First of all, a little context: in the past decade, the European Central Bank, the Bank of Japan, as well as the central banks of Denmark, Switzerland and Sweden, have experienced negative interest rates. In other words, banks are being forced to pay the central bank’s excess cash.
Previously unthinkable, negative interest rates are now an accepted practice, even if they have an irregular history of meeting their stated political goals. Furthermore, negative interest rates took root, with only Sweden managing to slow its stimulus economy and rates of return to positive territory.
The pandemic increased the need for monetary stimulus and, with further rate cuts off the table, negative-rate central banks responded by buying a large number of bonds and other assets to support their economies. The US Federal Reserve and the Bank of England, which have long resisted negative interest rates, are now under enormous pressure to follow the course set in Europe and Japan.
The Bank of England has been flirting with the negative for some time. On Thursday, lawmakers gave banks another six months to prepare for negative rates, while insisting that they should not be seen as inevitable. In the end, the biggest drop in production in centuries could force UK rates into negative territory, leaving the US Federal Reserve as the only major central bank not to dive.
The pandemic is also pushing government spending around the world to its limit. The combined fiscal response amounts to 12% of global GDP, compared to 2% of global GDP after the 2008 financial crisis, according to the Capital Economy. Stimulus spending helped push the United States’ deficit for fiscal 2020 to $ 3.1 trillion, and the country’s debt reached $ 21 trillion – the largest share of the economy since 1946, when it emerged from Monday. World War.
There are a few reasons why most economists are not overly concerned with deficits at the moment. The first is that government spending is necessary to prevent economies from sinking further into recession. The second is that low interest rates mean that it is cheaper for governments to borrow to finance stimulus measures.
Neil Shearing, the group’s chief economist at Capital Economics, said deficits become a problem when they remain high, whether through continued high spending or substantially lower tax revenues. But the economy can recover relatively quickly, once the pandemic is overcome. Looking further ahead, low interest rates will help prevent public debt from getting out of hand.
“None of this means that some countries will not need to go through a fiscal restraint after the pandemic passes. But most governments, especially those whose central banks can support their bond markets, have time to assess the scale of the damage and determine an appropriate response, “said Shearing.
But there are still risks. The huge amount of stimulus launched by governments has obscured part of the economic trauma caused by the pandemic, especially in Europe, where employment support programs have kept companies afloat and workers employed. There is a chance that when the health crisis subsides and support is withdrawn, unemployment and bankruptcies will increase dramatically.
“If there is really large-scale, long-term damage to the economy’s productive potential, it will affect its ability to increase tax revenue in the future and its scope for running large deficits is now clearly less the more permanent the damage,” he said. David Miles, professor of financial economics at Imperial College Business School.
In the face of mass unemployment and commercial failure, most governments have put aside concerns about the deficit for now. The same goes for concerns about monetary policy, suggesting that ultra-low interest rates are here to stay in the near future.
“A world in which unemployment is moving to a significantly higher level is probably one in which inflationary pressures do not accumulate much, and this is a world in which central banks will not rush to raise interest rates” , said Miles, who was a member of the Bank of England’s Monetary Policy Committee from 2009 to 2015.
One problem: keeping interest rates low will limit central banks’ ability to respond to the next crisis, just as the global financial crisis and the eurozone debt saga kept rates low before the pandemic. But central bankers have to deal with the current crisis before thinking of a return to a more conventional policy.
“You would be cutting your nose to irritate your face if you think, ‘well, let’s put interest rates at 3% so that when things get even worse in the future, we can reduce them to zero,'” Miles said. .
“You are going to the next problem, if such a thing happens, with limited ammunition on the side of monetary policy, but that does not mean that there is an easy answer,” he added.
The man who could rock the gig economy
Marty Walsh may not seem like the person to reshape the gig economy. He spent years defending construction workers and less time on the intricacies of on-demand work at billion-dollar technology companies.
Millions of Americans lost their jobs when the health crisis created an economic crisis. And many started working with companies like Uber, Instacart and DoorDash as a barrier to their livelihood.
At the same time, these companies are pressing to defend a controversial business model, in which they treat their workers as independent contractors, instead of employees who would be entitled to traditional benefits and protections, such as labor compensation, unemployment insurance, family leave, leave or the right to unionize.
“At the moment, we are at a crossroads,” said Shannon Liss-Riordan, a Boston labor lawyer who has been challenging Uber and Lyft over the classification of workers in various lawsuits for seven years. “If he meets the challenge, Marty Walsh could have one of the biggest impacts on work in this country since Frances Perkins,” she said, referring to Franklin D. Roosevelt’s secretary of labor, who was the chief architect of the New Deal .
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Friday: UK GDP; Holiday market in China, South Korea, Singapore
Correction: an earlier version of this story incorrectly stated America’s debt. It is $ 21 trillion.