Happy to do my bit

This week marked another of those set piece UK fiscal events that are so beloved of politicians, journalists and a large number of economists with the publication of the government’s Spending Review. The media focus was on the OBR’s forecasts which highlighted that the UK is set to experience its worst drop in annual output since the Great Frost of 1709 (around 11%) and the biggest fiscal deficit since 1944-45. Neither of these come as a surprise to those who have been following the UK economy in 2020 and the macro picture painted by the OBR for 2020 and 2021 largely accords with my own, so I found it rather difficult to get excited about the big picture.

That did not stop TV news editors and newspaper journalists from focusing on lurid headlines demonstrating the impact of Covid-19 on UK economic prospects. But in my view, the narrative around the outlook was more interesting. In this context I was particularly intrigued by comments from the BBC’s chief political correspondent suggesting that public borrowing is at “absolutely eye-wateringly enormous” levels and that with regard to the 60-year high in public debt: “This is the credit card, the national mortgage, everything absolutely maxxed out.”

This was yet another example of the failure to grasp some of the basic issues of fiscal policy – an issue I touched on here. It was particularly interesting to hear these comments on a day when the Economic Statistics Centre of Excellence (ESCoE) issued a report highlighting the general public’s lack of understanding of economic issues. The report, which was based on direct surveys of the public, found that they “could give broad definitions and speak in broad terms about economic concepts. However, when they were asked to provide more detailed explanations, they were generally unable to do so, and had typically never considered factors beyond their ‘personal economy’.”

When it comes to issues of dealing with public debt, this distinction is crucial. A household has a finite life and has to repay its debt over its lifetime but a government has a much longer lifespan (if not infinite, then certainly over many generations). Accordingly there is no rush to repay debt so long as there are institutional borrowers willing to hold it in the form of government bonds. Indeed for all the talk of “paying down debt”, UK debt levels have fallen in only 22 of the last 100 years and the incremental declines have been small relative to those years in which it increased. But between 1945 and 2000 it fell sharply relative to GDP, from 250% to 30%, implying that the costs of carrying the debt fell relative to income. As I noted in this post, the economic conditions for debt solvency imply that so long as the rate of GDP growth exceeds the interest rate paid on debt, the ratio of debt-to-GDP will decline (other things being equal). This means that governments should worry less about paying down the debt than ensuring that the amount of debt relative to GDP can be reduced.

The non-specialist media made great play of the “eye-wateringly enormous” £2.3 trillion debt level. But what does this mean? As it happens, the UK national debt has risen to just over 100% of GDP, which is a 60-year high. However the last time the debt ratio was at similar levels, the outstanding debt was a mere £29.6 billion and when it was at an all-time high of 259% of GDP in 1946 it amounted to £25 billion. To put that into context, the UK recorded a fiscal deficit of £47.9 bn in April 2020 alone: in absolute terms, the April deficit figure was almost twice the annual debt which the UK racked up after the most expensive conflict in its history. Of course such comparisons are meaningless for they take no account of inflation but they illustrate the futility of trying to grasp what a £2.3 trillion figure means. It is perhaps not surprising that voters struggle to understand basic fiscal concepts.

On the basis that the survey indicates they can relate economics to their own experience, consider this thought experiment. Imagine that a household has a gross income of £50,000 and borrows £200,000 to fund a mortgage. To be sure, £200,000 is a tiny fraction of £2.3 trillion but it represents four times the household’s annual income compared to one times the economy’s total income (or three times the government’s annual tax receipts). Who is more indebted? Moreover, the household has to pay back its borrowing over a horizon of 25 years but the government can simply issue more interest-bearing IOUs in order that it can roll over its debt. Who has the more onerous debt repayment schedule? And it is not just the UK consumer who struggles. The German government has convinced its electorate that it also should pay down debt, with the consequence that many German economists bemoan the lack of investment in infrastructure in recent years. 

I have made the point previously that the media has a big role to play in educating the public in the use of economic statistics and holding those politicians who misuse them to account. The most egregious misrepresentation of recent years was the claim by the Leave campaign that the UK could save £350 million per week by leaving the EU. When Boris Johnson repeated this claim in 2017 the head of the UK Statistics Authority called him out. However it was known to be a lie in 2016 before the referendum, and the popular press did nowhere near enough to call it for what it was. The comments by the BBC’s political correspondent, referred to above, were not (I assume) motivated by a deliberate intention to mislead but they nonetheless painted a false picture of an economic problem that affects all taxpayers. In that sense, the media can be said to be acting irresponsibly.

However the economics profession does not get off scot free either. Economists are often not good at explaining economic concepts in ways which relate to the everyday lives of most people. As the ESCoE report points out, “people are deeply interested in the economy and economic issues … However, at the same time, … they felt economics was difficult to engage with properly for the average person, and felt it was communicated it an inaccessible way, describing the economy as ‘confusing’, ‘complicated’ and ‘difficult to understand’”. In a speech given a couple of years ago, BoE chief economist Andy Haldane recounted an anecdote in which an academic tried to explain to an audience why leaving the EU would be bad for UK GDP. To quote Haldane: “A woman rose from the audience and, with finger pointed, uttered the memorable line: ‘That’s your bloody GDP, not ours!’” Indeed the ESCoE report suggested that “GDP was seen as economic jargon, contributing to the feeling that economics was largely inaccessible to them.”

This does suggest that there is a growing divergence between policymakers and the small group who understand the message they are trying to convey, and a sizeable majority of voters who do not. It certainly goes a long way towards explaining why the rational economic arguments against Brexit found such little resonance. The key lesson from all this is that the public needs to be more engaged with those economic issues which affect them in order that they can make more informed decisions. This in turn requires more effort across the spectrum in order to get the message across, and my first wish would be for the media to tone down the hyperbole when discussing matters such as fiscal issues. Economists have a duty to make some of the concepts more accessible as well, otherwise much of what we say will simply go over the heads of those who should be taking notice. On that front, I am more than happy to do my bit.

The IMF and economic support: It's Mainly Fiscal

On a day when the UK reported another eye-wateringly high level of government borrowing, one MP tweeted that “the state of the public finances should alarm everyone who understands them.” My advice would be let’s not get too alarmed just yet. It is also the advice given by the IMF in its latest Fiscal Monitor (FM) published this week. Politicians’ views are usually based on the assumption that public finances can be equated with household finances thus prompting howls of outrage when deficits and debt are deemed to be “too high” because they look at the monetary amount of the deficit or debt without putting it into some form of economic context.

When it comes to debt, what matters is the ability to service it in the short-term and reduce the burden it poses on the economy in the longer-term. Admittedly the UK’s public debt now exceeds 100% of GDP which is higher than we would ideally like but as I have pointed out previously, many countries have lived with higher debt ratios. To the extent that GDP represents a measure of annual income, the UK (in common with many other European economies) has a debt level which exceeds its annual income. But households routinely borrow significant multiples of their annual income to buy a house, and for the record the UK household sector has debt equivalent to 139% of its annual income. Calls for the government to cut back on the support it provides, despite the fact that the Covid pandemic is getting worse rather than better, are thus deluded.

The IMF points out that in a global context, “public debt is expected to stabilize at about 100 percent of GDP until 2025, benefiting from negative interest-growth differentials. These high levels of public debt are hence not the most immediate risk. The near-term priority is to avoid premature withdrawal of fiscal support.” A crucial reason for this is that fiscal measures have undoubtedly “saved lives, supported vulnerable people and firms, and mitigated the fallout on economic activity” and unsurprisingly the IMF advocates devoting considerable fiscal resources to health. But “further support is necessary to protect people who cannot make a living under the current circumstances” (a message which might be directed at UK the government following the heated discussions regarding how much support it should be expected to provide to those regions of the country which have been subjected to a more intense lockdown).

Quite how long the pandemic will last is obviously unknown, and this explains why governments are not willing to make open-ended commitments. On the basis that eventually we will overcome the worst effects of Covid-19, governments will have to make some important decisions about when and how to reduce their fiscal support. But the IMF, which has undergone a form of Damascene conversion on fiscal policy since the 2008 crisis, argues that governments should continue a programme of public investment even after the worst of the crisis has passed. It makes the point that the bang for the buck from higher public investment is larger during times of economic uncertainty (i.e. the fiscal multiplier is higher) than during more “normal” times. Moreover, low interest rates, high precautionary savings and weak private investment are strong arguments for boosting public investment to “crowd in” private investment. This is all a long way from the IMF’s advice in October 2008 when it suggested “policymakers must be very careful about how stimulus packages are implemented, ensuring that they are timely and that they are not likely to become entrenched and raise concerns about debt sustainability.”

Indeed in October 2012, the IMF concluded that it had systematically underestimated fiscal multipliers since the start of the Great Recession by between 0.4 and 1.2. Thus, if we thought pre-crisis that the multiplier was around 0.5, it would in fact be more likely to be in the range 0.9 to 1.7 (a figure greater than unity implies that a fiscal expansion of x% of GDP would lead to an increase in output of more than x%). Subsequent IMF research also suggested that fiscal multipliers are significantly larger in times of a negative output gap than when the output gap is positive (I was not very popular amongst my German colleagues in 2015 for pointing this out). In the latest FM, the IMF’s empirical results suggest that an increase of public investment equivalent to 1% of GDP increases the level of output by a factor of more than two in a high uncertainty environment versus 0.6 in the baseline case (chart below).

However, much of the public debate proceeds on the basis that all government spending is somehow equal and that as long as “something is done” all will be well. This is not the case. As Chris Giles pointed out in the FT last week, the UK government spent 0.6% of GDP on its much-vaunted Covid track and trace system in the expectation that this would allow the economy to reopen safely with the result that the economic benefits would significantly outweigh the costs. The project has not worked out like that and it currently looks like an expensive failure. It may yet match expectations with additional outlays but the point is made that public projects have to be carefully scrutinised to ensure that they generate decent rates of return (either social or financial). BoE Governor Andrew Bailey made this point to a parliamentary Economic Affairs Committee last week, noting that investment “has to be in projects that earn a rate of return. History is quite mixed on that front.”

The IMF notes that in “advanced economies that do well on the World Economic Forum’s index of government-spending wastefulness, public investment has been found to have a fiscal multiplier of 0.8 in the first year and above 2.0 at the four-year horizon.” For the record, the UK ranks 34 out of 136 countries behind Germany (20) and Japan (22) but ahead of France (73) and the US (74). Whilst it is all very well arguing for higher public investment, there is a question of where it should be targeted. Aside from health, education is high up the priority list since it results in significant externalities which produce very high rates of social return (although these returns tend to accumulate only over long horizons). I have increasingly become an advocate of investing in climate-proofing the economy where the evidence suggests that returns are often in excess of 100%, and well above this in regions particularly exposed to extremes of weather. Investment in digital infrastructure is another area likely to generate significant returns in the near future and I will undoubtedly return to these issues another time.

Governments have clearly learned from past experience that they have to step in to make up for a shortfall in private demand in times of extreme crisis such as we are experiencing today. Whether they will learn from the experience of the past decade remains to be seen. Too many governments were quick to turn off the taps following the GFC in a bid to improve their fiscal position. The trick in coming years will be to recognise that this cannot be achieved in a matter of a few years – this is a multi-decade problem which will be made all the easier by policies which support growth rather than hinder it.

Greatest hits

For most of the last 40 years I have listened to politicians misrepresenting fiscal issues. In the 1980s the Thatcher government in the UK talked about “living within our means”, treating the government budget constraint as if it were a household. This never made any sense because whilst households have a finite lifespan, governments – in theory – do not which raises their borrowing capacity because they can repay debt on a multi-generational basis. A decade ago, George Osborne adopted a similar approach, arguing that if the UK government did not rein in its budget deficit it would suffer similar fiscal consequences to Greece. Never mind the fact that UK debt levels were lower, or the fact the UK had an independent monetary policy or indeed that it issued debt in a currency which it controlled.

For the present we appear to have put the need for wearing a fiscal hair shirt behind us. Instead politicians like to boast of their fiscal largesse, even though a large segment of the public is increasingly asking who will pay for it. Ultimately, it is the tax payer although not necessarily the current generation. But just as politicians have overdone the fiscal rectitude in the past, so they may be guilty of exaggerating their largesse today. At the end of June, Boris Johnson announced a plan to spend £5bn on infrastructure which was portrayed as a “new deal” along the lines of Franklin D Roosevelt’s 1930s plan. It was, of course, nothing of the sort. FDR’s plan amounted to a splurge equivalent to around 40% of US GDP at the time whereas Johnson’s equates to around 0.2% of UK GDP. The BBC Fact Check team looked at the details of Johnson’s speech and concluded that large parts of the plan merely involved allocating funds that had previously been announced.

Chancellor Rishi Sunak, who has performed creditably during the crisis, did come up with a more substantive plan in his Summer Statement last week. His plan to provide additional support of £30bn (1.4% of GDP) included a Job Retention Bonus which promised a subsidy to employers for each furloughed employee they retain until end-January 2021; a package of measures to help the hospitality sector and a housing Stamp Duty holiday. There are many reasons why the package is badly targeted: A subsidy of £1000 per employee will not do much to dissuade employers from making job cuts and it also runs the risk that taxpayers will foot the bill for workers who would otherwise have been re-employed anyway. A Stamp Duty holiday will be of most benefit to those in the south east of England where house prices are highest, which is not exactly consistent with the government’s plan to level up the economy by helping those regions which have fallen behind. Yet for all that, we do have to give the Chancellor credit for pulling out all the stops after a decade in which fiscal policy has been relegated to the back burner.

The plan came too late to be fully incorporated into this week’s Fiscal Sustainability Report (FSR) from the OBR. Nonetheless, it dutifully ploughed through the fine details and found that the Chancellor has been even more generous than he admitted. The OBR pointed out that the Treasury “’has so far approved £48.5 billion of additional expenditure on public services’, of which £32.9 billion had not previously been announced.” On my maths, this implies a fiscal boost equivalent to almost 3% of GDP.

For those with the time to browse it, the FSR was an excellent, sober overview of the current problems facing the UK economy and how it might perform in future (chart 1). The scenario set out in April always felt a little rushed – understandably – but having had time to reflect on events, the OBR set out three possible long-term scenarios. The central case looks for output to get back to pre-recession levels by end-2022, which is achievable although I fear it could take a bit longer. In this scenario, the deficit balloons out to 16% of GDP this year before falling back to 4.6% by fiscal 2024-25 with the debt-to-GDP ratio remaining above 100%.

Indeed it is the long-term implications of the economic crisis which are particularly interesting.  A debt ratio in 2025 of around 100% is far lower than in the late-1940s when it went above 250%. A combination of favourable demographics, rapid growth and low interest rates allowed the ratio to halve between 1947 and 1957 and it halved again within the next 15 years. We are unlikely to see such a rapid reduction this time around unless there is a miraculous transformation in the potential growth rate. Indeed, the OBR’s central case scenario suggests that based on assumptions for demographics, pensions and health care spending, the debt ratio will rise to 320% on a 50 year horizon (chart 2). Whilst we should not take the figures at face value, they do highlight that in the absence of counteracting measures the debt ratio is not going to decline anytime soon and the OBR’s illustrative calculations suggest that fiscal tightening of around 2.9% per decade will be required to get the debt ratio back to 75% over a 50-year span.

All of this is, of course, subject to a huge degree of uncertainty and it is purely an illustrative scenario. But the point is made that even in the absence of COVID-19, the UK (and indeed all industrialised countries) face major fiscal challenges. Governments will have to make major decisions about what kind of debt levels they are prepared to tolerate and what level of services they can realistically provide. Societies as a whole will have to make decisions about how much tax they are prepared to pay. Whilst I have been an advocate for greater use of fiscal policy over the past decade, like most people I never expected to see the kind of hit to public finances which we have seen in just the last four months. In the coming years we will need a proper debate about the role of the state in the economy. Political blustering on fiscal issues will no longer suffice.

EU expansion

After appearing to drag its feet on the issuance of joint bonds, the German government last week endorsed a French proposal to set up a fund capable of delivering €500bn of grants to EU member states suffering from the economic impact of Covid-19. This week the European Commission went further by setting out a plan to borrow €750bn by directly issuing bonds and distributing the proceeds to member states. After a decade of wrangling, this is a very important step and is vital if the EU is to hold together as a cohesive body. At last, the Commission has decided to lend its weight to a plan to issue pan-European fiscal instruments and will thus back up the ECB which has done all the heavy lifting on policy up to now. There are many who see this as a game changing event. And if implemented, it will be. But there are a number of hurdles to be crossed before the plan can be realised.

What does the plan entail?

Ursula von der Leyen, the Commission President, outlined a programme dubbed Next Generation EU. This is very apt because if it can be made to stick the EU could be about to take the first steps on the way to a fiscal union. Who knows, but this plan may be to the formation of a common fiscal policy what the snake in the tunnel was to the single currency. If nothing else it would break the taboo on fiscal cooperation which has long been one of the structural issues which has prevented the euro zone/EU from becoming the economic entity that the 1990s generation of leaders envisaged. That said, this measure is viewed as a one-off plan, nor will the Commission take any responsibility for debt already incurred by member states.

The idea is that the Commission will use its strong credit rating to borrow €750bn on international capital markets and recoup the funds though future EU budgets “not before 2028 and not after 2058”(i.e. not within the current budgetary period). Of this total, €500bn will be distributed in the form of grants whilst the remainder will take the form of loans. But the Commission is not simply proposing to write blank cheques: The funds will be distributed via EU programmes designed to achieve specific goals such as boosting competitiveness, supporting a broader green agenda and building the digital economy.

In order to facilitate repayment, the Commission suggested that a number of additional revenue raising items could be agreed at the pan-European level with each country paying the revenues from these streams into a centralised budget. “These could include a new own resource based on the Emissions Trading Scheme, a Carbon Border Adjustment Mechanism and an own resource based on the operation of large companies. It could also include a new digital tax … These will be in addition to the Commission’s proposals for own resources based on a simplified Value Added Tax and non-recycled plastics.”

In terms of the entitlement of individual states, the Commission has set out a formula based on three main economic factors: (i) population; (ii) the inverse of GDP per capita and (iii) the average unemployment rate over the past 5 years compared to the EU average. Based on this formula, Italy would be entitled to the largest share of the grants (20.5%) followed by Spain (19.9%), whereas France would only be able to secure a maximum of 10% and Germany 7% (chart).

What are the obstacles?

The first obstacle, and the most difficult, will be to convince the ‘frugal four’ (Austria, Denmark, Netherlands and Sweden) to sign up. The plan requires unanimous approval from governments, primarily because it entails structural changes in the EU budget that demand ratification by national parliaments. The frugal four have consistently opposed the creation of a debt union and have led the opposition which the German government is not willing to explicitly lead but which its electorate supports. But although Germany may have come somewhat reluctantly to the table, the government realises that failure to take action will ultimately weaken the ties that bind the union. After all, rising euroscepticism in Italy risks taking the EU in a direction it would rather not go and Germany certainly does not want to be the trigger for a breakup of the union. Arguably, however, the frugal four have less to lose and since they do not have the clout to bring down the union on their own, they act as a useful sounding board for the fears of all the northern countries.

A second concern is whether the establishment of an EU-wide fund will prompt individual governments to reduce their own efforts to put in place measures to combat the economic crisis. There has long been a concern amongst northern European members that an EU-wide safety net would result in moral hazard issues.

There are also some concerns with regard to fiscal legitimacy. One of the biggest problems is that only national governments have the power to levy taxes on their citizens since the government derives its tax-raising power from its electorate. Although there is a European Parliament which derives its legitimacy from citizens of the EU, it looks after pan-EU interests rather than the local interests which are generally more important to electorates. The levying of specific taxes for pan-European purposes might thus be seen as problematic.

But a brave attempt for all that

A decade ago it was clear that the euro zone is not a proper economic union – it was effectively a fixed exchange rate system in which debtor nations had to bear the brunt of the necessary economic adjustment. Greece and Ireland learned this lesson in a very painful way as the global debt crisis unfolded. It was also equally clear that some form of fiscal transfer mechanism would be necessary if the euro zone were to survive in the longer term, but efforts by Emmanuel Macron to make headway over the last three years largely fell on deaf ears. Now the tide has turned. That said, the Commission’s proposals are unlikely to be accepted in their current form and a compromise will emerge instead. Nor do the proposals outlined this week constitute a fiscal union. But they do mean that some form of countercyclical transfer mechanism could be in place sooner rather than later. In my view it is a very heartening move – at least from an economic standpoint although we can argue about the politics. The only disappointment is that it took so long to get here.

The Great Repression

Economic policy is about to take a turn for the weird. UK government borrowing in April 2020 was as high as in the whole of fiscal year 2019-20, at over £62bn, whilst the Bank of England is now seriously considering reducing interest rates into negative territory. Such is the precarious state of the economy as measures to combat Covid-19 take effect that all of the things we previously took for granted are about to be turned upside down.

The fiscal position

Dealing first with fiscal issues, the Office for Budget Responsibility reckons that UK public borrowing will reach 15% of GDP in fiscal 2020-21 which would represent the biggest peacetime deficit on record (chart below). Governments have no choice but to pull out all the stops given that they have imposed measures which impact on people’s livelihoods. With governments having shut down large parts of the economy, those affected by the measures need some form of support as a quid pro quo. The question remains as to how we will pay for it. In the short-term governments have no choice but to borrow more. Although the UK did not enter this crisis with a great deal of fiscal headroom, it does have some. The ratio of net debt to GDP ended fiscal year 2019-20 at 93.3% but as a result of the surge in borrowing in the first month of the fiscal year it jumped to 97.7% in April – the highest since 1963 - and it seems only a matter of time before it exceeds 100%. 

A decade ago, Carmen Reinhart and Ken Rogoff, in their famous 2010 paper, Growth in a Time of Debt, argued that a debt ratio in excess of 90% has major adverse consequences for economic growth since an increasing amount of resources is then devoted to debt servicing. The low level of interest rates today means that debt servicing costs are at their lowest in history so the 90% threshold may be less binding than in the past (if indeed it ever was, as there remains a lot of controversy regarding this figure). Ironically, on data back to 1700 the UK’s average debt ratio is 99% (chart below). Evidently imperial expansion and the financing of wars did not come cheap. But at the beginning of this century, the debt ratio was around 30% of GDP and whilst the financial crisis of 2008 did a lot of damage, it is notable that the debt ratio has continued to climb during the Conservative government’s term of office. Having spent the past decade telling the electorate that the deterioration in public finances was all the fault of the previous Labour government, even before the Covid crisis, the Tories have not exactly had a great record on managing public finances.

That said, even a net debt ratio of 100% is likely to be easily fundable. Despite what the ratings agencies may say, the UK has a long track record of not defaulting on its debt and it issues in its own currency. Nonetheless, no government will be comfortable with debt ratios at current levels and this partly explains why many policy makers want to reopen the economy as soon as possible in order to get some tax revenues flowing into the Treasury’s coffers.

The monetary response

Whilst I have long been an advocate of a more activist fiscal policy, it is equally clear that fiscal policy alone cannot do everything and needs to be backed up by monetary policy. It is presumably for this reason that the BoE is discussing the merits of cutting policy rates into negative territory. Although there are some circumstances in which they might be useful, I have never been persuaded of the merits of negative rates (a view summarised here).  In very simple terms, they are designed to persuade households and firms to bring forward activity and represent an attempt by central banks to alter the time preferences of economic agents. For those with an eye on their retirement funds, the idea of negative rates is anathema and the impact on savers is one of the reasons why a case has been brought before the German Constitutional Court.

As I have mentioned numerous times before, one of the problems with the negative interest rate policy is that it operates only on the supply side of the credit equation. Reluctant borrowers cannot be forced to take out loans and in the current environment, where uncertainty is at a maximum, households and corporates will not borrow under any circumstances. A bigger concern is that once rates fall into negative territory, they will stay there for a long time. That has certainly been the experience in Japan and the euro zone. Indeed, the experience of the last decade has been that central banks never seem to believe that the economy is strong enough to support monetary tightening. Consequently if interest rates do fall into negative territory, I fear they would not quickly rebound. As the respected head of the BIS research department, Claudio Borio, noted last year, “A growing number of investors are paying for the privilege of parting with their money. Even at the height of the Great Financial Crisis (GFC) of 2007-09, this would have been unthinkable. There is something vaguely troubling when the unthinkable becomes routine.”

As to whether a policy of negative interest rates has much economic effect, the jury is still out. Evidence from ECB researchers suggests that negative rates have boosted economic growth in the euro zone, although Italy might beg to differ. But no central bank is ever going to produce evidence that says its signature policy is not having the desired effect so we should treat the results with some caution. However, it does have a real impact on the banking sector. I do not expect the vast majority of the public to shed any tears for banks, which emerged from the 2008 crisis in better shape than they dared hope, but negative rates will squeeze margins. At a time when the BoE is exhorting banks to continue lending because “it is in their interest to do so”,  a policy which makes banks think more carefully about who they lend to is inconsistent with this strategy. Evidence from Sweden suggests that initial moves into negative territory do get transmitted to lending rates but subsequent moves do not. In other words, the monetary transmission mechanism can break down quite quickly. 

We should be under no illusions that policymakers will have to take all available measures to get the economy back on its feet. Given the huge surge in sovereign debt, governments and central banks are about to embark on a prolonged period of financial repression in order to reduce the cost of debt servicing. By doing so, governments will be able to reduce the extent of fiscal austerity required to control public finances when the economy finally recovers. If this means a period of negative interest rates, so be it. However, there is nothing to be gained from doing so for a prolonged period although if asset bubbles, screwing future generations of pensioners and failure to use the market mechanism to discipline risk taking are your thing, be my guest.