Deflation

From a rather different perspective Richard Batley of Lombard Street Research argues that global deflationary pressure has also increased as a result of the relative decline in US economic power. For much of the postwar period the US acted as a clearing house for global demand and supply by maintaining open markets that absorbed the rest of the world’s goods. But the supply clearing capacity of the US ran out after 2008 because it had exhausted its debt capacity. Instead of excess supply being cleared through ever higher US household debt, it is now being cleared through lower prices.

Krishna Guha on Scottish independence

The onset of divorce negotiations would lay bare that Scotland faces an impossible trinity: full independence, financial stability and deep economic integration with the UK. It can have any two of these but not all three.

The declared objective of the pro-independence campaign is to unwind the British political and fiscal union while retaining a common currency. But the eurozone crisis demonstrated that monetary unions without deep integration are debt intolerant: they become unstable at relatively low levels of debt and deficits, particularly absent banking union.

Buiter on Helicopter Drops

Three conditions must be satisfied for helicopter money always to boost aggregate demand. First, there must be benefits from holding fiat base money other than its pecuniary rate of return. Second, fiat base money is irredeemable – viewed as an asset by the holder but not as a liability by the issuer. Third, the price of money is positive. Given these three conditions, there always exists – even in a permanent liquidity trap – a combined monetary and fiscal policy action that boosts private demand – in principle without limit. Deflation, ‘lowflation’ and secular stagnation are therefore unnecessary. They are policy choices.

The FT on Abe

On target? Selected objectives of Abenomics’ ‘third arrow’

Labour and demographics 
● Goal: Make Japan’s labour market more flexible; diversify and expand the labour force by increasing opportunities for women and bringing in more foreign workers
● What has been done? Day care-related spending increased by a third to about Y700bn ($6.8bn) this fiscal year; visa periods for “technical trainees” in the construction sector extended temporarily (ends 2020)
● But . . .  More aggressive rollback of job protections for full-time workers shelved; proposal to open door to 200,000 immigrants a year shot down

Corporate tax 
● Goal: Lower Japan’s corporate income tax rate from roughly 38 per cent to something closer to the OECD average of 25 per cent
● What has been done? 2.4 per cent surcharge to fund tsunami reconstruction lifted in April, one year early
● But . . .  Mr Abe has won backing to cut the base rate starting next fiscal year but the policy update may not contain a detailed timetable or an ultimate target level

Trade 
● Goal: Increase ratio of Japan’s international trade that falls under free-trade deals from 20 per cent to 70 per cent
● What has been done? Japan-Australia bilateral trade deal signed in April, including limited reduction of Japanese tariffs on Australian beef and other agricultural products
● But . . .  Bilateral Japan-US trade talks remain deadlocked, stalling broader negotiations over the proposed 12-nation Trans-Pacific Partnership; Japan-EU trade deal also in limbo

Medical care 
● Goal: Turn Japan’s pharmaceutical and healthcare sectors into engines of economic growth
● What has been done? Pharmaceutical law amended to allow online sales of non-prescription medicines (with some exceptions); restrictions on testing of regenerative therapies such as stem-cell treatments loosened; approvals process for advanced drugs changed to allow for faster approval
● But . . .  Doctor-supported rule that prevents patients from collecting insurance payouts if they try experimental therapies is seen as a big obstacle. The policy update may contain a goal of relaxing this rule, but how aggressively?

Special economic zones 
● Goal: allow specified cities and regions to carve out exemptions from national regulations
● What has been done? Law allowing creation of “national strategic economic zones” passed; six zones named in March: Tokyo (promotion of foreign investment); Osaka-Kyoto-Kobe (medical research); Fukuoka (employment); Okinawa (tourism); two cities in Niigata and Fukui (agriculture)
● But . . .  Zones are more policy tool than policy, and no specific deregulation plans have been drawn up yet

Max Hastings on 1914

Grand Admiral Tirpitz employed and English governess for his daughters, who completed their education at Cheltenham Ladies College.

Russia boomed in the last years before Armageddon. After 1917, its new Bolshevik rulers had become the fourth largest in the world, growing at almost ten percent annually. 

Max Hastings on Kaiser Wilhelm

He had no real thirst for blood but a taste for panolpy and posturing, a craving for martial success; he displayed many of the characteristics of a uniformed version of Mr Toad....Most of his contemporaries, including the statesman of Europe, thought him mildly unhinged, and this was probably clinically the case. 

The FT on George Saravelos on NIRP

"Second, the effect on FX once the zero bound is crossed will likely be non-linear. On the one hand, it will be the first time a major central bank “pays” investors to short the currency. Swiss money market rates briefly turned negative in the crisis but the SNB never charged banks for deposits. Denmark also has negative rates but this is to defend a fixed exchange rate. If the euro becomes the first major funder with NIRP (negative rate policy) rather than ZIRP status, portfolio shifts are likely to be larger than usual.

"Third, negative rates will open up market pricing for QE. The ECB can’t take rates too negative, because at some point the opportunity cost of depositing at the ECB will be high enough to encourage physical cash hoarding and financial disintermediation. Once rates go negative, the next step is for the market to start pricing quantitative easing, and rightly so in our opinion – real rates in Europe remain higher than in the US.