Benn Steil

Geo-Graphics

A graphical take on geoeconomic issues, with links to the news and expert commentary.

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Bank Valuations Tank as ECB Flubs Its Stress Test

by Benn Steil and Dinah Walker
european bank valuations before and after stress test

Low market valuations (i.e., price to book ratios) for euro area banks reflect market concerns over their capital cushions, opined the Bank of England just prior to last-year’s launch of the ECB stress tests—the long-awaited results of which were published on October 26.  The tests, “by improving transparency,” said the BoE, have “the potential to improve confidence in euro area banks.” Read more »

The ECB Fails to Stress Banks Over the One Critical Variable It Controls: Inflation

by Benn Steil and Dinah Walker
ECB Stress Tests Inflation Scenario

Relentlessly falling inflation is bad news for Eurozone banks.  It increases the real (inflation-adjusted) value of borrower debt and the real cost of servicing that debt.  It causes loan defaults, and therefore bank loan losses, to rise.

So with Eurozone inflation, currently at a near-record low of 0.4%, clearly at risk of heading into deflationary territory, what did the ECB say was the “adverse scenario” for this year?  Inflation of 1% – more than twice its current level.  This is indefensible; the ECB’s dire scenario for this year is actually much cheerier than the IMF’s baseline forecast, which pegs inflation at 0.5%.  The country-by-country comparison is shown in the graphic above. Read more »

Our Fed Dual-Mandate Tracker Affirms Taper Timing

by Benn Steil and Dinah Walker
Fed Performance Measured

St. Louis Fed President James Bullard continues to burnish his reputation as the FOMC’s least predictable member, reversing course on policy for the second time in 3 months—going from dove to hawk and now back to dove again.  Having as recently as August publicly advocated a rate rise in early 2015, he is now calling for the Fed to halt its monthly taper of QE3 bond purchases, citing falling inflation expectations. Read more »

Are Fed Doves Mucking with Future Unemployment Estimates to Justify Dovishness?

by Benn Steil and Dinah Walker
fed changing unemployment projections 2

Do Fed doves and hawks get their aviary classifications based on their cold, hard analysis of data, or is it the reverse – do they select data points to justify their dovish or hawkish perspectives?

The history of the Fed’s post-crisis focus on unemployment suggests the latter.  After June of 2013, as the figure above shows, the Fed’s estimate of the natural long-term unemployment rate begins declining in sync with the decline in the actual unemployment rate.  This suggests that FOMC members are lowering their estimates of the natural rate of unemployment to justify keeping interest rates at zero longer than they could if they stuck by their initial estimates, the 6% consensus upper bound of which is now above today’s actual 5.9% rate. Read more »

Can Russia Escape Dollar Dependence?

by Benn Steil and Dinah Walker
Russia investment in BICS

Russian president Vladimir Putin is determined to wean his country off the dollar, or so he says.

In July, after insisting that the international monetary system depended too much “on the U.S. dollar, or, to be precise, on the monetary and financial policy of the U.S. authorities,” Putin signed off on a new BRICS development bank whose initial paid-in capital would be entirely in dollars – unlike the World Bank, where only 10% of paid-in capital was in dollars.  So the new BRICS bank actually creates a new source of demand for dollar assets. Read more »

A Dovish Market Has History on Its Side in Tuning Out the Fed

by Benn Steil and Dinah Walker
Fed Transition Times

Market expectations for Fed policy have been decidedly more dovish than the Fed itself, a conundrum that is concerning San Francisco Fed economists.  As the Fed debates its rate-liftoff forward guidance this week, however, it is worth asking how much it really matters. Read more »

Notable Quotables From THE BATTLE OF BRETTON WOODS

by Benn Steil
J. M. Keynes, flanked by Soviet delegation head M. S. Stepanov (left) and U.S. delegation head Henry Morgenthau, Jr. (right), addressing delegates at the Bretton Woods conference, July 1944 (Bettmann/CORBIS). J. M. Keynes, flanked by Soviet delegation head M. S. Stepanov (left) and U.S. delegation head Henry Morgenthau, Jr. (right), addressing delegates at the Bretton Woods conference, July 1944 (Bettmann/CORBIS).

“The various currencies, which were all maintained on a stable basis in relation to gold and to one another, facilitated the easy flow of capital and of trade to an extent the full value of which we only realize now, when we are deprived of its advantages.”
- Keynes on the classical gold standard (72) Read more »

Bullard Has Fed History on His Side in Rate-Hike Debate with Yellen

by Benn Steil and Dinah Walker
unemployment and inflation august update

St. Louis Fed President James Bullard has moved decisively and vocally from the dove to hawk camp over the past year, and is now predicting a rate hike in the first quarter of next year – in contrast to Fed Chair Janet Yellen, who still does not appear to see one coming before the middle of the year.  The economy, Bullard said, was “way ahead of schedule for labor-market improvement.” But it’s not just the unemployment picture that’s changed dramatically over the past half-year; the inflation picture has as well. Read more »

Is the BRICS Contingent Reserve Arrangement a Substitute for the IMF?

by Benn Steil and Dinah Walker
BRICS CRA vs IMF borrowing

Russian President Vladimir Putin has hailed the new BRICS contingent reserve arrangement (CRA) as a substitute for the IMF, saying that it “creates the foundation for an effective protection of our national economies from a crisis in financial markets.” But does it? Read more »