On 16 January 2024, the second ECB@25 Symposium was hosted by Professor Mary Pieterse-Bloem (Erasmus School of Economics Professor of Financial Markets) at our Pavilion.
From left to right: Eijffinger, Pieterse Bloem, Goodhart, Ji, De Grauwe, Hermans.
Left to right on screen: Chinn, Frankel, Ito.
Link to the agenda and the presentations by Paul de Grauwe, Yuemei Ji, Charles Goodhart, and Menzie Chinn, Jeffrey Frankel and Hiro Ito are that the site.
Off topic, but related to some recent topics –
The process of interest-rate adjustment to an improved economic outlook and expectations of Fed rate cuts is not progressing evenly:
https://fred.stlouisfed.org/graph/?g=1eY9K
Corporate borrowing rates have come down, but as of November, interest rates on credit cards were still rising. Bankrate confirms that credit card rates haven’t been coming down as of January:
https://www.bankrate.com/finance/credit-cards/current-interest-rates/
Mortgage rates have come down, but remain well above corporate BBB rates, unlike before the Covid recession when the two were roughly the same. So households are facing a greater burden from higher rates than are corporations.
By the way, we keep hearing from our local Putin Pal, JohnH, that higher interest rates are great for the common folk because the common folk get to collect interest on their savings. Our local Putin Pal never mentions that the common folk also pay interest on borrowing, ’cause that would make his argument sound silly – which it is.
Ready? Here’s the picture:
https://fred.stlouisfed.org/graph/?g=1eYiO
Households carry almost exactly three times as much debt as they hold in debt as assets. Add in bank accounts (which pay less in interest than any form of consumer debt costs, by the way), and households are still net debtors by a wide margin, wide like $3.4 trillion. So once again, Johnny is absolutely, completely wrong. It’s almost as if Johnny has some agenda other than the truth.
Menzie , in his post about his paper with Laurent Ferrara on recession prediction, points out the value of the debt service ratio as a predictive tool. In that paper, it’s the DSR for non-financial firms which proves useful in predicting recessions. Here’s the picture:
https://data.bis.org/topics/DSR/BIS,WS_DSR,1.0/Q.US.N?
The DSR is headed higher (and will keep heading higher for a while) but isn’t high relative to earlier non-recessionary periods. I have been too lazy to figure out whether levels or changes were used in forecasting efforts. Menzie, could you clear that up for this lazy reader?
Here’s a picture of the household DSR with the level of household debt:
https://fred.stlouisfed.org/graph/?g=1eYmj
Notice the disconnect between debt level and debt service. Part of the disconnect is that the denominator for the DSR – disposable income – is rising most of the time. The other part is the downward trend, till recently, in borrowing rates. As debt rolls over in a higher interest-rate environment, the DSR will rise unless incomes rise very fast or households decide to stop borrowing so much. History suggests the DSR will rise.
Yes, households are net debtors by a wide margin…but most of it is mortgage debt. “As of September 2022, most mortgage borrowers had locked in ultra-low rates, suggesting that recent rate hikes have had a limited effect on a typical borrower’s debt service expenditures…just 31 percent of outstanding mortgages had a rate exceeding 4 percent (~3% after tax.”)
https://www.dallasfed.org/research/economics/2022/1227
For most mortgage holders, it is the best of times. The rate they are paying is at rock bottom. The real value of their debt service has dropped significantly due to inflation. The real value of the mortgage they hold has declined substantially. Real wages have held steady. The value of their property is bound to skyrocket once the Fed does decide to lower interest rates. And the yields on their secure savings are higher than they’ve been for more than a decade. You would think that Ducky and pgly would be exuberant about high interest rates.
Meanwhile, anyone with a savings account can earn a significantly positive, real return on their secure savings, particularly if it is invested in a tax deferred account. CDs of 4.5-5.0% are readily available at many credit unions. Higher rates are available as money market accounts and brokered CDs. People on fixed incomes, or who are saving for retirement, for their kids college education, or for HSA accounts are finally getting a real return on their secure savings.
All of this should be freeing up money to drive consumption (steady real wages – declining real debt service and positive real yields on secure savings.) This should be helping the economy. But Ducky and pgly think it imperative to reduce interest rates!!!
Other than driving up the value of their homes, how does lowering interest rates help the average mortgagee or anyone else? Refinancing will make no sense for the foreseeable future, if ever. Selling and buying another house at a higher price and a higher mortgage rate won’t make sense for the foreseeable future, if ever. The wealth effect stemming from the Fed’s ZIRP has basically been tapped out, at least for mortgages.
For new home buyers, lower rates will essentially be nullified, because lower rates quickly translate into higher prices, particularly since the Inventory of houses on the market is going to be very low for a long time, simply because most homeowners are stuck where they are due to their ultra-low mortgage rate.
So what would be the motivation of the Fed to lower interest rates, particularly since the economy is humming along, private investment is strong compared to the 2010s, inflation is dropping, and unemployment is low?
The main beneficiaries of lower interest rates, as I see it, appear to be limited to wealthy investors, whose share prices are already back to where they were at their previous peak, and banksters, who are doing reasonably well despite high interest rates.
As you see it? You keep offering that as a standard, as if your beliefs have anything to do with reality. Your little essay here is further evidence that they don’t. The simpe fact, explained to you repeatedly, is that the rich save more than the rest, an earn interest in their savings. They benefit mos from high interest rates. You getting this wrong, apparently willfully.
Oh, and real wages have not simply held steady. They have risen.
What would motivate the Fed to cut rates? You’ve asked before and I’ve answered before. Not sure why you keep asking if you’re just going to ignore the answer. Quick recap: the Fed is running tight monetary policy. With inflation running at target and lagged effects of earlier tightening still on the way, here is no longer justification for tight policy. Taylor rule – look it up.
As I have pointed out to you, households are net debtors in the amount of roughly $3.4 trillion. Your folksie “as I see it” story, with no figures to back it up, can’t change that fact. Rich people lend to everybody else, so it’s the rich who benefit most from high rates. You are cheering for making the rich richer.
A heads up for casual readers of this blog. All of this has been explained to Johnny in the past. He mostly ignores it, because he doesn’t really care about how th economy works. When he responds, it’s mostly with made up stories, lacking substance, like the one he offered here.
Johnny, the average household has more in credit card debt than in savings. that wipes out any benefit of higher interest. those credit card interest rates increase more than any profit from savings. your argument is simply dishonest Johnny. my household is far more profitable with higher interest rates than low interest rates. I am not in the average household segment. wealthy households benefit tremendously with higher rates, moreso than lower rates, as macroduck, already told you. high interest rates give me risk free profits. I like that. low rates add to the risk. your argument is simply flawed Johnny.
“Johnny, the average household has more in credit card debt than in savings. that wipes out any benefit of higher interest. those credit card interest rates increase more than any profit from savings. your argument is simply dishonest Johnny.”
Thank you for making this point as it saves me the time. BTW – JohnH has flipped flopped on this one too. Well there used to be someone posing as JohnH would complained incessantly about high credit card rates. I guess little Jonny boy has the most malleable opinions.
Are there two JohnH’s out there? You used to whine about high mortgage rates but now you have finally realized that a lot of mortgages are long-term fixed rate loans? With all your flip flopping – you finally got one small point right once? But even a stopped clock is right twice a day.
BTW I hope our host does not read your little claim about after inflation mortgage rates. The last time he mocked your stupid claims was just brutal.
Just my two cents worth on the presentations –
Paul De Grauwe
“…rate rises…have… caused the ECB to effectively transfer… approximately 146 billion euro, to banks in the eurozone. The two main problems of this transfer are a loss of effectiveness of monetary policies and societal unfairness for taxpayers. Hence De Grauwe and Yuemei Ji (propose) a two-tier system of reserve requirements.”
Excellent. However, in the U.S. case, we saw banks sitting on vast reserves earning interest from the Fed rather than lending to the private sector in the aftermath of the Great Recession. If a two-tiered system of reserves will prevent banks from withholding lending when lending is needed, then it’s a great idea. Sounds in the blurb like it’s meant to solve a related problem faced in a higher interest-rate environment. If a two-tier reserve system doesn’t fix both problems, then we still have a policy problem to solve.
Charles Goodhart
“Demographics, Deglobalisation and Decarbonisation, are all going to be very taxing for the world economy…”
I find this three Ds list troubling; climate change ain’t on it. Because it doesn’t start with a D? Because our best minds can’t break out of the intellectual bubble that doesn’t allow recognition of the cost of climate change, only the cost of decarbonization? Climate change and its consequences are going to be “very taxing for the world economy.”
Discussion
“…whether the introduction of the digital euro will be a game changer for its international reserve currency status.”
We do love our gadgets and geegaws. Does a digital thingie overcome the network and anchor advantages which historically have prolonged reserve-currency status? Doesn’t the reserve-currency country have to produce “excess” assets (a negative financial balance with the world) in the amount of reserves held? Not only does the country need the capacity to issue debt – credit-worthiness, liquidity and such – but doesn’t it need to use that capacity pretty generously, or there won’t be enough asset to hold in reserve?
Employment cost data for Q4 are out:
https://fred.stlouisfed.org/graph/?g=1f38K
Using the PCE deflator, the data show a 2.0% annualized rise in real wages and salaries, the biggest quarterly rise since Q2 2020. It’s also the smallest nominal rise since Q2 2021. Good for workers, good for the Fed.
The BLS release showed inflation adjusted compensation which indeed increased.
pgl is too lazy to provide a link, as usual…
I did under another post. Yea – my stalker is mentally retarded.
No wonder pgl didn’t provide a link: the real Employment Cost Index : Wages and Salaries is still below where it was four years ago.
https://fredblog.stlouisfed.org/2018/02/are-wages-increasing-or-decreasing/
pgl is lying, as usual…
I love it when a mentally retarded LIAR accusing me of lying. I get to re-post the link that lying little Jonny boy claimed I did not provide:
https://www.bls.gov/news.release/eci.nr0.htm
Now I get Jonny boy is too retarded to read this or what Macroduck wrote. But over the period that Macroduck mentioned real compensation as clearly reported by the BLS increased.
Of course little Jonny boy goes back to a FRED blog post written in 2018 to prove the obvious – Jonny boy is the most moronic little liar ever.
“Wages and Salaries is still below where it was four years ago”
Macroduck presented nominal ECI growth since 2018 v. the increase in the BEA reported measure of consumer prices. We get you are dumber than a rock but even Mr. Magoo could see the latter has risen more than the former.
I guess we could ask if you get EVERYTHING wrong? But the answer is a clear yes.
Dude – I get Bruce Hall is going out of his way lately to take the lead in the 2024 troll of the year. But I’m still cheering for you! So keep up the stupidity as this is going to be your year!
do you think it is fair judgement to compare anything to a spike that occurred four years ago? that spike being the unprecedented covid epidemic? do you think it is good faith argument to compare the normal of today to the outlier of 4 years ago? you are nothing but a dishonest crook Johnny. this is quintessential misinformation on your part. you are not interested in an accurate discussion of the issues. a freshman in college would have failed the class for trying to pull such misguided analysis Johnny.
Fair point. But even on this 4 year comparison real ECI compensation is up 0.3%. When Jonny boy says it is down – he is either lying or just showing how incredibly stupid he is (or both).
Watch how Jonny boy takes my observation that the source BLS data confirms what you wrote somehow makes me a liar:
‘No wonder pgl didn’t provide a link: the real Employment Cost Index : Wages and Salaries is still below where it was four years ago.’
His source? A FRED post from 2018 that does have an update of a fuzzy chart that is hard to read. Maybe that’s why little Jonny boy missed the fact the the graph uses a less reliable longer term measure of consumer prices. And of course Jonny boy is the expert in “moving the goal posts” but let’s take a look at the last 4 years. I used FRED data. Consumer prices rose by 16.4% over the past 4 years. Nominal ECI rose by 16.7%. Not a huge increase in real compensation over little Jonny boy’s alternative time period but still a 0.3% increase.
“Still below” is not true at all. Not that little Jonny boy ever lies. No – this troll is too stupid to know what is the correct data so how can this worthless troll ever be seen as a liar?