The Governing Council of the European Central Bank meets on May 2, with a possible rate cut in the offing. Yet a rate cut is not the no-brainer the Bank’s critics often suggest, as today’s Geo-Graphic shows.

The ECB’s official inflation-rate target is “below, but close to, 2%.” Both Portugal and Greece have inflation under 1% , but the transmission mechanism from ECB rates to business borrowing rates in those two countries has been virtually severed by the crisis. In short, they need a rate cut, but the ECB can’t deliver them one. Read more »

European Central Bank president Mario Draghi has promised to do “whatever it takes to preserve the euro,” and the bank’s Outright Monetary Transactions initiative last September, aimed at pulling down crisis-country bond rates, no doubt calmed market fears of a eurozone breakup. But whereas eurozone sovereign bond spreads have narrowed, the gap in real economic performance – particularly unemployment – between the best and worst performers, as shown in today’s Geo-Graphic, has continued to grow precipitously. Compare this to the United States, which has a fiscal and banking union as well as a monetary one. There, jumps in unemployment rate dispersion across states caused by financial and other shocks are reversed in relatively short order. Read more »

President Obama has proposed increasing the federal hourly minimum wage from $7.25 to $9.00, pointing out that 19 states already have minimum wages in excess of $7.25.  Only one state, however, Washington, has a minimum wage above $9.

So what impact would this have? Read more »

China has since 1994 operated some form of currency peg, harder or softer, between its yuan and the U.S. dollar. While China’s state-run Xinhua news agency has in recent years railed against U.S. management of the dollar, and has called for “a new, stable, and secured global reserve currency,” this week’s Geo-Graphic illustrates why China has little incentive to press for such a thing. Read more »

Last week’s Bank of England (BoE) poll of UK lenders turned up some good news: credit “availability” for both households and companies is on the rise – as we document in the upper right figure of today’s Geo-Graphic.  The Old Lady of Threadneedle Street was quick to take credit for the credit: “Lenders noted,” crowed the BoE, “that the Funding for Lending Scheme,” through which the BoE and UK Treasury have since August provided banks with cheap funds to boost their lending, “had been an important factor behind this increase.” Read more »

Back in March, we showed that the $1.4 trillion in U.S. direct federal student loans that will be outstanding by 2020 will amount to roughly 7.7% of the country’s gross debt. This is 6.3 percentage points higher than it would have been had the scheme not been nationalized in President Obama’s first term. Read more »

The United States marches solemnly towards its fiscal cliff, awaiting only the command from the Goddess of Reason to halt. Unfortunately for Greece, that country plugged its ears back in March.

Like the United States, Greece made prior commitments on spending and taxation in order to bind itself to the mission of deficit reduction. Unlike the United States, Greece left itself little means to unbind itself. As shown in the graphic above, its massive debt restructuring in March only reduced its debt-to-GDP ratio from 170% to 150%, but in the process made further significant restructuring much more difficult. Read more »

Back in February, Benn argued that the Fed’s three-year zero-rate pledge, combined with a 2% long-run inflation target, may have been a pledge too far, given the Fed’s poor forecasting record going back decades.  The Board of Governors’ and Reserve Banks’ first three-year forecasts in October 2007, for example, were wildly off the mark: actual 2010 GDP, unemployment, and inflation were all outside the range of the 17 forecasts.  Yet at its September meeting, the Fed’s Open Market Committee extended its zero-rate pledge into 2015, on the basis of its forecast that unemployment would still be significantly above their “longer run” expectation at that time—as shown in the figure above.  But last week’s September payrolls report revealed that the unemployment rate had dropped more than anticipated, to 7.8%, putting the 6-month trend line into 2015 well within the Fed’s comfort zone.  This implies that interest rates, by the Fed’s own reasoning, may well need to rise sooner.  We think it’s time that the Fed pledged to stop pledging for a while. Read more »

The IMF last week told the Greek government to get with the program—specifically, the economic adjustment program that Greece agreed to as a condition for receiving loans from the Fund.  Greece is indeed way off target, but that’s apparently par for the course with such programs.  In 2003, the IMF’s own independent evaluation office looked at the difference between actual and projected changes in fiscal balances in countries receiving funds from its Extended Fund Facilities (EFF) and so-called Stand-By Arrangements (SBA).  As shown in the graphic above, nearly ¾ of market-based countries (that is, countries not in transition from central planning) receiving funds from the EFF or SBA underperformed their targets in the second year of their program.  By this standard, Greece looks like a normal ward of the IMF. However, Der Spiegel reported on Monday that the Troika of official Greek lenders (the European Commission, ECB, and IMF) was now pegging Greece’s budget deficit at €20 billion.  If accurate, that would put Greece on track to miss its IMF fiscal deficit target by €13 billion, or a whopping 6 percent of GDP – making it an extreme target-underperformer even by the standards of the many past underperformers. Read more »

Fed Chairman Ben Bernanke defended QE3 at his September 13 press conference by arguing that it would lower mortgage rates and increase home prices.  Over 80% of U.S. household debt is mortgage debt, so the extent to which he is right could be of considerable consequence to the future path of economic recovery.  Read more »