power parity, quantitative easing, RAND corporation, rent control, rent-seeking, reserve currency, reshoring, road to serfdom, Robert Shiller, Robert Shiller, Ronald Coase, Ronald Reagan, school vouchers, secular stagnation, Shenzhen was a fishing village, Silicon Valley, Simon Kuznets, special economic zone, Steve Jobs, The Chicago School, The Wealth of Nations by Adam Smith, Thomas Malthus, too big to fail, total factor productivity, trade liberalization, universal basic income, unorthodox policies, Washington Consensus, We are the 99%, women in the workforce, working-age population

As Robinson remarked: ‘The misery of being exploited by capitalists is nothing compared to the misery of not being exploited at all.’19 10 Milton Friedman: Are Central Banks Doing Too Much? The 2008 financial crisis has introduced new economic terms into popular use, like central banks undertaking quantitative easing (QE or cash injections), forward guidance (central banks saying what they think interest rates might be in the future), negative interest rates (central banks charging commercial banks for depositing money with them) and macroprudential policy (central bank regulations aiming for financial stability), to name a few. These are in addition to using interest rates to target price stability or inflation, and are ‘unconventional’ or fairly new monetary policy tools.

Glossary BRIC economies The acronym stands for Brazil, Russia, India and China, a term coined by investment bank Goldman Sachs to identify the large emerging markets with good growth potential. current account deficit/surplus The difference between the value of traded goods and services, and portfolio capital, flowing into and out of the country. first-generation currency crisis The Latin American crisis of 1981–82. forward guidance Central banks giving guidance as to where interest rates might be in the future. G7 A group comprising seven of the world’s major economies – Canada, France, Germany, Italy, Japan, the United Kingdom and the United States – formed with the intention of shaping global economic policy. global financial crisis The failure of many of the world’s leading financial institutions precipitated in 2008 by the collapse of the US sub-prime mortgage market.

Buccleuch, Henry Scott, 3rd Duke of budget deficits and austerity Burns, Arthur Burns, Mary business cycle theory Fisher Hayek Schumpeter Callaghan, James Cambridge School see also Keynes, John Maynard; Marshall, Alfred; Robinson, Joan Cambridge University Girton College Kings College Newnham College St Johns and women Canon capital accumulation capital investment capitalism in aftermath of 2008 financial crisis and communism derivation of term and Engels and the financial crisis of 2008 free-market and Hayek inequality and capitalist economies laissez-faire see laissez-faire and Marx and the Occupy movement and Schumpeterian ‘creative destruction’ socialism vs welfare state capitalism car industry Carney, Mark Carter, Jimmy Case, Elizabeth central banks Bank of England Bank of Japan European Central Bank Fed see Federal Reserve forward guidance macroprudential policy monetary policy tools see also quantitative easing (QE) Chamberlin, Edward Chicago School see also Friedman, Milton Chile China 1949 revolution asset management companies banking system Beijing Consensus Communist Party corporate debt Cultural Revolution domestic innovation economic transformation ‘effect’/‘price’ employment system entrepreneurs exports Five Year Plan (1953) foreign direct investment (FDI) and Germany industrialization and reindustrialization inequality innovation challenge legal institutions manufacturing Maoism and Marx national debt openness ‘paradox’ poverty reduction privatization R&D investment regional free trade agreement renminbi (RMB) as second largest economy services sector shadow banking smartphones social networks trade-to GDP ratio and the USSR wage increases women Churchill, Winston class Engels’ The Condition of the Working Class in England and Marx middle see middle class and Ricardo wage earner class Classical School of economics see also Mill, John Stuart; Ricardo, David; Smith, Adam Clinton, Bill Clinton, Hillary cloth clothing Coase, Ronald Cold War Collectivist Economic Planning collectivization Collier, Paul Columbia University communism Bolshevik Party and capitalism Chinese Communist League First International Marxism see Marxism and Robinson Socialist/Second International Third International USSR see Soviet Union Vietnamese vs welfare state capitalism Communist League comparative advantage theory competition ‘competing down’ (Schumpeter) imperfect between money providers perfect and Robinson wages and competitiveness computers Conard, Ed construction consultancy firms consumerism consumption and comparative advantage theory consumer spending and marginal utility analysis convergence hypothesis corn, free trade in Corn Laws repeal and Ricardo corporate debt Cowles Commission Crafts, Nicholas crafts credit crunch credit default swaps (CDS) credit rating Crimean War crypto-currencies currency crises first-generation second-generation third-generation currency stability Cyprus death duties debt Chinese corporate debt-deflation spiral and government bonds indexation and protection from and Minsky’s financial instability hypothesis mortgage debt national see national debt private corporate as share of GDP decentralization defence deflation debt-deflation spiral Fisher and combating deflation Japan self-fulfilling deindustrialization and globalization premature reversing/reindustrialization and trade US Deng Xiaoping depression see Great Depression (1930s); Long Depression (1880s); recession/depression diminishing returns to capital distributive lag model Douglas, David, Lord Reston Douglas, Janet DuPont East Asian ‘tiger’ economies see also Hong Kong; Singapore; South Korea; Taiwan eastern Europe Eastman Kodak Econometric Society Econometrica economic development challenges and Beijing Consensus financial/currency crises and institutions and Lewis model Myanmar and North and path dependence poverty eradication/reduction South Africa Sustainable Development Goals Vietnam and Washington Consensus economic equilibrium economic freedom economic growth and austerity barriers convergence hypothesis development challenges see economic development challenges drivers of 2 see also innovation; institutions; public investment; technology endogenous growth theories inclusive growth through investment Japan’s growth and Japan’s ‘lost decades’ Lewis model mercantilist doctrine of and new technologies policy debates on raising and poverty reduction and productivity debate/challenge slow growth and the future Solow model UK government’s renewed focus on and unemployment Economic Journal economic rent Ricardo’s theory of economies ‘animal spirits’ of crises see financial crises deflation see deflation emerging see emerging economies equilibrium in GDP see gross domestic product global macroeconomic imbalances growth of see economic growth inequality and capitalist economies inflation see inflation and international trade and investment see investment; public investment national debt see national debt QE see quantitative easing rebalancing of recession see recession/depression services economy see services sector and stagnant wages state intervention Economist education higher role in reducing inequality universal Eliot, T.


Money and Government: The Past and Future of Economics by Robert Skidelsky

anti-globalists, Asian financial crisis, asset-backed security, bank run, banking crisis, banks create money, barriers to entry, Basel III, basic income, Bear Stearns, Ben Bernanke: helicopter money, Big bang: deregulation of the City of London, Bretton Woods, British Empire, business cycle, capital controls, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, central bank independence, cognitive dissonance, collapse of Lehman Brothers, collateralized debt obligation, collective bargaining, constrained optimization, Corn Laws, correlation does not imply causation, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, David Graeber, David Ricardo: comparative advantage, debt deflation, Deng Xiaoping, Donald Trump, Eugene Fama: efficient market hypothesis, eurozone crisis, financial deregulation, financial innovation, Financial Instability Hypothesis, forward guidance, Fractional reserve banking, full employment, Gini coefficient, Growth in a Time of Debt, Hyman Minsky, income inequality, incomplete markets, inflation targeting, invisible hand, Isaac Newton, John Maynard Keynes: Economic Possibilities for our Grandchildren, John Maynard Keynes: technological unemployment, Joseph Schumpeter, Kenneth Rogoff, labour market flexibility, labour mobility, law of one price, liberal capitalism, light touch regulation, liquidationism / Banker’s doctrine / the Treasury view, liquidity trap, market clearing, market friction, Martin Wolf, means of production, Mexican peso crisis / tequila crisis, mobile money, Modern Monetary Theory, Money creation, Mont Pelerin Society, moral hazard, mortgage debt, new economy, Nick Leeson, North Sea oil, Northern Rock, offshore financial centre, oil shock, open economy, paradox of thrift, Pareto efficiency, Paul Samuelson, placebo effect, price stability, profit maximization, quantitative easing, random walk, regulatory arbitrage, rent-seeking, reserve currency, Richard Thaler, rising living standards, risk/return, road to serfdom, Robert Shiller, Robert Shiller, Ronald Reagan, savings glut, secular stagnation, shareholder value, short selling, Simon Kuznets, structural adjustment programs, The Chicago School, The Great Moderation, the payments system, The Wealth of Nations by Adam Smith, Thomas Malthus, Thorstein Veblen, too big to fail, trade liberalization, value at risk, Washington Consensus, yield curve, zero-sum game

At first it hoped to take advantage of their ‘surprise’ effect. When it discovered that the surprise soon wore off, it started to emphasize signalling and ‘forwardguidance’. When the Bank acts, its actions give clues to what it will do in the future, and these clues are signals; ‘forward-guidance’ is an explicit commitment to act in a certain way under specified conditions. In its most explicit form, the forward-guidance channel works through policymakers making long-term commitments to keep interest rates exceptionally low. The policy boasts a placebo effect – self-fulfilling prophecies producing a recovery without undertaking the significant risks of expanding the central bank’s balance sheet.

But this rate has already been cut to the lowest level that the Bank feels comfortable with . . . another way for the Bank to support the economy has been to offer this indicator, by which companies and mortgage borrowers can estimate for how long such low interest rates may be around for in terms of months or years. Forward guidance is thus a way of converting low short-term interest rates into lower long-term interest rates. The thinking is that if the High Street banks can be convinced that they will be able to borrow overnight from the Bank of England at just 0.5% for many nights – indeed many months or years – to come, then they will hopefully be willing to lend money out to the rest of us for the longer term at a commensurately lower interest rate as well.42 There is a trade-off between credibility and pragmatism.

Available at: https://staging.businessreporter.co.uk/2014/08/03/the-big-interview-nick-leeseon-the-original-roguetrader-on-regrets-and-revival/ [Accessed 6 December 2017]. BBC (2010), Irish deficit balloons after new bank bail-out. Available at: http://www.bbc.co.uk/news/business-11441473 [Accessed 4 July 2017]. BBC (2014), Q&A: What is ‘forward guidance’? Available at: http://www. bbc.co.uk/news/business-23145755 [Accessed 10 July 2017]. BBC News (2003), Buffett warns on investment ‘time bomb’. Available at: http://news.bbc.co.uk/1/hi/2817995.stm [Accessed 31 July 2017]. Beattie, A. and Giles, C. (2010), Obama urges G20 to boost demand. Financial Times, 18 June.


pages: 665 words: 146,542

Money: 5,000 Years of Debt and Power by Michel Aglietta

bank run, banking crisis, Basel III, Berlin Wall, bitcoin, blockchain, Bretton Woods, British Empire, business cycle, capital asset pricing model, capital controls, cashless society, central bank independence, collapse of Lehman Brothers, collective bargaining, corporate governance, David Graeber, debt deflation, dematerialisation, Deng Xiaoping, double entry bookkeeping, energy transition, eurozone crisis, Fall of the Berlin Wall, falling living standards, financial deregulation, financial innovation, Financial Instability Hypothesis, financial intermediation, floating exchange rates, forward guidance, Francis Fukuyama: the end of history, full employment, German hyperinflation, income inequality, inflation targeting, information asymmetry, Intergovernmental Panel on Climate Change (IPCC), invention of writing, invisible hand, joint-stock company, Kenneth Arrow, Kickstarter, liquidity trap, margin call, means of production, Money creation, money market fund, moral hazard, Nash equilibrium, Network effects, Northern Rock, oil shock, planetary scale, Plutocrats, plutocrats, price stability, purchasing power parity, quantitative easing, race to the bottom, reserve currency, secular stagnation, seigniorage, shareholder value, special drawing rights, special economic zone, stochastic process, the payments system, the scientific method, too big to fail, trade route, transaction costs, transcontinental railway, Washington Consensus

Figure 6.8 Deformation of the rates curve on approach to zero nominal rate The central bank tries to have an effect on long-term rates by influencing anticipated short-term rates. It does this by making a commitment to preserve the short-term rate at zero while certain stated employment and inflation conditions are not met. This is the policy of guiding future interest rates (forward guidance). If the central bank’s commitment is credible, then the anticipation-element of long-term rates will remain low. Forward guidance also allows a reduction in the influence that the volatility of future short-term rates has on the price of risk. It thus pushes down the rate curve as a whole (Figure 6.8). The rise in the price of risk also reflects the weakened liquidity of the assets held by financial investors (a weakening linked to the risk of heavy value losses, should it appear necessary to liquidate these assets).

The central bank will make targeted purchases of long-term assets in order to place beyond market stress that asset which is the pivot of the financial markets, namely, the state bonds at various different maturities. This allows it to flatten the gradient of the rate curve and thus to complement forward guidance with control of the term premium. It can also buy up certain long-term assets that are particularly affected by the crisis, like mortgage securities in the US and UK, and more recently in the eurozone, or even certain company bonds. These are targeted asset purchases.14 If the central bank makes unlimited purchases of certain types of assets, it changes the liquidity of the securities chosen in relation to other securities, and thus the term premiums.


pages: 374 words: 113,126

The Great Economists: How Their Ideas Can Help Us Today by Linda Yueh

"Robert Solow", 3D printing, additive manufacturing, Asian financial crisis, augmented reality, bank run, banking crisis, basic income, Bear Stearns, Ben Bernanke: helicopter money, Berlin Wall, Bernie Sanders, Big bang: deregulation of the City of London, bitcoin, Branko Milanovic, Bretton Woods, BRICs, business cycle, Capital in the Twenty-First Century by Thomas Piketty, clean water, collective bargaining, computer age, Corn Laws, creative destruction, credit crunch, Credit Default Swap, cryptocurrency, currency peg, dark matter, David Ricardo: comparative advantage, debt deflation, declining real wages, deindustrialization, Deng Xiaoping, Doha Development Round, Donald Trump, endogenous growth, everywhere but in the productivity statistics, Fall of the Berlin Wall, fear of failure, financial deregulation, financial innovation, Financial Instability Hypothesis, fixed income, forward guidance, full employment, Gini coefficient, global supply chain, Gunnar Myrdal, Hyman Minsky, income inequality, index card, indoor plumbing, industrial robot, information asymmetry, intangible asset, invisible hand, job automation, John Maynard Keynes: Economic Possibilities for our Grandchildren, joint-stock company, Joseph Schumpeter, laissez-faire capitalism, land reform, lateral thinking, life extension, manufacturing employment, market bubble, means of production, mittelstand, Money creation, Mont Pelerin Society, moral hazard, mortgage debt, negative equity, Nelson Mandela, non-tariff barriers, Northern Rock, Occupy movement, oil shale / tar sands, open economy, paradox of thrift, Paul Samuelson, price mechanism, price stability, Productivity paradox, purchasing power parity, quantitative easing, RAND corporation, rent control, rent-seeking, reserve currency, reshoring, road to serfdom, Robert Shiller, Robert Shiller, Ronald Coase, Ronald Reagan, school vouchers, secular stagnation, Shenzhen was a fishing village, Silicon Valley, Simon Kuznets, special economic zone, Steve Jobs, The Chicago School, The Wealth of Nations by Adam Smith, Thomas Malthus, too big to fail, total factor productivity, trade liberalization, universal basic income, unorthodox policies, Washington Consensus, We are the 99%, women in the workforce, working-age population

As Robinson remarked: ‘The misery of being exploited by capitalists is nothing compared to the misery of not being exploited at all.’19 CHAPTER 10 Milton Friedman: Are Central Banks Doing Too Much? The 2008 financial crisis has introduced new economic terms into popular use, like central banks undertaking quantitative easing (QE or cash injections), forward guidance (central banks saying what they think interest rates might be in the future), negative interest rates (central banks charging commercial banks for depositing money with them) and macroprudential policy (central bank regulations aiming for financial stability), to name a few. These are in addition to using interest rates to target price stability or inflation, and are ‘unconventional’ or fairly new monetary policy tools.

Minsky Conference on the State of the US and World Economies – ‘Meeting the Challenges of the Financial Crisis’; www.frbsf.org/our-district/press/presidents-speeches/yellen-speeches/2009/april/yellen-minsky-meltdown-central-bankers/ Yergin, Daniel and Joseph Stanislaw, 1998, The Commanding Heights: The Battle Between Government and the Marketplace that is Remaking the Modern World, New York: Free Press Yueh, Linda, 2010, The Economy of China, Cheltenham: Edward Elgar ———, 2011, Enterprising China: Business, Economic, and Legal Developments Since 1979, Oxford: Oxford University Press ———, 2013, China’s Economic Growth: The Making of an Economic Superpower, Oxford: Oxford University Press Glossary BRIC economies The acronym stands for Brazil, Russia, India and China, a term coined by investment bank Goldman Sachs to identify the large emerging markets with good growth potential. current account deficit/surplus The difference between the value of traded goods and services, and portfolio capital, flowing into and out of the country. first-generation currency crisis The Latin American crisis of 1981–82. forward guidance Central banks giving guidance as to where interest rates might be in the future. G7 A group comprising seven of the world’s major economies – Canada, France, Germany, Italy, Japan, the United Kingdom and the United States – formed with the intention of shaping global economic policy. global financial crisis The failure of many of the world’s leading financial institutions precipitated in 2008 by the collapse of the US sub-prime mortgage market.


pages: 475 words: 155,554

The Default Line: The Inside Story of People, Banks and Entire Nations on the Edge by Faisal Islam

Asian financial crisis, asset-backed security, balance sheet recession, bank run, banking crisis, Basel III, Ben Bernanke: helicopter money, Berlin Wall, Big bang: deregulation of the City of London, bond market vigilante , Boris Johnson, British Empire, capital controls, carbon footprint, Celtic Tiger, central bank independence, centre right, collapse of Lehman Brothers, credit crunch, Credit Default Swap, crony capitalism, dark matter, deindustrialization, Deng Xiaoping, disintermediation, energy security, Eugene Fama: efficient market hypothesis, eurozone crisis, financial deregulation, financial innovation, financial repression, floating exchange rates, forensic accounting, forward guidance, full employment, G4S, ghettoisation, global rebalancing, global reserve currency, hiring and firing, inflation targeting, Irish property bubble, Just-in-time delivery, labour market flexibility, light touch regulation, London Whale, Long Term Capital Management, margin call, market clearing, megacity, Mikhail Gorbachev, mini-job, mittelstand, Money creation, moral hazard, mortgage debt, mortgage tax deduction, mutually assured destruction, Myron Scholes, negative equity, North Sea oil, Northern Rock, offshore financial centre, open economy, paradox of thrift, Pearl River Delta, pension reform, price mechanism, price stability, profit motive, quantitative easing, quantitative trading / quantitative finance, race to the bottom, regulatory arbitrage, reserve currency, reshoring, Right to Buy, rising living standards, Ronald Reagan, savings glut, shareholder value, sovereign wealth fund, tail risk, The Chicago School, the payments system, too big to fail, trade route, transaction costs, two tier labour market, unorthodox policies, uranium enrichment, urban planning, value at risk, WikiLeaks, working-age population, zero-sum game

‘Open-mouth operations’ involve using communications to guide down expectations of future interest rises. ‘Forward guidance’ is the innovation of the moment, involving the managing-down of expectation using speeches and press statements. The hope would be that a company would be more likely to take out a loan for more equipment, or a homebuyer a mortgage, if there exists confidence on low rates over a period of years. Both Mr Carney and the ECB president Draghi deployed forms of ‘forward guidance’ in July 2013. The end result is lower interest rates for longer. The guidance can be supplemented with a conditional threshold too.


pages: 497 words: 150,205

European Spring: Why Our Economies and Politics Are in a Mess - and How to Put Them Right by Philippe Legrain

3D printing, Airbnb, Asian financial crisis, bank run, banking crisis, barriers to entry, Basel III, battle of ideas, Berlin Wall, Big bang: deregulation of the City of London, Boris Johnson, Bretton Woods, BRICs, British Empire, business cycle, business process, capital controls, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, Celtic Tiger, central bank independence, centre right, cleantech, collaborative consumption, collapse of Lehman Brothers, collective bargaining, corporate governance, creative destruction, credit crunch, Credit Default Swap, crony capitalism, currency manipulation / currency intervention, currency peg, debt deflation, Diane Coyle, disruptive innovation, Downton Abbey, Edward Glaeser, Elon Musk, en.wikipedia.org, energy transition, eurozone crisis, fear of failure, financial deregulation, first-past-the-post, forward guidance, full employment, Gini coefficient, global supply chain, Growth in a Time of Debt, hiring and firing, hydraulic fracturing, Hyman Minsky, Hyperloop, immigration reform, income inequality, interest rate derivative, Intergovernmental Panel on Climate Change (IPCC), Irish property bubble, James Dyson, Jane Jacobs, job satisfaction, Joseph Schumpeter, Kenneth Rogoff, Kickstarter, labour market flexibility, labour mobility, liquidity trap, margin call, Martin Wolf, mittelstand, moral hazard, mortgage debt, mortgage tax deduction, North Sea oil, Northern Rock, offshore financial centre, oil shale / tar sands, oil shock, open economy, peer-to-peer rental, price stability, private sector deleveraging, pushing on a string, quantitative easing, Richard Florida, rising living standards, risk-adjusted returns, Robert Gordon, savings glut, school vouchers, self-driving car, sharing economy, Silicon Valley, Silicon Valley startup, Skype, smart grid, smart meter, software patent, sovereign wealth fund, Steve Jobs, The Death and Life of Great American Cities, The Wealth of Nations by Adam Smith, too big to fail, total factor productivity, Tyler Cowen: Great Stagnation, working-age population, Zipcar

In August 2013, the new governor of the Bank of England, Mark Carney, who had the good fortune to leave his job running Canada’s central bank just as that country’s housing bubble appears to be bursting, called time on QE and tried a new trick designed to give monetary policy more traction: “forward guidance”.436 He sought to reassure markets, businesses and the general public that he would not raise interest rates until the unemployment rate had fallen to 7 per cent – so long as this did not threaten to destabilise inflation or the financial system.437 But although Carney had been lionised by Osborne – who hailed him as “the outstanding central banker of his generation”, something his peers might dispute – markets were not impressed by his announcement.438 Far from falling after he spoke, longer-term interest rates rose substantially.

Footnote 9, page 16 433 The Funding for Lending scheme was launched in August 2012 and subsequently extended to January 2015. 434 In April 2013, the terms were made more generous for banks that lent more and sooner to smaller businesses. 435 http://www.hsbcnet.com/gbm/global-insights/insights/2013/stephen-king-pain-killers-might-work-but-economies-need-antibiotics.html 436 Forward guidance involves signalling what future interest rates are likely to be. But as Erik Nielsen, the chief economist of Unicredit, has pointed out, if a commitment to keep interest rates low is too weak and full of escape clauses, it is likely to have little effect on markets’ expectations. On the other hand, a firm commitment to keep interest rates low come what may risks undermining a central bank’s credibility, because if it is successful and stimulates the economy, the central bank will subsequently be torn between leaving rates low and risk inflation taking off or breaking its promise and losing credibility.


pages: 524 words: 143,993

The Shifts and the Shocks: What We've Learned--And Have Still to Learn--From the Financial Crisis by Martin Wolf

air freight, anti-communist, Asian financial crisis, asset allocation, asset-backed security, balance sheet recession, bank run, banking crisis, banks create money, Basel III, Bear Stearns, Ben Bernanke: helicopter money, Berlin Wall, Black Swan, bonus culture, break the buck, Bretton Woods, business cycle, call centre, capital asset pricing model, capital controls, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, central bank independence, collateralized debt obligation, corporate governance, creative destruction, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency manipulation / currency intervention, currency peg, debt deflation, deglobalization, Deng Xiaoping, diversification, double entry bookkeeping, en.wikipedia.org, Erik Brynjolfsson, Eugene Fama: efficient market hypothesis, eurozone crisis, Fall of the Berlin Wall, fiat currency, financial deregulation, financial innovation, financial repression, floating exchange rates, foreign exchange controls, forward guidance, Fractional reserve banking, full employment, global rebalancing, global reserve currency, Growth in a Time of Debt, Hyman Minsky, income inequality, inflation targeting, information asymmetry, invisible hand, Joseph Schumpeter, Kenneth Rogoff, labour market flexibility, labour mobility, light touch regulation, liquidationism / Banker’s doctrine / the Treasury view, liquidity trap, Long Term Capital Management, mandatory minimum, margin call, market bubble, market clearing, market fragmentation, Martin Wolf, Mexican peso crisis / tequila crisis, Modern Monetary Theory, Money creation, money market fund, moral hazard, mortgage debt, negative equity, new economy, North Sea oil, Northern Rock, open economy, paradox of thrift, Paul Samuelson, price stability, private sector deleveraging, purchasing power parity, pushing on a string, quantitative easing, Real Time Gross Settlement, regulatory arbitrage, reserve currency, Richard Feynman, risk-adjusted returns, risk/return, road to serfdom, Robert Gordon, Robert Shiller, Robert Shiller, Ronald Reagan, savings glut, Second Machine Age, secular stagnation, shareholder value, short selling, sovereign wealth fund, special drawing rights, tail risk, The Chicago School, The Great Moderation, The Market for Lemons, the market place, The Myth of the Rational Market, the payments system, The Wealth of Nations by Adam Smith, too big to fail, Tyler Cowen: Great Stagnation, very high income, winner-take-all economy, zero-sum game

The busts that follow prolonged credit booms are both very costly and very hard to remedy.7 One reason for this is that with interest rates at or close to the zero bound, the effectiveness of monetary policy is constrained, though not zero. Prolonged periods of ultra-low interest rates, together with quantitative easing and ‘forward guidance’ – indications of low policy rates far into the future – have brought only a modest recovery. Thus, as of early 2014, neither the US nor the UK had achieved rates of growth higher than before the crisis. The recovery had, accordingly, not even begun to close the proportional gap between actual output and the pre-crisis trend.

This could have brought the benefit of not relying so much on a policy that amounts to manipulating asset prices and encouraging further borrowing. The risks of such an expansionary monetary policy, even if effective, are real. Furthermore, while not as unmanageable as some critics allege, exit from unconventional monetary policy, including massively expanded balance sheets and forward guidance, is sure to create bumps along the road. With a more expansionary fiscal policy, monetary policy could have been less extreme than it was. For all these reasons, the decision to tighten fiscal policy after 2010 was almost certainly premature and unwise. It would have been better to rely more on fiscal policy and less on monetary policy.


pages: 333 words: 76,990

The Long Good Buy: Analysing Cycles in Markets by Peter Oppenheimer

"Robert Solow", asset allocation, banking crisis, banks create money, barriers to entry, Berlin Wall, Big bang: deregulation of the City of London, Bretton Woods, business cycle, buy and hold, Cass Sunstein, central bank independence, collective bargaining, computer age, credit crunch, debt deflation, decarbonisation, diversification, dividend-yielding stocks, equity premium, Fall of the Berlin Wall, financial innovation, fixed income, Flash crash, foreign exchange controls, forward guidance, Francis Fukuyama: the end of history, George Akerlof, household responsibility system, housing crisis, index fund, invention of the printing press, Isaac Newton, James Watt: steam engine, joint-stock company, Joseph Schumpeter, Kickstarter, liberal capitalism, light touch regulation, liquidity trap, Live Aid, market bubble, Mikhail Gorbachev, mortgage debt, negative equity, Network effects, new economy, Nikolai Kondratiev, Nixon shock, Nixon triggered the end of the Bretton Woods system, oil shock, open economy, price stability, private sector deleveraging, Productivity paradox, quantitative easing, railway mania, random walk, Richard Thaler, risk free rate, risk tolerance, risk-adjusted returns, Robert Shiller, Robert Shiller, Ronald Reagan, Savings and loan crisis, savings glut, secular stagnation, Shenzhen special economic zone , Simon Kuznets, South Sea Bubble, special economic zone, stocks for the long run, tail risk, Tax Reform Act of 1986, technology bubble, The Great Moderation, too big to fail, total factor productivity, trade route, tulip mania, yield curve

Whatever the reasons, forward market measures of inflation have also fallen compared with previous cycles. In the past, labour market tightening often generated substantial and persistent inflationary pressure, causing central banks to raise interest rates sharply, thereby raising the risks of recession. But since the 2000s more effective forward guidance by central banks has contributed to lower and more stable inflation, alongside a flatter Phillips curve (the relationship between unemployment and inflation), resulting in much more stable inflation expectations.11 To some degree, the impact of QE has also been responsible.12 I discuss in more detail the impact of inflation expectations and ultra-low bond yields in chapter 10.


pages: 269 words: 83,307

Young Money: Inside the Hidden World of Wall Street's Post-Crash Recruits by Kevin Roose

activist fund / activist shareholder / activist investor, Basel III, Bear Stearns, cognitive dissonance, collateralized debt obligation, Credit Default Swap, credit default swaps / collateralized debt obligations, discounted cash flows, Donald Trump, East Village, eat what you kill, eurozone crisis, fixed income, forward guidance, glass ceiling, Goldman Sachs: Vampire Squid, hedonic treadmill, jitney, knowledge worker, new economy, Occupy movement, Plutocrats, plutocrats, Robert Shiller, Robert Shiller, selection bias, shareholder value, side project, Silicon Valley, Skype, Steve Jobs, tail risk, The Predators' Ball, too big to fail, two and twenty, urban planning, We are the 99%, young professional

Lots of people chimed in with observations about how these phenomena might affect the financial markets, and the unmistakable impression given off was that this is a serious group. These guys had opinions about austerity in Greece, the effects of expansionary monetary policy, and the Federal Reserve’s forward guidance. They weren’t the most brilliant market insights I’ve ever heard, but for guys who should by virtue of their stations in life be saying “bro” a lot and doing keg stands, they weren’t half bad. Despite their ages, most of the members of Black Diamond are somewhat experienced investors. There’s Bryce, a sophomore from Southern California who ordered his first annual report at age thirteen, began investing shortly thereafter, and at sixteen was the youngest-ever person to apply for a job at PIMCO, the giant California-based investment manager.


pages: 920 words: 233,102

Unelected Power: The Quest for Legitimacy in Central Banking and the Regulatory State by Paul Tucker

Andrei Shleifer, bank run, banking crisis, barriers to entry, Basel III, battle of ideas, Bear Stearns, Ben Bernanke: helicopter money, Berlin Wall, Bretton Woods, business cycle, capital controls, Carmen Reinhart, Cass Sunstein, central bank independence, centre right, conceptual framework, corporate governance, diversified portfolio, Fall of the Berlin Wall, financial innovation, financial intermediation, financial repression, first-past-the-post, floating exchange rates, forensic accounting, forward guidance, Fractional reserve banking, Francis Fukuyama: the end of history, full employment, George Akerlof, incomplete markets, inflation targeting, information asymmetry, invisible hand, iterative process, Jean Tirole, Joseph Schumpeter, Kenneth Arrow, Kenneth Rogoff, liberal capitalism, light touch regulation, Long Term Capital Management, means of production, Money creation, money market fund, Mont Pelerin Society, moral hazard, Northern Rock, Pareto efficiency, Paul Samuelson, price mechanism, price stability, principal–agent problem, profit maximization, quantitative easing, regulatory arbitrage, reserve currency, risk free rate, risk tolerance, risk-adjusted returns, road to serfdom, Robert Bork, Ronald Coase, seigniorage, short selling, Social Responsibility of Business Is to Increase Its Profits, stochastic process, tail risk, The Chicago School, The Great Moderation, The Market for Lemons, the payments system, too big to fail, transaction costs, Vilfredo Pareto, Washington Consensus, yield curve, zero-coupon bond, zero-sum game

In the case of the Bank of England, the Westminster Parliament having specified “price stability” as the primary objective, the executive government could not set a target for inflation that is unreasonably high without risking challenge in the courts. But some of my former colleagues were concerned about subtle backseat driving when, in 2013, the remit was amended to push the MPC toward employing “forward guidance” on the future path of interest rates (which, it should be said, the incoming governor was committed to). As provided for by the fourth Design Precept, the executive government needs to be monitored and held accountable by the legislature for its part in the determination of IA regimes. Constitutionally, the remit mechanism can work in the UK because ministers, including the prime minister, are subject to the law and are accountable to Parliament.

When the money markets are disfunctional, solvent banks simply go into bankruptcy if they cannot acquire reserves via the central bank’s OMOs.6 At the effective lower bound for nominal interest rates, the only instrument available to the central bank would be to talk down expectations of the future path of the policy rate (what has become known as forward guidance).7 All other interventions to stimulate aggregate demand—for example, the “quantitative easing” and “credit easing” of the postcrisis years—would fall to the “fiscal arm” of government. That—not a judgment on the merits of the minimal conception—is my main point: what is not within the realm of the central bank falls to elected policy makers, with the attendant problems of credible commitment and time inconsistency.


pages: 317 words: 100,414

Superforecasting: The Art and Science of Prediction by Philip Tetlock, Dan Gardner

Affordable Care Act / Obamacare, Any sufficiently advanced technology is indistinguishable from magic, availability heuristic, Black Swan, butterfly effect, buy and hold, cloud computing, cuban missile crisis, Daniel Kahneman / Amos Tversky, desegregation, drone strike, Edward Lorenz: Chaos theory, forward guidance, Freestyle chess, fundamental attribution error, germ theory of disease, hindsight bias, How many piano tuners are there in Chicago?, index fund, Jane Jacobs, Jeff Bezos, Kenneth Arrow, Laplace demon, longitudinal study, Mikhail Gorbachev, Mohammed Bouazizi, Nash equilibrium, Nate Silver, Nelson Mandela, obamacare, pattern recognition, performance metric, Pierre-Simon Laplace, place-making, placebo effect, prediction markets, quantitative easing, random walk, randomized controlled trial, Richard Feynman, Richard Thaler, Robert Shiller, Robert Shiller, Ronald Reagan, Saturday Night Live, scientific worldview, Silicon Valley, Skype, statistical model, stem cell, Steve Ballmer, Steve Jobs, Steven Pinker, tail risk, the scientific method, The Signal and the Noise by Nate Silver, The Wisdom of Crowds, Thomas Bayes, Watson beat the top human players on Jeopardy!

Try to imagine the mild-mannered Ben Bernanke channeling Jack Nicholson’s rage from the film A Few Good Men: “You can’t handle the truth.” In this view, we just aren’t mature enough to handle the numbers. So we must continue to decode statements like this from Janet Yellen in February 2015: “It is important to emphasize that a modification of the forward guidance should not be read as indicating that the committee will necessarily increase the target range in a couple of meetings.” See James Stewart, “Wondering What the Fed’s Statements Mean? Be Patient,” New York Times, March 13, 2015, C1. The implications for the IC are clear. Even if the IC eventually went as far as the Fed toward quantifying assessments of uncertainty in its internal deliberations, the IC should stick with sphinxlike external messaging. 13.


pages: 478 words: 126,416

Other People's Money: Masters of the Universe or Servants of the People? by John Kay

Affordable Care Act / Obamacare, asset-backed security, bank run, banking crisis, Basel III, Bear Stearns, Bernie Madoff, Big bang: deregulation of the City of London, bitcoin, Black Swan, Bonfire of the Vanities, bonus culture, Bretton Woods, buy and hold, call centre, capital asset pricing model, Capital in the Twenty-First Century by Thomas Piketty, cognitive dissonance, corporate governance, Credit Default Swap, cross-subsidies, dematerialisation, disinformation, disruptive innovation, diversification, diversified portfolio, Edward Lloyd's coffeehouse, Elon Musk, Eugene Fama: efficient market hypothesis, eurozone crisis, financial innovation, financial intermediation, financial thriller, fixed income, Flash crash, forward guidance, Fractional reserve banking, full employment, George Akerlof, German hyperinflation, Goldman Sachs: Vampire Squid, Growth in a Time of Debt, Ida Tarbell, income inequality, index fund, inflation targeting, information asymmetry, intangible asset, interest rate derivative, interest rate swap, invention of the wheel, Irish property bubble, Isaac Newton, James Carville said: "I would like to be reincarnated as the bond market. You can intimidate everybody.", John Meriwether, light touch regulation, London Whale, Long Term Capital Management, loose coupling, low cost airline, low cost carrier, M-Pesa, market design, millennium bug, mittelstand, Money creation, money market fund, moral hazard, mortgage debt, Myron Scholes, NetJets, new economy, Nick Leeson, Northern Rock, obamacare, Occupy movement, offshore financial centre, oil shock, passive investing, Paul Samuelson, peer-to-peer lending, performance metric, Peter Thiel, Piper Alpha, Ponzi scheme, price mechanism, purchasing power parity, quantitative easing, quantitative trading / quantitative finance, railway mania, Ralph Waldo Emerson, random walk, regulatory arbitrage, Renaissance Technologies, rent control, risk free rate, risk tolerance, road to serfdom, Robert Shiller, Robert Shiller, Ronald Reagan, salary depends on his not understanding it, Schrödinger's Cat, shareholder value, Silicon Valley, Simon Kuznets, South Sea Bubble, sovereign wealth fund, Spread Networks laid a new fibre optics cable between New York and Chicago, Steve Jobs, Steve Wozniak, The Great Moderation, The Market for Lemons, the market place, The Myth of the Rational Market, the payments system, The Wealth of Nations by Adam Smith, The Wisdom of Crowds, Tobin tax, too big to fail, transaction costs, tulip mania, Upton Sinclair, Vanguard fund, Washington Consensus, We are the 99%, Yom Kippur War

The chosen target changes according to the fashion of the time. In the 1980s money supply growth was the preferred indicator, then inflation-targeting came into vogue. The scale of indebtedness that emerged in the global financial crisis led many to favour commitment to a path of debt reduction. At the time of writing, forward guidance – a supposedly binding conditional declaration of future intentions – is coming to the end of its brief moment in the sun. These strategies of commitment to declared goals have intellectual and ideological attractions. The political right applauds the abandonment of discretion, or at least the appearance of such abandonment, which supposedly secures economic stability with minimal political intervention.


pages: 517 words: 139,477

Stocks for the Long Run 5/E: the Definitive Guide to Financial Market Returns & Long-Term Investment Strategies by Jeremy Siegel

Asian financial crisis, asset allocation, backtesting, banking crisis, Bear Stearns, Black-Scholes formula, break the buck, Bretton Woods, business cycle, buy and hold, buy low sell high, California gold rush, capital asset pricing model, carried interest, central bank independence, cognitive dissonance, compound rate of return, computer age, computerized trading, corporate governance, correlation coefficient, Credit Default Swap, Daniel Kahneman / Amos Tversky, Deng Xiaoping, discounted cash flows, diversification, diversified portfolio, dividend-yielding stocks, dogs of the Dow, equity premium, Eugene Fama: efficient market hypothesis, eurozone crisis, Everybody Ought to Be Rich, Financial Instability Hypothesis, fixed income, Flash crash, forward guidance, fundamental attribution error, housing crisis, Hyman Minsky, implied volatility, income inequality, index arbitrage, index fund, indoor plumbing, inflation targeting, invention of the printing press, Isaac Newton, joint-stock company, London Interbank Offered Rate, Long Term Capital Management, loss aversion, market bubble, mental accounting, Money creation, money market fund, mortgage debt, Myron Scholes, new economy, Northern Rock, oil shock, passive investing, Paul Samuelson, Peter Thiel, Ponzi scheme, prediction markets, price anchoring, price stability, purchasing power parity, quantitative easing, random walk, Richard Thaler, risk free rate, risk tolerance, risk/return, Robert Gordon, Robert Shiller, Robert Shiller, Ronald Reagan, selling pickaxes during a gold rush, shareholder value, short selling, Silicon Valley, South Sea Bubble, sovereign wealth fund, stocks for the long run, survivorship bias, technology bubble, The Great Moderation, the payments system, The Wisdom of Crowds, transaction costs, tulip mania, Tyler Cowen: Great Stagnation, Vanguard fund

It is perfectly possible for firms to fall short of revenue estimates and fail to meet their margin expectations, yet still beat on per share earnings because over the past quarter the firm has reduced the number of shares outstanding through corporate buybacks. Per share earnings can continue to grow even if overall revenues are stagnant. Finally, investors are influenced by any earnings guidance that firms give over the next quarter or year. Forward guidance below earlier forecasts will certainly influence the stock price negatively. Years ago, management would often tip off analysts when unexpected good or bad news impacted the firm. But after tough new fair disclosure laws were adopted by the SEC in 2000, such selected disclosure is no longer permitted.


pages: 497 words: 144,283

Connectography: Mapping the Future of Global Civilization by Parag Khanna

"Robert Solow", 1919 Motor Transport Corps convoy, 2013 Report for America's Infrastructure - American Society of Civil Engineers - 19 March 2013, 9 dash line, additive manufacturing, Admiral Zheng, affirmative action, agricultural Revolution, Airbnb, Albert Einstein, amateurs talk tactics, professionals talk logistics, Amazon Mechanical Turk, Asian financial crisis, asset allocation, autonomous vehicles, banking crisis, Basel III, Berlin Wall, bitcoin, Black Swan, blockchain, borderless world, Boycotts of Israel, Branko Milanovic, BRICs, British Empire, business intelligence, call centre, capital controls, charter city, clean water, cloud computing, collateralized debt obligation, commoditize, complexity theory, continuation of politics by other means, corporate governance, corporate social responsibility, credit crunch, crony capitalism, crowdsourcing, cryptocurrency, cuban missile crisis, data is the new oil, David Ricardo: comparative advantage, deglobalization, deindustrialization, dematerialisation, Deng Xiaoping, Detroit bankruptcy, digital map, disruptive innovation, diversification, Doha Development Round, edge city, Edward Snowden, Elon Musk, energy security, Ethereum, ethereum blockchain, European colonialism, eurozone crisis, failed state, Fall of the Berlin Wall, family office, Ferguson, Missouri, financial innovation, financial repression, fixed income, forward guidance, global supply chain, global value chain, global village, Google Earth, Hernando de Soto, high net worth, Hyperloop, ice-free Arctic, if you build it, they will come, illegal immigration, income inequality, income per capita, industrial cluster, industrial robot, informal economy, Infrastructure as a Service, interest rate swap, Intergovernmental Panel on Climate Change (IPCC), Internet of things, Isaac Newton, Jane Jacobs, Jaron Lanier, John von Neumann, Julian Assange, Just-in-time delivery, Kevin Kelly, Khyber Pass, Kibera, Kickstarter, LNG terminal, low cost airline, low cost carrier, low earth orbit, manufacturing employment, mass affluent, mass immigration, megacity, Mercator projection, Metcalfe’s law, microcredit, mittelstand, Monroe Doctrine, mutually assured destruction, New Economic Geography, new economy, New Urbanism, off grid, offshore financial centre, oil rush, oil shale / tar sands, oil shock, openstreetmap, out of africa, Panamax, Parag Khanna, Peace of Westphalia, peak oil, Pearl River Delta, Peter Thiel, Philip Mirowski, Plutocrats, plutocrats, post-oil, post-Panamax, private military company, purchasing power parity, QWERTY keyboard, race to the bottom, Rana Plaza, rent-seeking, reserve currency, Robert Gordon, Robert Shiller, Robert Shiller, Ronald Coase, Scramble for Africa, Second Machine Age, sharing economy, Shenzhen special economic zone , Shenzhen was a fishing village, Silicon Valley, Silicon Valley startup, six sigma, Skype, smart cities, Smart Cities: Big Data, Civic Hackers, and the Quest for a New Utopia, South China Sea, South Sea Bubble, sovereign wealth fund, special economic zone, spice trade, Stuxnet, supply-chain management, sustainable-tourism, TaskRabbit, telepresence, the built environment, The inhabitant of London could order by telephone, sipping his morning tea in bed, the various products of the whole earth, Tim Cook: Apple, trade route, Tragedy of the Commons, transaction costs, UNCLOS, uranium enrichment, urban planning, urban sprawl, WikiLeaks, Yochai Benkler, young professional, zero day

Obama’s 2015 National Security Strategy was more a meditation on the past than a vision for the future—more talk than action. A grand strategy premised more on containing than shaping Russia, Iran, and China smacks more of futility than vision, while the minimalism of habitually uttering the need for “restraint” provides no forward guidance. America’s top diplomats have forgotten that standing on the shoulders of giants doesn’t make one a giant. They have instead been little more than celebrity firemen and firewomen, leaving little dent on the international arena other than the weight of their self-congratulatory autobiographies.


pages: 1,066 words: 273,703

Crashed: How a Decade of Financial Crises Changed the World by Adam Tooze

Affordable Care Act / Obamacare, Apple's 1984 Super Bowl advert, Asian financial crisis, asset-backed security, bank run, banking crisis, Basel III, Bear Stearns, Berlin Wall, Bernie Sanders, Big bang: deregulation of the City of London, bond market vigilante , Boris Johnson, break the buck, Bretton Woods, BRICs, British Empire, business cycle, capital controls, Capital in the Twenty-First Century by Thomas Piketty, Carmen Reinhart, Celtic Tiger, central bank independence, centre right, collateralized debt obligation, corporate governance, credit crunch, Credit Default Swap, credit default swaps / collateralized debt obligations, currency manipulation / currency intervention, currency peg, dark matter, deindustrialization, desegregation, Detroit bankruptcy, Dissolution of the Soviet Union, diversification, Doha Development Round, Donald Trump, Edward Glaeser, Edward Snowden, en.wikipedia.org, energy security, eurozone crisis, Fall of the Berlin Wall, family office, financial intermediation, fixed income, Flash crash, forward guidance, friendly fire, full employment, global reserve currency, global supply chain, global value chain, Goldman Sachs: Vampire Squid, Growth in a Time of Debt, housing crisis, Hyman Minsky, illegal immigration, immigration reform, income inequality, interest rate derivative, interest rate swap, Kenneth Rogoff, large denomination, light touch regulation, Long Term Capital Management, margin call, Martin Wolf, McMansion, Mexican peso crisis / tequila crisis, mittelstand, money market fund, moral hazard, mortgage debt, mutually assured destruction, negative equity, new economy, Nixon triggered the end of the Bretton Woods system, Northern Rock, obamacare, Occupy movement, offshore financial centre, oil shale / tar sands, old-boy network, open economy, paradox of thrift, Peter Thiel, Ponzi scheme, Post-Keynesian economics, predatory finance, price stability, private sector deleveraging, purchasing power parity, quantitative easing, race to the bottom, reserve currency, risk tolerance, Ronald Reagan, Savings and loan crisis, savings glut, secular stagnation, Silicon Valley, South China Sea, sovereign wealth fund, special drawing rights, Steve Bannon, structural adjustment programs, tail risk, The Great Moderation, Tim Cook: Apple, too big to fail, trade liberalization, upwardly mobile, Washington Consensus, We are the 99%, white flight, WikiLeaks, women in the workforce, Works Progress Administration, yield curve, éminence grise

Not that exciting, but what the hay, it’s an existence! . . . Mother Nature nor Mother Market cares not a whit for your losses nor your hoped for double-digit return from an equity/bond portfolio that is priced for much less. Be a contented cow, not a voracious crow, and graze wisely with increasing certainty that the Fed and its forward guidance is your best bet for survival.”41 With trillions of dollars at stake and markets feverishly trying to second-guess the Fed’s policy, was Bill Gross’s pastoral image not wishful thinking? Rather than a herd grazing contentedly, to the Financial Times it seemed that relations between the markets and the Fed were increasingly coming to resemble the contorted psychodrama of a rocky marriage.