Quantitative Easing, Capitalism, and Investment...2016/06/21 · KOOTHS | Quantitative Easing,...

1 KOOTHS | Quantitative Easing, Capitalism, and Investment

Quantitative Easing, Capitalism, and Investment

University of Leipzig, Institute for Economic Policy | Leipzig, 21 June 2016 International Conference: Zero Interest Rate Policy and Economic Order

Stefan Kooths

Forecasting Center


QE/ZIRP

Mankind‘s largest monetary experiment of all peace times


Personal wealth

Capitalism

Private ownership of production factors » Land (natural resources)

» Labor

» Capital (produced means of production)

Private risk taking

» Uncertain future speculation

» No risk-free assets

Accountability » Private profits and private losses

» Liquidation in case of failure


The market signal system: Profits, Losses, Bankruptcy

Profits » Revenues (value creation) > Costs (value destruction)

» Net creation of value

Agent stays in the game, activity can be continued/expanded

Losses » Revenues < Costs

» Net destruction of value

Yellow card (warning): activity should be reduced/modified

Bankruptcy » Revenues << Costs

» Net value destruction ongoing/at large scale

Red card (sending-off): activity must stop (reallocation of resources)


Human action: Means, ends, and values

Reverse value imputation » The end may not „sanctify “ the means, but it values it!

Limited knowledge » Action under uncertainty (= speculation)

Rationality » Humans do not purposefully act against their aims

Final purpose of economic activity: Consumption goods

Means End Expected effect

Selection Means End Valuation Subjective judgment


Cargolifter: The plan …


… and the outcome: Tropical Islands


Cargolifter hangar Tropical Islands hall

Production cost: 78 million euro (1999/2000)

Liquidation value: 17.5 million euro (2003)


Cargolifter in the national accounts

A hangar is a hangar is a hangar …


Value of the Spanish capital stock?

0

50

100

150

200

250

300

350

400

450

500

0

500

1000

1500

2000

2500

3000

3500

4000

1980 1985 1990 1995 2000 2005 2010

Net fixed capital formation (rhs)

Net capital stock (2005 prices)

Bn. Euro Bn. Euro

Source: AMECO Database.

No level shift


Spain: Invisible “ghost estates”

-6

-5

-4

-3

-2

-1

0

1

2

3

4

0

200

400

600

800

1000

1200

1980 1985 1990 1995 2000 2005 2010

Output gap

Potential output

Gross domestic product at 2005 market prices

Bn. Euro Percentage points

Source: European Commision, AMECO and CIRCA databases.

2006-2008 output gap nowcast/forecast:

-0.9 to -1.3 %


Two types of mal-investments

Idiosyncratic: Cargolifter example » Wrong expectations of one market participant

» Happens every day, no systemic risk

» Liquidation, reallocation of resources

Pervasive: Expansionary monetary policy » Systematically wrong expectations of all market participants

» Financial crisis (debt crisis = flip-side of heavy capital stock distortion)

Liquidation: cold-turkey type recession, reallocation of resources

Bail-outs: sluggish activity, incomplete reallocation of resources


Three options of coping with debt crises

Public bail-outs » Shifts private debt to public sector

» Private debt crisis sovereign debt crisis

» No solution for fiscally distressed countries

Inflating the debt away » Takes a long time, promotes zombification

» Puts the currency at risk

» Not targeted towards non-performing loans

Liquidation » Tough (cold turkey) in the short-run …

» … but targeted (and root cause oriented)

» Puts capital at second (now first) best use

Anti-capitalist approach

(harms principle of accountability, creates moral hazard risks)

Capitalist approach

(in line with free market principles)


Production and expenditure account

Intermediate consumption (production structure)

Source/Input Use/Output

Goods and services account for period t

Domestic value-added

Imports

Intermediate consumption (production structure)

Final consumption (exclusive source of value)

Domestic capital formation

Exports

Capital formation abroad

„Final“ use of domestic production (only with respect to period t)


Production: A time consuming, multi-stage process

Capital formation: intertemporal intermediate consumption

Pri

mar

y p

rod

uct

ion

fac

tors

(l

abo

r an

d n

atu

ral r

eso

urc

es)

t t-1 t-2 t-3 t-4 t-5 t-6

Co

nsu

mab

le o

utp

ut

(fir

st-o

rde

r go

od

s)

Early stages (higher-order goods)

Production

Value imputation

Late stages (lower-order goods)

QC Q2 Q3 Q4 Q5 Q6 Q7

Capital stock as a structure


Capital

Capital as intentionally produced productive means … » … not a disembodied abstraction or homogenous aggregate

» … nor a self-perpetuating (“Knightian”) fund

Structure of heterogeneous goods » Limited convertibility and recombination losses

» Capital as a structural pattern (Lachmann)

Value dimension: » Ability to allow individuals to more readily realize their plans rather

than physical characteristics or physical history

» “Unfinished entrepreneurial plans” (Kirzner): Capital goods to be assessed in light of their usefulness to those plans

Missing link between micro and macro level (Skousen)


Labor productivity and capital

Low capital intensity High capital intensity » Higher gross value added per

capita (trivial)

» Higher net value added per capita (via natural forces)


Production: The Hayekian triangle

Number of production stages/shape of the Hayekian triangle?

Pri

mar

y p

rod

uct

ion

fac

tors

(l

abo

r an

d n

atu

ral r

eso

urc

es)

t t-1 t-2 t-3 t-4 t-5 t-6

Co

nsu

mab

le o

utp

ut

(fir

st-o

rde

r go

od

s)

Early stages (higher-order goods)

Production

Late stages (lower-order goods)

QC Q2 Q3 Q4 Q5 Q6 Q7


Interest

Interest as a value phenomenon » Expression of time preference

» Price of future goods relative to present goods

» Discount rate interwoven in the entire price system

Capitalization theory (Fetter): Interest vs. price of capital » Productivity of capital reflects in price of capital goods

» Valuation of reproducible capital pushed backward to primary factors

» Price of capital = present value of future income streams

Interest and “roundaboutness of production” » Capital-intensity increases labor productivity via natural forces

» Choice of more roundabout production schemes depends on time preference

Pure time preference = market rate of interest?


Interest rate and market for loanable funds

LFD=I

LFS=S

i*

i

LF


Coordinating saving and investment

Saving » Saving up for something: Future demand, not a leakage

» Derived-demand and discount effect

M*V = P*(QC + Q2 + Q3 + Q4 + Q5 + Q6 + Q7)

Investment: Stage pattern matters (not volume alone)

Entrepreneurial challenge: bringing capital structure in line with pure time preference (intertemporal arbitrage)

derived-demand effect dominates

discount effect dominates


Capital-based macroeconomic framework (Garrison)

C

I i

LF

S

I

Production possibilities

frontier

Stages of production

Loanable funds


Monetary theory of the business cycle

Financial crisis » Flipside of capital stock distortion

» Systematic investment failures due to excessive credit creation

Non-neutrality of money » Cantillon effects

» “Capital gives money time to cause trouble” (Garrison)

Monetary policy » Interest rate: Key economic variable in the capitalist system manipulated by

central banks

Credit creation vs. credit intermediation » Forced savings vs. voluntary savings


Financial markets

Supply of capital

(savings)

Money supply

Demand for capital

(investment)

Money demand Credit creation

Credit intermediation

Securities markets

(shares, bonds)

Credit market

Banking sector


Interest rate and monetary policy

LFD=I

LFS=S

i*

i

LF

LFD=I+L

LFS=S+M

iM


Euro area GDP

Sluggish post-crisis activity

Two financial crises in a row » Global financial crisis

» Sovereign Debt crisis

80

85

90

95

100

105

110

115

120

125

Q1 2005 Q1 2007 Q1 2009 Q1 2011 Q1 2013 Q1 2015

GDP

growth path (5 y)

growth path (10 y)

Index


Euro area business investment

In line with known patterns

Investment stimulus » Building capacities …

» … or absorbing capacities?

70

75

80

85

90

95

100

105

110

115

120

1 2 3 4 5 6 7 8

Baseline

Bankingcrisis

EA 2008

EA 2011

Index


Flip-side of not liquidating: Debt overhang hampers credit channel

0

50

100

150

200

250

300

350

2000 2002 2004 2006 2008 2010 2012 2014

Protugal Italy Spain Greece Ireland

Gross Private Sector Debt Gross Private Sector Debt Gross Private Sector Debt Gross Private Sector Debt Gross Private Sector Debt Gross Private Sector Debt Gross Private Sector Debt Gross Private Sector Debt Gross Private Sector Debt Gross Private Sector Debt

Annual Data. In relation to nominal GDP.

Gross Private Sector Debt

Percent

12,3

17,3

7,0

34,4

18,9

0

5

10

15

20

25

30

35

40

2000 2002 2004 2006 2008 2010 2012 2014

Portugal Italy Spain Greece Ireland

Annual data. Share of total loans.

Non-Performing Loans

Percent

Non-Performing Loans

Data source: Bank for International Settlements, World Bank.


Target-2 imbalances: Intra-euro area liquidity and capital flight are back

Bank Recovery and Resolution Directive (BRRD) » Passed in March 2014

» Bail-in elements

Liquidity flight

Greek crisis 2015 » Capital flow and cash controls

» ELA

Liquidity and capital flight

QE-programs » Starting in March 2015

» 60 (now 80) bn Euro/month

Capital flight

-1200

-1000

-800

-600

-400

-200

0

200

400

600

800

1000

1200

2008

2009

2010

2011

2012

2013

2014

2015

2016

TARGET balances

Monthly data. Sorce: ECB.

billion euro

GER

ESP

ITA

GREPORIRE

FRA

LUX

NEDFIN

AUTBEL


Global QE

0

100

200

300

400

500

600

700

800

900

1000

Fed BoE BoJ ECB

Quarterly data.

Index (2005=100)

Monetary Base

60

70

80

90

100

110

120

130

140

150

160

USD GBP JPY EUR CNY

Monthly data.

Index (2005=100)

Nominal effective exchange rates

Data source: Thomson Datastream, IfW calculations.


Monetary financing of governments

0

1

2

3

4

5

6

7

8

2005 06 07 08 09 10 11 12 13 14 15 16

Germany France Italy Spain EMU

Monthly data. EMU: Averrage.

Government Bond Yields (10-year) Government Bond Yields (10-year) Government Bond Yields (10-year)

Percent

Government Bond Yields (10-year) Government Bond Yields (10-year)

0

20

40

60

80

100

120

140

2005 2007 2009 2011 2013 2015

Germany France Italy Spain EMU

Gross Government Debt Gross Government Debt Gross Government Debt Gross Government Debt Gross Government Debt Gross Government Debt Gross Government Debt Gross Government Debt

Annual Data. In relation to nominal GDP; EMU: Average.

Gross Government Debt

Percent

Data source: Eurostat, European Commission.


Monetary policy: The all-purpose tool?

Generic target: Provision of a means of exchange

Other targets » Government financing

» Debt-monetization

» Boosting employment

» Business-cycle stabilization

» Systemic financial stability

Monetary policy Potential conflicts

Room for excessive rent-seeking

High risk of sacrificing the (most abstract, general) generic target for (more simplistic, partisan) non-generic targets

What about Tinbergen?


Monetary policy: Overloaded!

Source: FAZ, 26. Oktober 2011, p. 11


Date post:	06-Aug-2020
Category:	Documents
Upload:	others
View:	1 times
Download:	0 times

Quantitative Easing, Capitalism, and Investment...2016/06/21 · KOOTHS | Quantitative Easing,...

Documents