NEWS,25.07.2012

Low Interest Rates Are Not Enough

 

Welcome to what could be called "GGIRC," the great global interest rate convergence -- whereby interest rates steadily converge to zero in many countries around the world, both advanced (other than the crisis European economies) and emerging (other than the persistent financial basket cases). In theory this is a good thing for a global economy.After all, major economic areas, particularly Europe and to a lesser extent the United States, are challenged by too little growth, too much debt and too high a joblessness rate (especially among the young and the long-term unemployed).Even more dynamic economies, from Brazil to China, are slowing.According to textbook economics, lower interest rates have beneficial flow and stock effects.They make it cheaper to fund investment and consumption; and they make it easier for companies, governments and individuals to carry a given stock of already-accumulated debt.In practice, however, the situation is much more complicated and not so benign. GGIRC is not happening for good reasons.As such, the effects are slow to materialize. And, unless quickly accompanied by other policy initiatives, the consequences will be at best mixed and, probably, net negative.Three major factors are behind GGIRC.First and foremost, hyper activist central banks that are using traditional (price) and unconventional (quantity) measures to force interest rates down.Just look at the series of actions by America's Federal Reserve -- from flooring policy rates at almost zero for an exceptionally long time (and also pre-committing to keeping them there until the end of December 2014) to purchasing an enormous amount of U.S. Treasury and mortgage securities in a further attempt to drive borrowing costs down.Second, individuals and institutions are piling into government securities to protect against principal loss in an increasingly uncertain and worrisome global economy and an ever-deepening European crisis.This is most pronounced for Germany, Switzerland and the United States, where inflows of capital have led to negative nominal rates for short-dated securities (i.e., investors willingly accepting marginally less money on maturity than they invest).Third, global investors are spreading GGIRC through "the global carry trade." This search for relatively safe yield is driving the flow of money into the local bond markets of countries such as Brazil, Mexico and South Africa.Yet GGIRC is not fueling an economic boom driven by labor hiring and investment in plant and equipment. Simply put, lower borrowing costs are not enough to convince companies to expand given the list of domestic, regional and global uncertainties; indeed, many of these companies are far from credit rationed as they sit on huge cash balances.And they only help at the margin the highly-indebted consumers.This limited scope for benefits comes with the growing reality of collateral damage and unintended consequences.Today's market-based economies, and the accompanying institutional setup, do not function well at such artificially repressed interest rates.Certain segments, from pension funds and life insurance companies to money market funds, are particularly challenged.They have no choice but to shrink the scale and scope of financial services they offer to individuals and institutions.Then there are some emerging countries that could well be de-stabilized by some of the activities encouraged by artificially-repressed interest rates.It is only a matter of time until they are challenged by asset market bubbles (including in housing) and irresponsible lending by institutions subject to weak market and regulatory supervision.This is not to say that GGIRC is a bad thing. It need not be.But it will be if not quickly accompanied by major policy actions that address the causes of today's global economic malaise.What the world economy needs today is a coordinated set of measures to promote growth, allocate financial losses, match healthy balance sheet with those that are challenged and reforming, and improve the functioning of the labor and housing markets.For this to materialize, highly polarized and dysfunctional politics needs to give way to more strategic and constructive interactions across party lines and social segments.There is little to suggest that this will happen any time soon absent yet another major financial crisis.In the meantime, GGIRC may well morph from being seen as part of the solution to inadvertently becoming part of the problem.

Interests vs. Values Is the Wrong Prism for Viewing the Reset with Russia

 

With their chilly meeting in sunny Los Cabos during the G20 summit fading into memory, the fate of the "reset" in U.S.-Russian relations is for the moment out of the hands of Presidents Putin and Obama. The future of the relationship is being fought on Capitol Hill over whether to extend Permanent Normal Trade Relations (PNTR) to Russia. Doing so would require removing the application of Cold War-era legislation called Jackson-Vanik from Russia, a law that was crafted to pressure the Soviet Union by linking free trade to the freedom of emigration.Jackson-Vanik has been an irritant for Russia for two decades, but the issue is pressing our Congress now because with Putin signing Russia's WTO ratification protocols on July 21, the clock is ticking down to Russia's entry to the WTO in August. Without PNTR in place before Congress goes into recess, American businesses will lose out on the various trade concessions fought for over the years by U.S. negotiators, giving our competitors an inside track to the world's 9th largest economy. PNTR for Russia was once perceived by Congress as a "gift" to Russians; now it is a necessity for American business and workers.At the same time, the issue of human rights has not disappeared as an area of serious concern for Russia, or as a core American value. Many in Congress want to replace Jackson-Vanik with the "Sergei Magnitsky Rule of Law and Accountability Act," which targets Russian officials implicated in the death in pretrial detention of a Russian lawyer and whistleblower. The House and Senate have different versions that have cleared committee--the House bill focuses on Russian officials, whereas the Senate bill would apply to violators from any country. As negotiators hammer out the differences in the two bills, they should keep in mind that the Jackson-Vanik legislation addressed a human rights principle and did not once mention the Soviet Union.The Obama administration prefers a clean extension of PNTR to Russia, arguing they have already taken steps against the Russian officials in question. The Russian government is threatening reprisals if the Magnitsky Act should come into force. But the overall impact of the Magnitsky Act, either in terms of provoking or constraining the Russians, is overestimated.The greatest constraint on Russian violations of human rights, and the greatest pressure towards liberalizing Russian society, has ultimately come from the Russians themselves as they seek to engage in regional and global institutions. Such accessions and agreements clearly have not prevented multiple Russian abuses and outrages against the human rights of its own people; but they have set Russian society on a path towards adopting certain core values on its own terms.In 1975, the year Jackson-Vanik went into force, Moscow signed the Helsinki Accords. Leaders in the Kremlin celebrated the cementing of post-war borders; but also committed the Soviet Union to certain human rights guarantees. It led to the formation of the Moscow Helsinki Group, which remains influential to this day, and, according to Cold War historian John Lewis Gaddis, gradually became a manifesto of the dissident and liberal movement. The contradictions between Soviet practice and the human rights values they pledged to protect played a key role in the erosion of the Soviet government's legitimacy with its own people.In the 1990s, a newly independent Russia pursued and gained entry into the Council of Europe. Russia wanted acceptance on the world stage as a European power. As a condition for membership, Russia also ratified the European Convention on Human Rights in 1998, subjecting itself to the jurisdiction of the European Court of Human Rights. Today, Russia holds the dubious distinction as the origin of over 35 thousand cases (about 24 percent) now pending before the Court - by far the most. Its track record with the court is mixed. Russian government lawyers dutifully participate in contesting the various cases, and Russia reliably pays the (usually nominal) judgments rendered against it. Critics rightly point out that the government rarely implements the underlying principles of the judgments, especially with regards to abuses in Chechnya. However, in other regions, a growing number of district courts are accepting the provisions of the Convention as a part of Russian law.In December 2011, Russia finally secured an invitation to join the WTO after 18 years of on-again, off-again negotiations. While industries and businesses around the world will welcome the various reductions in tariffs that accession will bring this summer, it is Russia's agreement to be bound by the stringent rules and dispute resolution mechanisms that will be the real game-changer over time. Corruption and the prevalence of political insiders at the helm of Russia's leading state enterprises will not end anytime soon, but international (and, with the passage of PNTR, American) companies will have unprecedented rights and remedies at their disposal. More importantly, in terms of Russia's development, new Russian companies and sectors, headed by Russia's emerging professional class, will greatly benefit from the expanding culture of commercial law and greater access to world markets.Russia is not the Soviet Union. Nor is it the liberal democracy many hoped to see emerge during the 1990s. It is a nation still in search of its own identity, wrestling with the historical legacy of Soviet power/terror and the more recent pain of devastating economic collapse in the 1990s. It is also a nation looking to engage with the global political and economic institutions of the world in order to help set the rules as well as follow them. Yet the more Russia opens itself this way, the less satisfied the Russian people become with the closed system of the power vertical.The United States has long taken an interest in how Russia conducts its internal affairs -- an interest that is not matched towards other nations, it must be noted. Today's debate over PNTR and the Magnitsky Act are simply the latest manifestation of that concern. But the community of policymakers, legislators, activists, and businesses who are interested in the fate of Russia's people should keep one idea in mind: No matter what gets signed in Washington, it is what Moscow signs on to that will ultimately shape the future for Russia and its people.