What are the main pillars of the new economic reality after the first wave of the pandemic? And how long will it last?
These are primarily low interest rates and a change in fiscal policy, ie an increase in deficits. For central banks, it is also possible to supply money to the economy in other ways than reducing rates. For example, by lending to selected entities, often small and medium-sized companies, or purchasing financial assets, such as bonds and shares in financial markets.
The only one of these instruments that has a clear limit is the interest rate. Its decline to a more negative level – I guess around minus one percent – can already lead economic agents to start preferring and storing cash. None of the other tools mentioned has any natural boundary.
How big a risk does the inflation of central bank balance sheets pose to future stability?
I do not see a problem with the future expansion of central bank balance sheets for future stability. However, this does not mean that some of the effects of their actions cannot pose such a threat. However, the mere dimension of the central bank’s balance sheet as such will not affect financial stability.
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How toxic is the increase in indebtedness of major economies due to the reaction to covide?
When considering debt and its growth, it is often and happily forgotten who lends. In general, every crown, dollar or euro borrowed must either be saved or created by a commercial or, much less often, central bank. More specifically: for highly over-indebted economies, it is certainly toxic and difficult to borrow, especially from foreign entities on international markets. But there is a minority of such states.
Do macroeconomic authorities still have room to respond to a possible second wave of the pandemic?
I have tried to explain why the notion that macroeconomic authorities have “charges” in their stack that can and do occur is false. Macroeconomic actions stimulating the economy are not limited by storage capacity, but by rising inflation. This is partly due to the sharp weakening of the exchange rate of the indebted untrustworthy economy. We have not yet seen such an increase, although it is good to realize that the new EU economies in particular are now significantly further from deflationary risks than, for example, in the post-Lehman crisis.
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