Find yourself at a loose end over the (long) weekend ? You could do worse than have a gander at these......

Friday 29th April 2016

  

Find yourself at a loose end over the (long) weekend ? You could do worse than have a gander at these......

ref :- " The ECB  --  Going negative", Leader,  The Economist

ref :- " The Bank of Japan  --  When easing gets hard" , Finance and economics , The Economist

ref :- " The Presidential race in the Philippines" , Asia, The Economist

We'll not dwell on one subject today .... rather, we'll just point you in the direction of three articles in this week's Economist. Two of them are cogent resumes of topics we've been banging on about quite a bit lately (though obviously these are much better written). The third looks at an area that we haven't touched upon, and at first glance is more political than economic in nature but points to the possibility of some pretty worrying ramifications on both fronts.

Essentially, the ECB article takes a swing at German (and Dutch) politicians interfering in ECB policy. There's a pointed nod to the hypocrisy of recent events in that both nations in the past have been staunch supporters of an independent central bank. Back in the 1990's it was Germany that blocked France's push for a political say in monetary policy, and it was the first head of the ECB Wim Duisenberg, a Dutchman no less, who said that "it might be normal for politicians to express views on monetary policy, but it would be abnormal for central bankers to listen to them". Quite.

In answer to German and Dutch complaints that ultra-low rates reward spendthrift Southern European borrowing nations at the expense of prudent Northern European savers, the ECB might well argue that if representatives of the two nations in question had allowed the ECB to aggressively ease policy earlier then things might not have come to this pretty pass in the first place. Well, that's a big maybe but there's no doubt that the ECB is responsible for the Eurozone as a whole where unemployment still averages 10% and inflation is currently non-existent. To take a different course from the current one would likely stymie the prospects of a recovery that would ultimately allow the ECB to start to tighten policy as both these nations would desire.

The most pertinent point may be that there is a growing school of thought that says monetary policy cannot do it alone, and if you want growth (and therefore higher rates) then fiscal policy must play a part. German politicians in particular should examine their own policies on this front. With a substantial surplus both in its budget and its current account , Germany of all nations is in a position to spend on infrastructure projects. Despite the obvious need for such projects, and the minimal cost of financing at such low rates even if required, the cautious Germans refuse to go down this route. That's fine, but don't then bleat about low rates.

You can tell 'em, but don't expect them to listen.....

In some ways the piece on the Bank of Japan discusses similar themes with regard to the efficacy of negative rates and how much a central bank's monetary policy can do . After the BoJ's surprise decision on Thursday not to ease policy further this subject is right in the spotlight. In particular the focus is on the highly undesirable strength of the Yen, which incidentally has made further gains this morning to below 107 to the dollar after some very modest US Q1 GDP data yesterday. If the decision to wait and see if negative rates are working is understandable, then its also true that the BoJ will almost certainly have to ease further sooner rather than later (probably sooner).

That won't preclude the need for accompanying fiscal stimulus however. As part of his "three arrow" approach to kickstart the economy and fight deflation. PM Abe has already embraced that principle but will now probably have to postpone once again his planned hike in consumption tax from 8% to 10%, planned for next April. Sensible, but it will do nothing for the national debt, which in stark contrast to Germany's say, stands at about 240% of GDP.

It's also in stark contrast to the situation faced by large companies, who hold cash reserves of about Y250tn ($2.2tn) which they prefer to hoard rather than invest. These corporates are attracting a great deal of flak in Japan, and it's hard to argue that it's not deserved.

And so off-piste to the Philippines ..... some might wonder if Filipino politics might only be of interest to those  specifically involved in that region. We can only say that it's worth remembering that the Philippines is a nation of over 100m people and is a player in the Pacific Rim where fortunes often overlap between nations, for better or worse. Besides, they are an important bulwark against China's expansionist ambitions and all that that might entail.

Anyway, presidential elections are to held on May 9th and as things stand the likeliest winner is one Rodrigo Duterte, the foul-mouthed mayor of Davao who has no attachment to any large political party and no discernible policies  --  except to kill criminals, it seems. Extraordinarily enough, his contempt for democracy and the rule of law seems to have made him more, rather than less, popular.

So how have things got to this stage ? On the face of it, outgoing president Benigno Aquino seems to have done a decent job of things, economically speaking. In fact, GDP has posted impressive gains ever since 2000. The current account is healthy and ratings have been raised. But corruption is endemic, and the benefits of that growth barely reach outside of the capital Manila and its political elite. The poor it seems, both rural and now urban too, are rejecting the Filipino model of democracy that panders to political dynasties and their cronies and are happy to put their faith in a "hard man" from outside the system with dictatorial tendencies.

The article is worth a read for the descriptions of Mr Duterte's mind-boggling behaviour alone. It does not speculate too much about the future of the Philippines under his control , either in human or economic terms. That's left to the reader, and it's not very comforting.