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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
2 KOOTHS | Quantitative Easing, Capitalism, and Investment
QE/ZIRP
Mankind‘s largest monetary experiment of all peace times
3 KOOTHS | Quantitative Easing, Capitalism, and Investment
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
4 KOOTHS | Quantitative Easing, Capitalism, and Investment
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)
5 KOOTHS | Quantitative Easing, Capitalism, and Investment
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
6 KOOTHS | Quantitative Easing, Capitalism, and Investment
Cargolifter: The plan …
7 KOOTHS | Quantitative Easing, Capitalism, and Investment
… and the outcome: Tropical Islands
8 KOOTHS | Quantitative Easing, Capitalism, and Investment
Cargolifter hangar Tropical Islands hall
Production cost: 78 million euro (1999/2000)
Liquidation value: 17.5 million euro (2003)
9 KOOTHS | Quantitative Easing, Capitalism, and Investment
Cargolifter in the national accounts
A hangar is a hangar is a hangar …
10 KOOTHS | Quantitative Easing, Capitalism, and Investment
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
11 KOOTHS | Quantitative Easing, Capitalism, and Investment
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 %
12 KOOTHS | Quantitative Easing, Capitalism, and Investment
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
13 KOOTHS | Quantitative Easing, Capitalism, and Investment
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)
14 KOOTHS | Quantitative Easing, Capitalism, and Investment
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)
15 KOOTHS | Quantitative Easing, Capitalism, and Investment
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
16 KOOTHS | Quantitative Easing, Capitalism, and Investment
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)
17 KOOTHS | Quantitative Easing, Capitalism, and Investment
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)
18 KOOTHS | Quantitative Easing, Capitalism, and Investment
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
19 KOOTHS | Quantitative Easing, Capitalism, and Investment
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?
20 KOOTHS | Quantitative Easing, Capitalism, and Investment
Interest rate and market for loanable funds
LFD=I
LFS=S
i*
i
LF
21 KOOTHS | Quantitative Easing, Capitalism, and Investment
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
22 KOOTHS | Quantitative Easing, Capitalism, and Investment
Capital-based macroeconomic framework (Garrison)
C
I i
LF
S
I
Production possibilities
frontier
Stages of production
Loanable funds
23 KOOTHS | Quantitative Easing, Capitalism, and Investment
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
24 KOOTHS | Quantitative Easing, Capitalism, and Investment
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
25 KOOTHS | Quantitative Easing, Capitalism, and Investment
Interest rate and monetary policy
LFD=I
LFS=S
i*
i
LF
LFD=I+L
LFS=S+M
iM
26 KOOTHS | Quantitative Easing, Capitalism, and Investment
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
27 KOOTHS | Quantitative Easing, Capitalism, and Investment
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
28 KOOTHS | Quantitative Easing, Capitalism, and Investment
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.
29 KOOTHS | Quantitative Easing, Capitalism, and Investment
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
30 KOOTHS | Quantitative Easing, Capitalism, and Investment
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.
31 KOOTHS | Quantitative Easing, Capitalism, and Investment
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.
32 KOOTHS | Quantitative Easing, Capitalism, and Investment
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?
33 KOOTHS | Quantitative Easing, Capitalism, and Investment
Monetary policy: Overloaded!
Source: FAZ, 26. Oktober 2011, p. 11
34 KOOTHS | Quantitative Easing, Capitalism, and Investment