What I’ve been reading:
In his post, Kevin Bryan discusses the paper, “Firm Dynamics, Persistent Effects of Entry Conditions, and Business Cycles” by S. Moreira.
This gap is double surprising if you think about how firms are founded. Imagine we are in middle of a recession, and I am thinking of forming a new construction company. Bank loans are probably tough to get, I am unlikely to be flush with cash to start a new spinoff, I may worry about running out of liquidity before demand picks up, and so on. Because of these negative effects, you might reasonably believe that only very high quality ideas will lead to new firms during recessions, and hence the average firms born during recessions will be the very high quality, fast growing, firms of the future, whereas the average firms born during booms will be dry cleaners and sole proprietorships and local restaurants. And indeed this is the case! Moreira finds that firms born during recessions have high productivity, are more likely to be in high innovation sectors, and and less likely to be (low-productivity) sole proprietorships. We have a real mystery, then: how can firms born during a recession both be high quality and find it tough to grow?
From Bloomberg, Simon Kennedy writes,
His proposal is that officials focus their policy more on boosting demand rather than just increasing liquidity in the hope that consumers and companies will find a need for it.
While he thinks targeted lending could help achieve that, he advocates what he calls“cold fusion” in which politicians would cut taxes and boost spending with central banks covering the resulting rise in borrowing by purchasing even more bonds.
“The next generation of policy tools is likely to be designed to act more directly on final demand, using persistently below target inflation as a lever to justify policies that will be anathema otherwise,” Englander said.
In a similar vein, Hans Redeker, head of global foreign-exchange strategy at Morgan Stanley in London, is declaring it’s time for central banks to begin using quantitative easing to buy private assets having previously focused on government debt.
Edward Chancellor in the Reuters Breaking Views writes, (and I recommend reading the article in its entirety),
Negative rates put yet more pressure on the solvency of life insurers and pension funds. More than $5 trillion worth of bonds now sport negative yields. Working families are likely to respond to ever lower returns by putting more money aside for retirement, which requires them to reduce current spending. Under the circumstances, it’s hard to see how businesses would respond to negative rates by investing more.
Given the pain that negative rates impose, it’s perhaps not surprising that economic growth in the Euro zone has weakened and that the rate of inflation is falling, which means the European Central Bank keeps on missing its inflation target. To make matters worse, real-estate speculation is picking up in several countries with negative rates. House prices appear to be in bubble territory in both Switzerland and Sweden.