Follow Dr. Andreas Höfert
Andreas Höfert is Chief Economist Wealth Management and Regional Chief Investment Officer Europe.
Last week I had the honor of giving a lecture during the Economists’ Career Day at my alma mater, the University of St. Gallen, to students, faculty members and alumni. My talk centered on the views that we at the CIO team have developed over the last five years regarding the euro crisis. We have written extensively about it in numerous publications, so I will not repeat everything here. However, there is one point I’d like to expand on since someone challenged me on it after my speech.
Economists were not very good at forecasting the financial crisis of 2007-08 and the ensuing Great Recession. They were far better at heralding the euro crisis. Before the euro was introduced in 1999, many warned that the way the European Monetary Union was constructed would eventually lead to the kind of crises we have experienced during the last five years.
More than a quarter century ago, while studying macroeconomics, I examined the tools and options a government had at its disposal to influence growth, employment and inflation, and the world looked easy. At the time, there were two competing schools of thought regarding these options: the “do something” school, or Keynesian tradition, and the “do no harm” school, or monetarist tradition.
I am almost ashamed to admit it: I am a big fan of Michael Bay’s blockbusters. My favorite is The Rock (1996), but a close second is Armageddon (1998). When I envision the latter, I am reminded of the current state of the Eurozone.
Usually when any crisis nears its end, finger pointing and blame gaming start. Who or what was responsible, or can be used as a scapegoat by those who suffered from the crisis?
The aftermath of the financial crisis has been characterized by lower economic growth and much lower inflation than what was experienced before the mayhem. This alone could explain why interest rates are so low. Real interest rates usually reflect real growth, and the difference between nominal rates and real ones is explained by inflation expectations.
The biggest puzzle in the post-financial crisis environment, perhaps the single most important defining characteristic of the “new normal,” is the lack of inflation. If someone had guessed six years ago that major central banks, among them the US Federal Reserve, would have expanded their balance sheets fivefold, he or she would have concluded that inflation rates by now would be running at least in the upper single-digit range.
Six years ago, on the verge of what would be known as the Great Recession, a fierce dispute erupted among pundits about the nature of the unfolding economic slump. The main sticking point of this “alphabet soup” debate was the shape the recession would take: V, U, L or W? Depending on the chosen letter, the political recommendations were quite different.
Appearances in the media
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