While we noted a few weeks ago that rules appear to be changing around the world in an ongoing game of Calvinball, this week has seen numerous new developments reminding us that a tiger can’t change its stripes.
“Deep Negative Rates Can Do the Job”
Our first striped tiger is the ever-crusading Ken Rogoff. Rogoff is back touting negative rates in his article, “The Case for Deeply Negative Rates”. Rogoff urges us to “imagine” a world where the Fed pushes short term rates to, ”say, -3% or lower” and argues that “if done correctly… negative rates would operate similarly to normal monetary policy”. Such a move would require the usual caveat of controls on the hoarding of cash, including the phasing out of “large-denomination bank notes” and other regulations. However, by employing a negative interest rate strategy, which have been empirically shown to “effectively stimulate… real economic activity”, the Fed could not only “lift many firms, states, and cities from default”, but also do so without “dispensing with market-based allocation mechanisms”.
“Muddle Through with Creative Interpretation”
Our second tiger is Germany, specifically its penchant for being a curmudgeon when it comes to fiscal matters, with its “black zero” policy and relatively conservative view of monetary policy. This time, the Germans are throwing a spanner in the ECB’s own alphabet soup of programs designed to help address the problems stemming from CV19. As an article from MarketWatch explains, the German Constitutional Court ruled that the ECB must clarify how the Pandemic Emergency Purchase Program, or risk having the Bundesbank no longer participate. The ruling does allow for a “transitional period of no more than three months”, so there is some room for Calvinball.
“Sharpened Rhetoric against China”
Our final tiger (or rather tigers) are the US Administration and China as they once again go for tit-for-tat, this time regarding CV19. As a Reuters article explains, President Trump has made it clear that the trade deal “now becomes secondary to what took place with the virus” and is said to have has asked for ideas on retaliatory measures. Meanwhile, China’s official news agency posted a short animation mocking the US response to CV19. However, in the end, it is likely that Europe will also be dragged into the squabble. With echoes of the Huawei and 5G battle, Mathias Dopfner explains in the article in Business Insider, that “Europe must decide between the US and China”, with both intelligence and economic cooperation in the balance.
