Since the leading central banks lowered their interest rates almost to zero in autumn 2008, to buy huge volumes of bonds as part of their quantitative easing operations, economists have wondered when the exit from these unorthodox monetary policies would take place quickly it would happen.
Ten years later, interest rates in developed economies are frozen well below pre-crisis levels and are likely to remain there. Germany’s 10-year bond yield of 0.02% (as of March 23) signals market expectations that the European Central Bank (ECB) will keep policy rates at zero, not just until 2020, but until 2030.
Japanese bond yields imply zero or negative interest rates over an even more extended time. And while ten-year returns in the United States and the United Kingdom are just above 1% and 2.4% respectively, these figures suggest minimal, if not zero, increases in policy rates for the next ten years.
The 2008 financial crisis may have ushered in a full quarter-century of considerably low-interest rates. In this new standard, more and more unorthodox monetary policies – including certain forms of monetary financing – will be necessary for certain countries to maintain consistent growth.
The financial crisis occurred in 2008 due to incomplete regulations, which allowed enormous risks to develop within the financial system. The severity of the resulting recession, as well as the long period of slow growth that followed, was the result not of the continued fragility of the financial system, but excessive leverage in the economy. A real-world developed over the previous half-century between 1950 and 2007, the private sector debt of advanced economies (households and businesses) increased from 50% to 170% of GDP, and adequate growth seemed possible only if indebtedness increased much faster than nominal GDP.
After the crisis, loan growth turned negative. It remained sluggish for many years, not because a disrupted financial system lacked the capital to lend, but because over-indebted households and businesses were determined to repay their debts, even if interest rates were zero. The same trend was observed in Japan in the 1990s.
In this environment, significant fiscal stimulus was the only way to get even anemic growth. The U.K. public finance deficit increased to 10.1% of GDP in 2009; the U.S. deficit soared to 12.17%, and also that of the euro area increased to 6.3 %. But the inevitable increase in public debt has led many governments to conclude that they should quickly curb these massive deficits. Fiscal austerity, coupled with private deleveraging, has led to below-target inflation rates, disappointing real wage growth, and an unfavorable populist political reaction.
In 2016, governments and central banks appeared to be short of monetary or fiscal ammunition. Economists wondered if there was a type of measure that could avoid secular stagnation when interest rates were already at zero, and public debt levels were already high. Some people, including myself, have broken the ultimate taboo by suggesting that we should consider monetary financing through an increase in budget deficits. Former chairman of the Federal Reserve, Ben Bernanke, argued that as long as European central banks determined the amount of such funding, they could take useful stimulus measures without excessive inflation.
Only two years after a gloomy 2016, the situation seemed to have improved significantly. By 2018, global growth and inflation expectations had increased considerably, and global banks and markets were once again focusing on a long-awaited “exit” from unorthodox policies.
We must understand what motivated this sudden upturn. The answer is simple: a policy of massive fiscal expansion, which has been partially or fully funded in two significant economies with money from their central bank. The U.S. public finance deficit increased from 3.9% of GDP in 2015 to 4.7% in 2018, and 5% was expected in 2019. China increased from less than 1% in 2014 to more than 4%, and that of Japan remained around 4%, abandoning previous zeroing projects by 2020.
While the U.S. fiscal expansion policy was financed by bond sales to the private sector, in China, the central bank indirectly funded large bond purchases by commercial banks. In Japan, the net increase in public debt is financed by purchases of sovereign bonds by the central bank. The global economy has rebounded because the three largest economies in the world have rejected the idea that the size of the public debt makes a policy of fiscal expansion impossible.
However, the impact of these stimulus measures has faded. U.S. growth is slowing as the exceptional effect of President Trump’s tax cuts runs out. China is having trouble reducing excessive debt and managing the impact of Trump’s tariff increase on exports and confidence. In October, Japan will introduce a tax hike long-term forecast consumption, which threatens to slow consumption growth. Eurozone growth is also slowing, in the face of declining external demand.
So here we are again faced with the same question as in 2016: what if stagnation threatens when interest rates are already close to zero? Among the proposed responses are variants of monetary financing. Proponents of “modern monetary theory” argue that budgetary spending financed by the creation of money should be the standard mechanism for managing nominal demand, and the “Green New Deal,” meanwhile, presents monetary financing as an option to finance desirable social and environmental investments.
Milton Friedman explained the relevant idea behind these proposals – that governments and central banks can always create nominal demand jointly – in a significant essay in 1948. But it is also crucial to understand that Monetary financing is exceptionally harmful just as it is dangerous to view it as an inexpensive method of solving long-term difficulties, rather than a demand management tool to be used only in exceptional circumstances.
In a context of slow growth, political discontent, and a considerable debt burden, monetary financing cannot be a taboo option. In Japan, permanent financial funding already exists, even if the central bank claims otherwise. The challenge is to ensure that it is used only with caution, as Bernanke suggested, rather than assuming a return to normal before the crisis.
Investing Money – Three Golden Investment Rules
Investing money requires you to follow specific basic rules. Any investment program will be successful if you follow these rules and apply them as a whole. The rules are not sequenced, so the order is not essential. It was the first time that a three-part guide published the article Ten Golden Rules for Investing Money Smartly But But Investing All to Reduce Their Financial Risks.
The first rule: get rid of debt
Generally, if you invest money, you should not have debt. You cannot be sure that you will receive a tax-free return on your investments, which will be equal to or higher than what you pay in interest on your debt. This rule does not apply all the time that you are at the same time to repay your mortgage while contributing to a retirement fund. However, the thing is that once you have paid off your debt, you should use that money as a source of funds for investment.
Second rule: Know the difference between investment and savings
Saving money is not to invest. Investing is taking risks with your money to make it grow for the community with long-term goals. Saving is a way to accumulate capital to invest or to meet specific short-term goals. With the savings, you build your resources, with the investment of your money working for you. Savings, your money earns typically interest, often nominal interest below the rate of inflation. Investing means seeking the total growth of your money, which includes, above all, capital gains.
Rule of Three: Set Goals
If you don’t know where you’re going, you never know how to get there – you need to set the investment goals. They want to be in the medium and long term. You don’t want to have a general-purpose. Separate goals may include retirement, a vacation abroad, or paying for the education of children. The main reasons for separating your investment objectives are:
- The different time intervals required to reach each target
- The priority is given to each goal
- The investment risk you can afford to reach a target (for example, you can take more risk with an investment from a Ferrari, but not with your retirement investments).
The best way to set your goals is to have a financial advisor to undertake a financial needs analysis for you. These computer-controlled programs know you to identify what investment plans do not have you need, how long you need to reach your goals, and what is and what if it is not affordable.