Neither do rapid growth in government debt, declining interest rates, or rapid Increases in a central bank’s balance sheet
By Richard Vague – Monetarist theory, which came to dominate economic thinking in the 1980s and the decades that followed, holds that rapid money supply growth is the cause of inflation. The theory, however, fails an actual test of the available evidence. In our review of 47 countries, generally from 1960 forward, we found that more often than not high inflation does not follow rapid money supply growth, and in contrast to this, high inflation has occurred frequently when it has not been preceded by rapid money supply growth.
The purpose of this paper is to present these findings and solicit feedback on our data, methods, and conclusions.
To analyze the issue, we developed a database of 47 countries that together constitute 91 percent of global GDP and looked at each episode of rapid money supply growth to see if it was followed by high inflation. In the majority of cases, it was not. In fact, the opposite was true—a large percentage of the cases of high inflation were not preceded by high money supply growth. These 47 countries all rank within the top 70 largest economies as measured by GDP and include each of the top 20 countries. If a country was not included, it was because we could not get a complete enough set of historical data on that country.
There are several reasons to want to better understand the causes of inflation. Currently, central banks in Japan, Europe and elsewhere are trying to engender a moderately higher level of inflation in order to stave off the drift toward deflation and under the belief that it will add to job and economic growth. Also, both public and private debt have reached such high levels in ratio to GDP that some policymakers are beginning to reflect on potential paths to deleveraging, and inflation is one such path. Lastly, a number of countries are trying to moderate levels of inflation that are deemed too high. For these countries, too, a deeper understanding of the mechanisms of inflation is important. more>
Posted in Business, Economic development, Economy, Education, History, Regulations
Tagged Banking reform, Capital, Debt, Financial crisis, Inflation, Money creation, Skills
The U.S. financial system could be on the cusp of calamity. This time, we might not be able to save it.
By Frank Partnoy – The reforms were well intentioned, but, as we’ll see, they haven’t kept the banks from falling back into old, bad habits. After the housing crisis, subprime CDOs naturally fell out of favor. Demand shifted to a similar—and similarly risky—instrument, one that even has a similar name: the CLO, or collateralized loan obligation. A CLO walks and talks like a CDO, but in place of loans made to home buyers are loans made to businesses—specifically, troubled businesses. CLOs bundle together so-called leveraged loans, the subprime mortgages of the corporate world. These are loans made to companies that have maxed out their borrowing and can no longer sell bonds directly to investors or qualify for a traditional bank loan. There are more than $1 trillion worth of leveraged loans currently outstanding. The majority are held in CLOs.
Despite their obvious resemblance to the villain of the last crash, CLOs have been praised by Federal Reserve Chair Jerome Powell and Treasury Secretary Steven Mnuchin for moving the risk of leveraged loans outside the banking system. Like former Fed Chair Alan Greenspan, who downplayed the risks posed by subprime mortgages, Powell and Mnuchin have downplayed any trouble CLOs could pose for banks, arguing that the risk is contained within the CLOs themselves.
Banks do not publicly report which CLOs they hold, so we can’t know precisely which leveraged loans a given institution might be exposed to. But all you have to do is look at a list of leveraged borrowers to see the potential for trouble. Among the dozens of companies Fitch added to its list of “loans of concern” in April were AMC Entertainment, Bob’s Discount Furniture, California Pizza Kitchen, the Container Store, Lands’ End, Men’s Wearhouse, and Party City. These are all companies hard hit by the sort of belt-tightening that accompanies a conventional downturn.
Under current conditions, the outlook for leveraged loans in a range of industries is truly grim. Companies such as AMC (nearly $2 billion of debt spread across 224 CLOs) and Party City ($719 million of debt in 183 CLOs) were in dire straits before social distancing. Now moviegoing and party-throwing are paused indefinitely—and may never come back to their pre-pandemic levels.
Meanwhile, loan defaults are already happening. There were more in April than ever before. Several experts told me they expect more record-breaking months this summer. It will only get worse from there. more>
Posted in Banking, Business, CONGRESS WATCH, Economic development, Economy, History, How to
Tagged Banking reform, Business improvement, Capital, CDO, CLO, collateralized debt obligation, collateralized loan obligation, Congress Watch