An article (in German) about this year’s Nobel prize that I wrote with my colleagues Christian Ewerhart and Joachim Voth just appeared in the Swiss economic policy journal “Die Volkswirtschaft”. Learn more about why financial crises are hard to predict, why banks must be unstable, why the laureates’ work is super relevant in a world of digital currencies — and what the late Queen Elizabeth II has to do with it all: https://dievolkswirtschaft.ch/de/2022/11/nobelpreis-2022-von-banken-und-krisen/?v
While the Fed’s 75bps hike on Wednesday 21st was in line with expectations, the market had priced in a 100 bps hike for the SNB. In this sense the 75bps announcement came as a dovish surprise, even though this still is the biggest SNB rate increase in more than 20 years.
While the SNB explicitly did not rule out further hikes in December and, if necessary, forex market intervention in the interim, it is noteworthy to what extent governor Thomas Jordan emphasized the role of international spillovers through the hiking of other central banks and the role of transitory inflation pressures in his opening statement and the subsequent media Q&A.
Matthias Schober from the German personal finance education portal pfenningfabrik.de invited me for a series of half-hour videos in which we discuss the current global economic situation, ranging from the energy crisis, ECB monetary policy to China and government finances.
The first of the series, covering the energy crsis and inflation available here: https://www.youtube.com/watch?v=o-g2BHOsfPw
Update Sep 14th 2022: The second part , covering global power shifts and the economic outlook for China, US, Europe is now available here: https://www.youtube.com/watch?v=YgmGfuqAa7g
We are currently planning another interview on government debt for in a couple of weeks. Watch this space.
Update, Oct 26th 2022: The interview on government debt is available here: https://www.youtube.com/watch?v=_ICtvxqE3cM
Before the summer break I gave an interview to the New York-based Global Finance Magazine about what the first German trade deficit in almost three decades means and whether it is reason for deeper worry.
The gist of my argument is that the German public has long fetishised its current account surpluses as a sign of strength. It was not. Our research with Iryna Stewen and Michael Stiefel highlights that high surpluses actually reflected some of Germany’s structural weaknesses and were far from being an unmitigated sign of strength. That also means that a one-off deficit is nothing to worry about. But could the move into deficit reflect deeper challenges to Germany’s growth model? This is indeed likely to be the case. Read the full article here: https://www.gfmag.com/magazine/julyaugust-2022/germany-trade-deficit-surprise
In a recent TV interview I have given the Swiss channel Tele Z, I had a chance to discuss with my host Claudia Steinmann the implications of sanctions for the Russian and western economies. We also talked about whether or not China is going to benefit from the situation. In this post, I follow up on my interview and elaborate a little more on whether sanctions will work or not. In the next post, I plan to write a little more on how I see the role of China.
Will sanctions work, then? I think, it is important to answer that question at three levels: macroeconomic, political, military-strategic. And at the three levels the respective answer is “yes”, “it depends” and “probably not”. But then there is another level — bear with me….
- Take the macroeconomic level first. Sanctions are already having a devastating effect on the Russian economy. The bulk of foreign currency reserves has been seized, the ruble has tumbled, domestic inflation is soaring, trade has collapsed, production come to a standstill in many parts of the economy. This is hurting the regime, but it is hurting the average Russian even more. While “oligarchs” have been targeted by the seizure of their overseas assets, the overall effect of the sanctions is clearly much smaller for oligarchs than for the average Russian household. Oligarchs are people with international networks and globally diversified asset portfolios, including access to countries that do not implement any sanctions (the yachts are starting to show up in Turkey already…). Such asset shifting is not really an option for the average Russian, though. Hence, if anything the West should work harder on actually implementing and extending the sanctions on the oligarchs. Actually seizing their assets would be a start, implementation in many countries (including Switzerland, Germany…) is patchy at best so far.
In a couple of interviews on Swiss Italian language radio RSI this weekend (here (from minute 18), here (from minute 8) and here), I argued that the SWIFT sanctions were the right thing to do and we already see their short-term impact in the form of a de-facto collapse of the Russian banking system: people are hoarding cash (credit cards have stopped working, they are ultimately based on the US infrastructure and the SWIFT payment systems) bringing the banking sector to crumble. And the firepower of the Russian central bank in terms of currency stabilization has been severely curtailed because its foreign-currency reserves (which of course are not sitting as dollar cash piles in its vaults but on foreign bank accounts) have effectively been seized. The effect has been a collapse of the rouble and will be high domestic inflation, coupled with the collapse of many small private firms which will no longer have access to bank credit.
Even though there is a risk that some of this will also spill over to western banks who are heavily exposed to Russia, I would argue that this can be dealt with. In fact, some political willingness to also accept some economic disruption in the west will be needed to make the sanctions develop their full impact.
The paper By a Silken Thread: regional banking integration and credit reallocation during Japan’s lost decade (with Toshihiro Okubo), has been accepted by the Journal of International Economics.
We show how the geographical reallocation of credit dampened regional heterogeneity in business cycles during Japan’s lost decade. Even though large, country-wide (“integrated”) banks were most affected by the property crisis in the major cities, they reduced their lending less in areas where they had many bank-dependent SME customers all while reducing credit to big corporates who increasingly turned to bond issuance.
In a recent column in VoxEU together with Michael Stiefel (UZH) and Iryna Stewen (JGU Mainz)) we discuss our new CEPR discussion paper Growing Like Germany: Local public debt, local banks, low private investment. The paper shows that local government debt in Germany crowds out private investment to the tune of 1 percent of GDP per year. The reason: Forced to lend to local governments by their statutory mandate, local public banks try to “make up” for the low-yields on municipal debt by charging SME higher rates in what are locally segmented credit markets. This effect is exacerbated by the dire straits of municipal finances in Germany which, as we argue, is a direct consequence of the debt brake at the federal and state levels which shifted a lot of expensive government task to municipalities.
My paper “Non-US global banks and dollar (co-)dependence: how housing markets became internationally synchronized” with Torsten Ehlers (BIS) and Alexander Raabe (UZH / ESM) is now out as BIS discusssion paper no 897. Here is the BIS tweet: