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If interest rates are raised high enough to kill off inflation, how bad will the consequences be?

Central banks are having to choose between ruinous inflation or ruinous interest rates.

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Cineworld has signalled its intention to declare bankruptcy. Like many companies in the UK and elsewhere, the London-based cinema chain took on massive amounts of debt to expand. It is expected to use the Chapter 11 process in the US to restructure its debt and other obligations.

Variations of this story are set to be repeated again and again. With benchmark interest rates rising from the near-zero levels adopted by central banks over a decade ago, a reckoning is coming for all the “zombie” companies that are only able to pay the interest on their debts but never the principal. The same goes for individuals and governments in similar positions.

So far, central banks have only taken small steps to get inflation under control. The Bank of England has raised its benchmark rate from 0.1% to 1.75%, whereas until the financial crisis of 2008 it ranged from 5% to 15%. A return to normal would therefore suggest rates increasing to at least 5%.

Benchmark lending rates: UK, US, eurozone

Orange = US; Blue = UK; Turquoise = eurozone. Trading View

That might sound frightening, but it’s nothing compared to what happened when Paul Volcker was chair of the US Federal Reserve between 1979 and 1987. While his predecessors had understood the need to raise rates to fight inflation, they kept caving in to political pressure and cutting rates before the medicine had taken effect.

With inflation rampant by the late 1970s, Volcker simply declared an end to this back and forth and raised rates to over 15% – and then 20% in 1981. This ultimately broke the back of inflation around the world until its current resurgence.

US benchmark rate v inflation

Graph comparing US federal funds rate and inflation
US benchmark rate = blue; Inflation = red. Trading View

What economists get wrong today

In 2016 the leading macroeconomist Paul Romer wrote a devastating critique called The Trouble with Macroeconomics, pointing to “three decades of intellectual regress”. He said macroeconomists had become comfortable with the idea that increases in economic variables like inflation were caused by “imaginary shocks, instead of actions that people take”.

For example, most economists and central bankers blame today’s double-digit inflation on the “shocks” of the pandemic and Russia’s invasion of Ukraine. But that is like saying that when a driver hits a rock going at 120mph on a country road, the rock caused the accident.

Thanks to zero interest rates and money creation in the form of quantitative easing (QE), the money supply has exploded. Reserves held at the Bank of England, which form the largest part of the core money supply, have risen from around £30 billion in mid-2008 to £946 billion today – doubling in the past two years alone.

This is worrisome by any standards, and my forthcoming book will look at why it was allowed to continue so long. According to the quantity theory of money, popularised by Milton Friedman and Anna Schwarz, this expansion should increase prices in the actual economy by a factor of ten.

Until it became inconvenient, economists and central banks generally believed that you should set benchmark interest rates using a formula known as the Taylor rule. By this calculation, we currently need a rate of 15%.

Central banks hopefully won’t have to go that far to convince the markets they are serious about fighting inflation. After all, everyone has gotten used to historically aberrant low and falling rates over four decades.

So far, however, the markets are pricing 30-year UK government bonds (gilts) at just 2.7%, meaning they still expect very low rates in the long term. And in the US, markets are already pricing in rate reductions. Since higher rates will only work once the markets believe they are here to stay, the worry is that maybe even 15% won’t be enough.

What higher rates entail

To get a sense of what much higher rates would mean, consider the UK housing market. If the Bank of England obeyed the Taylor rule, your tracker mortgage would rise from the low of roughly 1% to above 15%.

Two million homeowners have variable rate mortgages, so would be affected immediately. Besides that, most fixed-rate mortgages in the UK are two or five-year fixes (unlike in the US, where most people get 30-year fixed mortgages). When these deals end, a further 7 million people would be exposed too.

The average mortgage balance today in the UK is about £150,000 (the good news is that fewer than 1% are currently in arrears). For someone with 25 years to repay on that size of mortgage, each percentage point increase on the rate will push up the annual repayment by an average of nearly £1,300 (or £1,500 on interest-only mortgages). So an increase in rates from 2% to 7% would cost home owners well in excess of the forthcoming utilities price hike.

How higher rates will affect repayments

Chart showing how increasing interest rates will affect mortgage repayments
The chart is referring to capital repayment mortgages. Author provided

Yet without downplaying the potential effect of forced repossessions and sales in our property-owning economy, the more important impact on the housing market from higher rates would be on new purchases. If rates merely double, house prices would have to roughly halve to maintain the same level of (un)affordability. For example, if someone buys a property for £200,000 with a 2% mortgage rate and no deposit, they pay about £4,000 annual interest. If interest rates double to 4%, they pay £8,000 interest. For repayments to remain the same, the house price would have to fall to £100,000.


Read more: Corporate debt is in serious trouble – here's what it means if the market collapses


Of course, the government would want to step in with house-price support measures in the face of higher rates. But that implies more borrowing when it is already paying nearly £20 billion in monthly debt interest.

Then there is the Bank of England. The Bank pays the benchmark rate on all the reserves it holds from UK banks and other financial institutions. Its balance sheet also massively expanded via QE, which involved buying lots of gilts at fixed interest rates from UK financial institutions by increasing their reserves at the Bank. For years, the interest from the gilts more than covered the interest payments on the reserves, but that situation is now reversing as benchmark rates rise, thereby adding to the government deficit.

The government will need to balance its books to cover these costs. It shouldn’t do this by restricting public sector wages or infrastructure investment. Tax rates on corporations and wealthy people will need to rise.

The coming hangover

After 40 years of partying, interest rates now have to go up sharply – the 7% rate associated with Professor Patrick Minford, Liz Truss’s economist advisor, would be a good starting point. Unfortunately the hangover will be massive.

But bite the bullet now and it’s possible that, like the Volcker years, the scene will be set for a prolonged period of technology-driven expansion and prosperity on the back of a low-inflation environment. There will also be other advantages, such as making homes more affordable for younger people and higher-interest savings accounts. These will be the consolations in a difficult period ahead.

Jefferson Frank does not work for, consult, own shares in or receive funding from any company or organisation that would benefit from this article, and has disclosed no relevant affiliations beyond their academic appointment.

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Government

What Is Helicopter Money? Definition, Examples & Applications

What Is Helicopter Money?What’s a surefire way to encourage spending, and thus, spur growth? How about dropping money from the sky? As far-stretched…

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Former Fed Chair Ben Bernanke describes helicopter money as a “money-financed tax cut.”

Public DomainPictures from Pexels; Canva

What Is Helicopter Money?

What’s a surefire way to encourage spending, and thus, spur growth? How about dropping money from the sky?

As far-stretched as this idea seems, it actually has credence in schools of economic thought, particularly during times of recession or supply shocks. Helicopter money policies inject large sums into the monetary supply either through increased spending, direct cash stimulus, or a tax cut.

This policy has two goals in mind:

1. Expand the supply of money, which improves liquidity

2. Spur economic growth

Economists consider helicopter money to be an option oflast resort, after other measures, such as lowering interest rates or quantitative easing, have either failed to lift an economy out of recession or because interest rates are already as low as they can get. This conundrum is known as a liquidity trap, when the economy is at a standstill because people are hoarding their savings instead of spending.

Since the practice of helicopter money also tends to foster inflation, it typically works best during periods of deflation, when prices, along with overall monetary supply, contract without a corresponding decrease in economic output. One relevant example is the Great Depression. Bank runs resulted in a reduction in both the monetary supply as well as in the overall prices of goods and services.

It takes a whole lot to lift an economy from such dire straits, and in such cases, helicopter money can be a viable option.

Example of Helicopter Money: The COVID-19 Recession

At the onset of the COVID-19 pandemic, the stock market crashed, and GDP nosedived, thrusting the economy into recession. While the Federal Reserve slashed interest rates and instituted a new round of quantitative easing measures, the U.S. government responded with helicopter money.

  • Under the Coronavirus Aid, Relief, and Economic Security Act (CARES), the Trump administration authorized two rounds of direct-to-taxpayer stimulus payments, of $1200 and $600 per person, in 2020.
  • In addition, as part of the Paycheck Protection Program (PPP), payroll loans were offered to thousands of small businesses—and many were quickly forgiven. The Federal Reserve also provided increased liquidity to banks so that they could offer loans to businesses to help them stay afloat.

Who Coined the Term Helicopter Money?

In a 1969 paper entitled “The Optimum Quantity of Money,” economist Milton Friedman coined the term “helicopter drop” as a method to increase monetary policy during times of economic stress. He wrote:

“Let us suppose now that one day a helicopter flies over [the] community and drops an additional $1,000 in bills from the sky, which is, of course, hastily collected by members of the community. Let us suppose further that everyone is convinced that this is a unique event which will never be repeated.”

The point was that the easiest way to lift an economy out of troubled times would be to give its population a direct injection of money. This would both expand the monetary supply and as well as increase the disposable income of the populace, resulting in greater consumer spending and increased economic output.

Who Made the Concept of Helicopter Money Popular?

In the 1990s, Japan was facing a deflationary crisis. Its central bank had implemented crippling rate hikes to calm its housing bubble—to disastrous economic effects.

In a 2002 speech to the National Economists Club, then-Fed Governor Ben Bernanke proposed that Japan’s central bank could have re-started the country’s economy through fiscal programs:

“A broad-based tax cut, for example, accommodated by a program of open-market purchases to alleviate any tendency for interest rates to increase, would almost certainly be an effective stimulant to consumption and hence to prices. Even if households decided not to increase consumption but instead re-balanced their portfolios by using their extra cash to acquire real and financial assets, the resulting increase in asset values would lower the cost of capital and improve the balance sheet positions of potential borrowers. A money-financed tax cut is essentially equivalent to Milton Friedman's famous "helicopter drop" of money”

However, critics interpreted Bernanke’s words as his way of authorizing indiscriminate money printing, and the moniker “Helicopter Ben” took hold.

Bernanke would go on to chair the Federal Reserve from 2006–2014, and many of his theories were put into practice during the Financial Crisis of 2007–2008 and subsequent Great Recession. In fact, President Barack Obama credited Bernanke’s leadership during the crisis with averting a second Great Depression.

Helicopter Money vs. Quantitative Easing

While helicopter money and quantitative easing are both monetary policy tools, and both increase the monetary supply, they actually have different effects on a central bank’s balance sheet.

Through quantitative easing, a central bank buys trillions of dollars’ worth of long-term securities, such as Treasury securities, corporate bonds, mortgage-backed securities, or even stocks. This increases its reserves and expands its balance sheet. These purchases are also reversible, meaning the central bank can swap out its assets if it chooses.

Helicopter money, on the other hand, involves fiscal stimulus: distributing money to the public. It has no impact on a central bank’s balance sheet. The practice of helicopter money is irreversible, which means it is permanent—and cannot be undone.

In effect, helicopter money is less a long-term economic solution than it is a “one-time” or short-term operation.

Pros of Helicopter Money

In a 2016 blog post written for the think-tank Brookings Institution, Bernanke admitted that his helicopter money reference gave him some bad PR. In fact, he said that their media relations officer, Dave Skidmore, had warned Bernanke against using the term, saying “It’s just not the sort of thing a central banker says.”

But Bernanke insisted, and the moniker stuck.

To this day, Bernanke continues to believe in the practice of helicopter money as a tool the Fed could use in response to a slowdown in the economy. His successor at the Federal Reserve, Janet Yellen, agreed, stating that helicopter money “is something that one might legitimately consider.”

Other central bankers support the concept, particularly in Europe, which suffered from debt crises that mired its economy throughout the 2000s, igniting deflationary pressures like low demand and weak lending, and made recovery exceedingly difficult.

Cons of Helicopter Money

The biggest drawback of helicopter money is the inflation it tends to ignite. And since inflation is notoriously difficult to manage, once the inflationary fires have been stoked, what’s to prevent them from growing out of control—and fostering hyperinflation? That’s what happened in countries like Argentina and Venezuela, when their central banks printed money and gave it to their governments, who in turn gave it to the people. Inflation surged.

Helicopter money also leads to weakened currencies, because as more and more money is printed, its value decreases significantly. It could also deter currency traders from making long-term investments if the practice is prolonged.

Clearly, helicopter money is not a practice a central bank should undertake lightly.

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Arsenal’s $55.9M Loss An Improvement Over Previous Fiscal Year

Arsenal took a heavy loss but saw reasons for optimism.
The post Arsenal’s $55.9M Loss An Improvement Over Previous Fiscal Year appeared first on Front…

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As a team in transition, Arsenal saw some losses in its last`fiscal year — but also saw signs of hope.

The Premier League team took an operating loss of $55.9 million in the fiscal year ending May 2022.

  • That figure was a significant improvement on last year’s $131.9 million loss.
  • The team saved around $39 million in wages compared to the previous year.
  • But broadcasting revenue dropped from $225 million to $178 million.

Arsenal benefitted from the lifting of pandemic restrictions, with matchday revenue rising by around $51.6 million to $453.7 million.

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Streak Snapped

The club failed to qualify for any European competitions in the 2020-21 season for the first time since 1994-95, which led to heavy spending on player contracts. 

“This investment recognises that the Club has not been where it wanted to be in terms of on-field competitiveness and that, as a minimum, qualification for UEFA competition needed to be regained, as a prerequisite to re-establishing a self-sufficient financial base,” the club wrote.

Arsenal credited owners Kroenke Sports & Entertainment for its willingness to invest in the team.

The move has borne fruit this season with Arsenal’s return to the Europa League, the second-tier competition to the UEFA Champions League. The team has already earned $8.4 million for its appearance there, with total potential earnings up to $22.1 million.

The post Arsenal’s $55.9M Loss An Improvement Over Previous Fiscal Year appeared first on Front Office Sports.

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Scientists reveal encouraging findings in first-in-human clinical trial evaluating HIV vaccine approach

NEW YORK and LA JOLLA, CA—While scientists have struggled in the past to create an effective vaccine against HIV, a novel vaccine design strategy being…

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NEW YORK and LA JOLLA, CA—While scientists have struggled in the past to create an effective vaccine against HIV, a novel vaccine design strategy being pursued by researchers at Scripps Research, IAVI, Fred Hutchinson Cancer Center (Fred Hutch) and the National Institutes of Health, National Institute of Allergy and Infectious Diseases (NIAID) Vaccine Research Center (VRC) shows new promise, according to data from a first-in-human clinical trial.

Credit: CHRISTOPHER COTTRELL, CREATED WITH BIORENDER.COM

NEW YORK and LA JOLLA, CA—While scientists have struggled in the past to create an effective vaccine against HIV, a novel vaccine design strategy being pursued by researchers at Scripps Research, IAVI, Fred Hutchinson Cancer Center (Fred Hutch) and the National Institutes of Health, National Institute of Allergy and Infectious Diseases (NIAID) Vaccine Research Center (VRC) shows new promise, according to data from a first-in-human clinical trial.

In a paper published in Science on December 2, 2022, the scientists reveal critical new insights into their novel vaccine strategy, which involves a stepwise approach to producing antibodies capable of targeting a wide range of HIV variants. 

“The data we are publishing in Science demonstrates for the first time that one can design a vaccine that elicits made-to-order antibodies in humans. We specified in advance certain molecular properties of the antibodies that we wanted to elicit, and the results of this trial show that our vaccine antigen consistently induced precisely those types of antibodies,” says co-senior author William Schief, PhD, a professor and immunologist at Scripps Research and executive director of vaccine design at IAVI’s Neutralizing Antibody Center, whose laboratory developed the vaccine antigen. “We believe this vaccine design strategy will be essential to make an HIV vaccine and may help the field create vaccines for other difficult pathogens.”

The Phase 1 trial, known as IAVI G001, tested the first stage in a multi-stage HIV vaccine regimen the researchers are developing. The trial results show that the vaccine had a favorable safety profile and induced the targeted response in 97% of people who were vaccinated. Importantly, the Science study also provides a detailed immunological analysis of the vaccine responses.

“HIV represents an area of dire unmet need across the world, which is what makes the findings from our Phase 1 clinical trial so encouraging,” says Mark Feinberg, MD, PhD, president and CEO of IAVI. “Through the close-knit collaboration of many different scientists, disciplines and institutions, we are that much closer to designing an effective vaccine that could help end the HIV pandemic.”  

Priming the Immune System

Broadly neutralizing antibodies (bnAbs) are a rare type of antibody that can fight and protect against many different variants of a virus—including HIV. This is why scientists have tried to develop an HIV vaccine that induces bnAbs, but thus far without success.   

The researchers in the study are using a strategy known as ‘germline targeting’ to eventually produce bnAbs that can protect against HIV. The first step of germline targeting involves stimulating the rare immune cells—known as bnAb-precursor B cells—that can eventually evolve into the cells that produce the bnAbs needed to block the virus. To accomplish this first step, the researchers designed a customized molecule—known as an immunogen—that would “prime” the immune system and elicit responses from these rare bnAb-precursor cells.

The overarching goal of the IAVI G001 trial was to determine if the vaccine had an acceptable safety profile and could induce responses from these bnAb-precursor B cells.

“Through extensive safety and tolerability monitoring during the trial, we showed the vaccine had a favorable safety profile, while still inducing the necessary target cells,” says study author Dagna Laufer, MD, vice president and head of clinical development at IAVI. “This represents a large step forward in developing an HIV vaccine that is both safe and effective.”

To determine if the targeted bnAb-precursor B cells were induced, the researchers carried out a sophisticated analytical process.

“The workflow of multidimensional immunological analyses has taken clinical trial evaluation to the next level,” says co-senior author Adrian B. McDermott, PhD, former chief of the Vaccine Immunology Program at the NIAID VRC. “In evaluating these important immunological factors, we helped show why the vaccine antigen was able to induce the targeted response in 97% of vaccine recipients.” 

IAVI G001 was sponsored by IAVI and took place at two sites: George Washington University (GWU) in Washington, D.C., and Fred Hutch in Seattle, enrolling 48 healthy adult volunteers. Participants received either a placebo or two doses of the vaccine antigen, eOD-GT8 60mer, along with an adjuvant developed by the pharmaceutical company GSK. Julie McElrath, MD, PhD, co-senior author, senior vice president and director of Fred Hutch’s Vaccine and Infectious Disease Division, and David Diemert, MD, professor of medicine at GWU School of Medicine and Health Sciences, were lead investigators at the trial sites.

A Deeper Immunological Dive

The study also carefully examined the properties of the antibodies and B cells induced by the vaccine antigen, in what Schief likens to “looking under the car hood” to understand how the immune system operated in response to the vaccine. One analysis showed that the vaccine antigen first stimulated an average of 30 to 65 different bnAb precursors per person vaccinated, and then caused those cells to multiply. This helped explain why the vaccine induced the desired response in almost all participants.

Other analyses delved into the specific mutations the bnAb-precursor B cells acquired over time and how tightly they bound to the vaccine antigen. These investigations showed that that after each dose of the vaccine, the bnAb-precursor B cells gained affinity and continued along favorable maturation pathways.

One concern for this type of vaccine approach is the notion of “competitors”—in other words, the B cells induced by the vaccine antigen that are not bnAb precursors. The researchers extensively studied the “competitor” responses, and the results were very encouraging. Although the majority of the B cells triggered by vaccination were, in fact, “competitors”, these undesired B cells could not match the binding strength of the desired bnAb precursors and did not seem to impede maturation of the bnAb-precursor responses.

“These findings were very encouraging, as they indicated that immunogen design principles we used could be applied to many different epitopes, whether for HIV or even other pathogens,” adds Schief.

With these promising data in hand spanning both safety and immune responses, the researchers will continue to iterate and design boosting immunogens that could eventually induce the desired bnAbs and provide protection against the virus. These findings also come shortly after two additional studies in Immunity published in September 2022, which helped validate the germline-targeting approach for vaccinating against HIV.

“Working together with IAVI, Scripps Research, the VRC, GWU, additional investigators at Fred Hutch and many others, this trial and additional analyses will help inform design of the remaining stages of a candidate HIV vaccine regimen—while also enabling others in the field to develop vaccine strategies for additional viruses,” says McElrath of Fred Hutch.

IAVI, Scripps Research, NIAID, the Bill & Melinda Gates Foundation and the U.S. President’s Emergency Plan for AIDS Relief (PEPFAR) through the United States Agency for International Development (USAID) are partnering with the biotechnology company Moderna to develop and test mRNA delivery of these HIV vaccine antigens. Two Phase I clinical trials are underway that build on IAVI G001, one (IAVI G002) at four sites in the U.S. and another (IAVI G003) at the Center for Family Health Research in Kigali, Rwanda, and The Aurum Institute in Tembisa, South Africa. Both are testing mRNA delivery of the eOD-GT8 60mer that was evaluated as recombinant protein in IAVI G001, and the U.S. trial includes a boost antigen designed by the Schief lab and delivered with Moderna mRNA technology. A third trial (HVTN302), at ten sites in the U.S., is testing mRNA delivery of three different stabilized HIV trimers designed in the Schief laboratory that are candidates for late-stage boosters in multi-stage vaccines aiming to induce bnAbs. Using mRNA technology could significantly accelerate the pace of HIV vaccine development as it allows for faster production of clinical trial material.

This work was supported by the Bill & Melinda Gates Foundation Collaboration for AIDS Vaccine Discovery; the IAVI Neutralizing Antibody Center; NIAID; Scripps Center for HIV/AIDS Vaccine Immunology and Immunogen Discovery and Scripps Consortium for HIV/AIDS Vaccine Development; and the Ragon Institute of MGH, MIT, and Harvard. Other collaborating organizations include Duke Human Vaccine Institute, Karolinska Institutet, and La Jolla Institute. 

Research at the IAVI Neutralizing Antibody Center that contributed to the development of the vaccine antigen eOD-GT8 60mer was also made possible by the government of the Netherlands through the Minister of Foreign Trade & Development Cooperation and through the generous support of the American people through PEPFAR through USAID. The contents are the responsibility of IAVI and Scripps Research and do not necessarily reflect the views of PEPFAR, USAID, or the United States government.

About IAVI

IAVI is a nonprofit scientific research organization dedicated to addressing urgent, unmet global health challenges including HIV and tuberculosis. Its mission is to translate scientific discoveries into affordable, globally accessible public health solutions. Read more at iavi.org.

About Scripps Research

Scripps Research is an independent, nonprofit biomedical institute ranked the most influential in the world for its impact on innovation by Nature Index. We are advancing human health through profound discoveries that address pressing medical concerns around the globe. Our drug discovery and development division, Calibr, works hand-in-hand with scientists across disciplines to bring new medicines to patients as quickly and efficiently as possible, while teams at Scripps Research Translational Institute harness genomics, digital medicine and cutting-edge informatics to understand individual health and render more effective healthcare. Scripps Research also trains the next generation of leading scientists at our Skaggs Graduate School, consistently named among the top 10 US programs for chemistry and biological sciences. Learn more at www.scripps.edu.


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