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My views on Economics News

I give my opinion on one economics news.

The Central Banks trade-off and the mechanism behind the pressure on the financial sector


A long news today - hope you like it :) !


A few days after the Fed rose the Fed’s fund rate by 25 basis points, I will focus on the difficult situations in which the Central Banks are. 


The Economist recently published an article entitled “Central Banks face an excruciating trade-off” - a title that summarises well the situation. Indeed, as the financial sector seems to get weaker every day that passes, Central Banks face a very difficult trade between inflation control and financial stability.


Cutting interest rates would make the banks' lives easier but would also increase the risk of rising inflation. As nicely said in the Economist: “Central bankers already faced a narrow path to success. The ravines on either side of it have become deeper.”

So, I guess the question is what is happening to the financial sector and why?


For what is happening to the financial sector, I would make it short as everyone that reads this probably already knows.


  • 10/03: Failure of the SVB after a bank run. The SBB had roughly $210bn of assets under management, which brings panic in the financial sector forcing the Fed to act, putting $25bn on the table


  • 15/03: Sharp decrease in the stock price of Credit Suisse – a bank that has been underperforming for a long time now – after the Saudi National Bank, the leading shareholder of CS, said it will not increase its participation in the bank.

Screenshot 2023-03-26 at 16.00.35.png
  • 19/03: Swiss Investment bank UBS agreed to buy Credit Suisse for $3.2bn in a deal brokered by the government of Switzerland and the Swiss Financial Market Supervision Authority


  • 26/03 (date of the news): Many banks are under pressure, especially Deutshce Bank.

Now, the interesting question is why is this happening?




During COVID households put a higher proportion of their money in deposits as demand contracted and money was distributed directly to households by governments to help them in difficult times. The banks invested a large proportion of those deposits in the bonds market.


With the rising prices due to catch-up demand after COVID and problems in the supply chain after Covid disruptions coupled with the war in Ukraine (with Putin’s energy war), Central Banks rose interest rates to control inflation. 


We know that when interest rates rise, the price of bonds decreases. Intuitively this is b/c the interest rate can be seen as the opportunity cost of investing in bonds. As bond prices decrease, the banks’ bond portfolio values also decrease. As a result, banks now face significant unrealised loss on these positions as well as withdrawing pressure b/c of the opportunity cost of having its money invested in low-return deposits rises with increasing rates.


FT: “Overall bank deposits declined $98.4bn to $17.5tn on March 15 from a week earlier, according to the Federal Reserve Data released on Friday afternoon”. “Separate data has shown cash rushed into money market funds in recent weeks, suggesting individuals and companies may be moving money from banks into ultra-liquid mutual funds, among other safe heaven investments.”


As people withdraw their deposits, it forces banks to realise their loss, putting the financial system under pressure.



With this in mind, let’s look at the market's short-term reaction to the 25 points hike of the Fed:


“The higher bond prices accompanying stocks (see the yield table below as of three days ago) confirm the market message post ECB last Thursday - namely, that the markets like central banks focusing rates on the inflation battle and deploying other tools for financial stability.” Mohamed El-Rian


Although I agree with Mohamed El-Rian, I guess the “other tools for financial stability” that he is mentioning do not appear to be very reassuring for the market.


To see that such policy puts high pressure on the financial sector, let's just have to look at stock prices as of the day I am writing this (26th March):

   - 24th March stock price DB: -8.53% & rise in Credit default Swaps

   - 24th March stock price BNP Paribas: -5.27%

    - 24th March stock price Societe Generale: -6.13%

Just a quick look at the price of gold - a good thing to look at during inflation & financial sector pressures.​

Quiz: Interpret the spot curve (now answered)


Screenshot 2023-02-27 at 22.15.00.png

First time I am doing this, but I guess it can be fun.


We discussed this Pound/US dollar spot curve in macro this week. Send me in DM your interpretation of this spot curve this week - if one is good it will be published. Otherwise, I will just post what we discussed in class.

Please find below another graph that might help you.

Good luck


Thanks a lot to the few who sent an answer !! - I will publish mine as most answers were incomplete (the question was probably a bit hard).

First thing first, we define the nominal exchange rate as the domestic price of the foreign currency.

The second thing to comment is the graph of the relative monetary base and the exchange rate. Why did I include this graph ? I included it for you to spot that movement in exchange rates are often very difficult to anticipate and at first sight uncorrelated to macroeconomic fundamentals.


For this purpose, the comparison between the relative monetary base and exchange rates makes sense as if you want to compare exchange rates to macro fundamentals, a logic variable to do so is the monetary base. Indeed, in the long run, the monetary base affects prices and hence the interest rates.

A good comment to add is that a comparison of money supplies across the 2 countries would have been better - as money supply is the actual variable that directly influences the price level. However, the definitions of the money supply in the UK & the US are different and, therefore, incomparable. Note that even the monetary base is not published by the BoE anymore.


Lastly, the high volatility of the monetary base since 2016 can be explained by the beginning of Quantitative Easing (QE).

Commenting on the actual graph:

The things to spot:

- On the 2nd of Feb: Both CBs increase their policy rate by 50 basis points -- no big movements in exchange rates that day

- Big depreciation of the US$ from the 3rd Jan - 20th Jan

- 3rd Feb: appreciation of the US$

-15 Feb: appreciation of the US$

Main conclusion: It is not the actual monetary policies that are driving the exchange rates. Instead, it is the news about macroeconomic fundamentals that make people adjust their expectations.

In this example:

- There was no big movement on the 2nd of Feb because both increase in policy rates were expected by financial markets and , consequently, already priced in.

- The big depreciation of the US$ between the 3rd and the 20th of January reflects the expectations that the US was not going to tighten monetary policy as much as previously anticipated in the next months / few years.

- 3rd Feb: Big news in the US job markets with a half a million job surge in January. Expectations that the Fed might have to raise rates further, leading to an appreciation of the US $. 

- 15 Feb: higher than expected retail sales in the US which also made markets believe that the Fed might have to further rise rates

Screenshot 2023-02-27 at 22.25.06.png

Source: International Macroeconomics Dr Petra Geraats

What can we expect from the FED'S first meeting of 2023


I already published yesterday, so today is not a "proper news", but just a quick reminder to connect on your FT app on February 1st to see what the Fed announces for the short-term interest rates.

The consensus is that the Fed will rise the rates by 25 basis points, less than previously expected, due to the slow down of inflation over the past months. I think that markets have priced in such policy, so such an announce should not have a major impact.

However, several economists, including Mohammed El Arian, advocate for the previously planned 50 basis point increase.


Reasons are:

         -  inflation seems to shift from goods to services - a sector where it is more difficult to fight inflation

          -  in the medium run China might reopen imports leading to inflationary pressure

         -    the US labour market is particularly tense, which might lead to inflationary pressure, for example Walmart has already announced that it will raise salaries from 12$ to 14$ per hour. 


 Hence, rising rates by 50 basis points would be to play safe and ensure not to fight the same fight twice. 

What hides behind the record low unemployment rate in the US?


I guess as any person interested in politics or just in what is going on in the world, I follow the 46th President of the United State, President Biden of course, on Twitter.

In the past 24 hours President Biden has written two tweets (please see below) on the US unemployment number, which has reached 3.5% - a "the lowest unemployment in half a century" (Biden). So, let me explain my understanding of this number.


Source: President Biden Twitter Account, 27/01/2021

First, let me state the obvious the 3.5% unemployment rate is a great news - in the US when people have they almost always have sufficient wages to leave a decent life. This number is also representative of a tense labour market where people are sometimes paid to show up for interviews (2 vacancies per job seekers).

But behind this number hides a significant decrease in the US participation rate. For example, if the labor force participation rate had remained the same as before COIVD, 2.6 million more Americans would be looking for a job.


Note that the participation rate is the labor force (i. e. the people that have a job or a looking for a job/ the employed and unemployed people) divided by the total working-age population. Also, note that the people included in these categories vary across countries.


These differences raise questions about how many metrics are calculated in the labor market. 

For example, although this changes across countries, the unemployment rate is often criticised as it often only includes people with no job at all. The significant movements of people from one category to another (see graph) might also prove the weaknesses of these categories. Hence, in my opinion there are surely more than 3.5% of the US labour that would like to work and that do not have a job.

This declining participation rate brings other question: where did these people go? why did they leave the labour force? and, maybe more importantly, what would bring them back in the labour force? I am sure that more research will be dedicated to this issue.

To conclude, as with any economic variable, we must be cautious about what it really tells us. Here, is it that more people that want to work have a job or that more people have given looking for a job? (I believe a bit of both) Lastly, this might be representative of a new problem that our economy will be facing: a shift from too-low aggregate demand to too-low aggregate supply. 

Screenshot 2023-01-20 at 12.01.04.png

Source: Graph from Google Images


Source: Lecture 1 Unemployment and Labour Market - Dr Faraglia Cambridge

The depreciation of the dollar over the past months



Source: Graph from Bloomberg

Hey everyone! 

Sorry for not posting for quite a long-time - I took some time off during the holidays and the end of term at Cambridge was intense.

To come back, I wanted to share a graph of what has been happening in the US over the past few months with a continued US dollar depreciation. 

The causes of this significant depreciation could be a reflection of the markets’ reassessment of US monetary policy, being perceived as less tight, relative to that in other major advanced economies.

Nevertheless, as the Fed has consistently maintained that it will continue to hike rates until the 2% inflation target is met, the continued depreciation can also only reflect worry investors' perception of the US market rather than a trend with a solid economic foundation. 

This could also be a market correction after the continued appreciation of the dollar relative to other major economies in the past year (see the graph below).

Overall, I still find very complicated to understand the rationale behind markets movements in such a context. 

Please send me a PM with your view on this. If anyone has the time, it could be interesting to compare the relative change in nominal exchange rates compared to that of money supply accross advanced economies.

Screenshot 2023-01-10 at 11.28.03.png

Source: Graph from Google Finance, updated 10/01/2023

Bank of England raises its benchmark rate by 75 basis points, its biggest hike in 33 years


Screenshot 2022-11-04 at 11.43.49.png

Source: Graph from; data from Bank of England

Today, the Bank of England rose interest by 0.75 percentage point -a 3 per cent increase-, matching the US Federal Reserve’s increase earlier this week. 


Although the Bank of England has raised interest rates to their highest point since 2008 , the Bank of England surprisingly insisted that interest rates should not rise further in the future to fight inflation:


” We can make no promises about future interest rates, but based on where we stand today, we think [rates] will have to go up by less than currently priced into financial markets. That is important because, for instance, it means that the rates on new fixed-term mortgages should not need to rise as they have done.” Andrew Bailey (BoE governor).

Message from the Bank of England:

I have posted below an extract of the message posted below by the Bank of England while rising interest rates. I think that the message is a clear and concise summary of the situation. The message describes some of the reasons for the inflation and recession in the UK – these causes are applicable to many other countries.


“Inflation is too high. High energy, food and other bills are hitting people hard. In September, prices had risen by 10.1% compared to a year ago. That is well above our 2% target.


Higher energy prices are one of the main reasons for this. Russia’s invasion of Ukraine has led to more large increases in the price of gas.


Higher prices for the goods we buy from abroad have also played a big role. During the Covid pandemic people started to buy more goods. But the people selling these have had problems getting enough of them to sell to customers. That led to higher prices – particularly for goods imported from abroad.


There is also pressure on prices from developments in the United Kingdom. Businesses are charging more for their products because of the higher costs they face. There are more job vacancies than there are people to fill them, as fewer people are seeking work following the pandemic. That means that employers are having to offer higher wages to attract job applicants. Prices for services have risen markedly.


Households have less to spend on other things. This has meant that the size of the UK economy has started to fall.”


Bank of England Official Statement– 03/11/2022

What does the Bank of England predict in the long term?

The Financial Times, as often, published a very interesting article ( on the current and past positions of the Bank of England  – if you have time, go read it, it is relatively short.


If you can’t be bothered, I have included the key graphs below.

Screenshot 2022-11-04 at 11.20.52.png
Screenshot 2022-11-04 at 11.21.04.png
Screenshot 2022-11-04 at 11.59.31.png

The first graph describes the BoE’s expectation across two interest rate scenarios.


Looking at the last graph, one might be sceptical regarding the projections made by the Bank of England and he/she should be – predicting the interest rates in such unstable times is extremely complicated even for the brightest macroeconomists of the country.

Lower yields on the UK government bonds and stronger sterling



Updated on the 24th October 2022,

Hope you had a nice weekend – short news this morning, but big news.

After Boris Johnson quit the contest last Sunday, Rishi Sunak (former Chancellor) now appears as a considerable favourite to become Britain’s new prime minister. 


The market reacted well to the news: both 2-year and 30-year UK government bonds are lower at, 3.519% and 3.891% respectively. In addition, the sterling rose 0.3% against the dollar to reach $1.1336 and advanced 0.6% against the euro to 1.525€.

Screenshot 2022-10-24 at 09.31.38.png

Updated on the 24th October 2022, Source: Yahoo Finance

The market’s reaction suggests that the market considers as good news the fact that Boris Johnson will not win another nomination. According to U. Leuchtmann, head of currency research at Commerzbank, Johnson’s exit removed one of the political risks that had been hanging over the UK currency – B. Johnson’s return could have prompted a flare up in tensions with Europe over post-Brexit argument. 


Overall, R. Sunak’s agenda is perceived as one that represents lower fiscal risk and that would put less pressure on the Bank of England to hike aggressively.

The  Yen trades at 150 per US dollars


Screenshot 2022-10-21 at 13.33.48.png

Updated on the 21st October 2022, Source: Yahoo Finance

Today (20th October), the Yen traded at 150 per US dollar, the highest level since 1990 (please see graph above). This 20-year record puts pressure on the Japanese Yield curve control policy (YCC). 



What is the YCC (Yield Curve Control) Policy?


I know it seems like a very long time ago, but up to early 2021, most of the developed economies were facing what they considered to be “too low” inflation. To tackle this problem, several central banks adopted yield curve control. Yield curve control (YCC) involves targeting a longer-term interest rate by a central bank, then buying or selling as many bonds as necessary to hit that rate target. When the targets are extreme, this approach is aggressive and significantly different from the central banks’ typical way of managing economic growth and inflation, which is by setting a key short-term interest rate, such as the federal funds rate in the US.


In 2016, the Bank of Japan adopted an extreme version of this strategy, through which the policy rate was reduced to -10 bps and the 10-year yield was fixed at 0%. The Bank of Japan promised to maintain YCC for as long as was necessary to achieve its 2% inflation target in a stable manner

The recent deflation of the Yen against the dollar puts pressure on the sustainability of Japan’s YCC (yield curve contrail) policy in a world of generalized yield increases. In the words of Dr. Mohamed El-Erian (President of Queens College and former Pimco CEO): “Pronounced yen weakness results from the sustained implementation of YCC (yield curve control) in the context of higher global yields”.



But why is Japan’s YCC problematic in today’s context? 


The YYC policy can be beneficial in a world of sustained economic growth or quantitative easing (QE). Indeed, YYC amplifies positive nominal growth shock as real interest rates do not rise in response to the shock, but rather fall. 


However, in an inflationary context, the 10-year yield fixed at 0% -fixed through Japan’s YCC- seems less appropriate. Over the world, the yields have risen in reaction to inflation, which is impossible under this regime. This situation forces the BoJ to conduct bond purchases – theoretically unlimited purchases – to maintain its yield curve control policy.


On Tuesday, Japan reported that core inflation rose 2.8% from a year ago in August, the fastest growth in nearly eight years and the fifth consecutive month where inflation exceeded the BoJ’s target. 



What’s next?


According to HSBC’s Senior Asia FX Strategist Joey Chew and analysts at Goldman Sachs, defending this policy would be the central bank’s priority instead of currency intervention, which would be decided by the Ministry of Finance, and carried out by the Bank of Japan.




PS: I have received messages asking me to discuss Liz Truss’ resignation as England’s Prime minister. For the moment, the markets have not reacted strongly to the news. I think that, as we are, the markets are waiting to see what’s next. When we will have more information regarding economic consequences, I will write about it  ;).

The 30-year UK government yield decreases, and the pound sterling is getting stronger 


Screenshot 2022-10-17 at 17.12.53.png

Source: MarketWatch, 17th of October

The new UK chancellor (Jeremy Hunt), has rewritten the government’s tax and spending plans in order to rebuild the government’s fiscal credibility. This includes suppressing parts of Kwasi Kwarteng’s tax cuts and slashing the government’s energy support package. Precisely, Hunt announced the scrapping of £32bn of tax cuts, roughly two-thirds of the £45bn package promised by the government. 


The market responded positively, and it seems that the market has confidence in Hunt’s capacity to control Britain’s public finances. The 30-year yield trades 0.42 percentage points lower today at 4.36 percent and sterling is at 1.3 percent higher against the dollar at $1.1316.

Screenshot 2022-10-17 at 17.09.55.png

Source:, 17th of October

Obviously, these decisions go against the economic policy promises of prime minister Liz Truss – tax cuts and no spending decrease. In the chancellor’s words, his priority is to restore “economic stability”, which brings the question “what about the promises made to the voters who elected prime minister Truss?”. 


I think that in such unprecedented times, it is complicated to criticise those decisions. The unfunded tax cuts were a threat to UK’s financial stability. I have posted below a graph from the Wall Street Journal as a reminder that inflation hurts the purchasing power of earnings. In addition, it is also important to keep in mind that it is for the most vulnerable populations that inflation is the most penalising. Financial stability is key to the well-being of populations and I hope that these measures will pave the way for inclusive and sustainable growth.


Source: WallStreet Journal

The Michigan Consumer Sentiment Index



Source: Bloomberg, 17th of October

The University of Michigan has just released a survey of Consumer Sentiment. The Index informs markets on the US consumers’ confidence. According to the index, there is an upward move in both short- and long-term inflationary expectations among US consumers. Consumers expect prices will rise over 5.1% in the next year.


This is a worrying result for the Fed as it has been heavily active to lower these expectations. The Federal Reserve is in a complex position as the market is both worried about its actions to stop the inflationary crises – the market is worried that these actions might push the economy into a recession and undermine market functioning. Nevertheless, US- year -ahead inflation expectations rose in early October for the first time in seven months.


Michigan Consumer Sentiment Index:

Actual: 59.8

Predicted: 59


The UMich is an insightful tool, especially in the current inflationary crisis – add it to your watch list.

The UK 10-year government bond rate is still above 4%


Screenshot 2022-10-17 at 09.03.36.png

Source: MarketWatch, updated on the 17th of October

At 4.08% this afternoon, the UK 10-year UK government bond rate has caught back its decline from this morning (3.991% at its lowest). The 10-year yield had declined following the announcement of the 45% tax cut being reversed. However, it now seems that the market’s focus has shifted to the other tax reduction proposals.


I think the UK government is in a very difficult situation. On the one side, Prime Minister Truss was elected on a liberal economic program, focusing on tax reductions, that she must follow. On the other hand, the market is very tense, and every government revenue cut that is not compensated with decreased spending is severely sanctioned. In addition, the economic context is not appropriate for spending cuts as the UK households’ purchasing power is suffering from strong inflation.


PS: It will be interesting to follow the attitude of the Bank of England in the following days and weeks. For the past few weeks, the BoE has not used its full bond purchasing capacity, even during important UK government bonds’ sell-off such as on the 10th of October.

It is also important to note that, in my opinion and considering the market tension, I do not see the UK 10-year yield decreasing in the next days and even weeks. We are walking on uncharted territories and the consequences of such yields on our economies are not fully understood, so keep your eyes open.

Why is the British pound dropping and why does it matter?

Week - 03/10/2022

This news was written by Kavinash Mautadin-Marin. Kavinash Mautadin-Marin  is  a first year student at Queen Mary University of London studying BSc Economics.

Screenshot 2022-10-03 at 10.28.57.png

What has happened?

The British pound has fallen to a record low against the dollar following the major tax cuts announced by the Chancellor of the Exchequer, Kwasi Kwarteng, on Friday 23rd September. Markets did not respond well to his plans to scrap the corporation tax increase from 19% to 25% and reduction in the basic rate of income tax by 1 percentage point to 19%, along with others, resulting in the value of the pound tumbling steadily from $1.12 until reaching $1.04 - a record low for the pound since 1985.

Why has it happened? 

The main reason for this significant event derives from speculation of currency investors. Investors buying the pound to later sell for profit have doubts on whether the government will be able to fully repay the loan needed to fulfil these tax cuts. Herding effect has also arguably played a role in the plummet of the pound as investors starting to sell the pound resulted in remaining investors getting more anxious and ultimately also selling their investments. This has caused an excess in supply of the pound as investors rapidly transfer to other more stable currencies such as the dollar and overall led to the depreciation of the pound. Furthermore, some economics argue that since the transactions on Monday 26th occurred close to midnight UTC, there may have been a lack of liquidity for such large transactions due to not many sales being processed so late into the night. This could explain the initial large dip in the pound, hitting its lowest, and then slowly recovering to a more accurate value or around $1.08.

What are the impacts? 

The impacts are essentially a boost in cost push inflationary pressure due to foreign goods and services becoming more expensive relative to the pound. For example, if you wanted to import a good from the US which is valued at $1, excluding shipping costs it would have previously been £0.88 on September 20th but after the pound depreciated on September 26th, the same $1 good would cost £0.96. This would magnify the cost-of-living crisis which the UK is currently experiencing as consumers and firms would have to pay more to import goods and importing firms may also decide to transfer these higher costs onto consumers. In 2020, the UK imported 46% of the food it consumed, according to the gov website, which indicates how reliant the UK is on imports and implies the major effect a weakened pound will cause in terms of boosting inflation. Furthermore, it may ultimately reduce the quality of life of UK travellers as holidays would become more expensive due to the pound not being able to purchase the same value of items abroad. This can be significant especially as we come close to the Christmas holidays where many families decide to travel during this period.

Are there any positives?

Although the negatives of inflation massively outweigh any positives, there are still some benefits from a lower exchange rate. The most obvious is a fall in the prices of exports compared to other countries. This could help improve the governments Balance of Payments, which is nearly at a £34 million pound deficit in Q2 2022, through encouraging exports and reducing the number of imports into the UK. It could also promote greater globalisation and improve UK trade relations with other countries in the short term. However, I would argue that focusing on the trade deficit is trivial when considering the extent of inflation and the effects it will have on UK households. The UK has been undergoing a trade deficit since 1998 and most recently was 4.5% of nominal GDP in Quarter 2 2022 which suggests how insignificant a trade surplus, or reducing the trade deficit, is in achieving economic growth in the UK.

Social & Economic contexts of the French presidential election

Week - 04/04/2022


AFP image of the 12 French candidates

This week's news topic will focus on the French presidential election, whose first round will take place in five days.

This Sunday, the 10th of April 2022, the French people, myself included, will vote in the first round of the French presidential election. The two candidates with the most votes will access the second round of the French presidential election.

Unfortunately, the winner of the first round could be abstention. According to the figures of the OpinionWay-Kéa Partners daily barometer published on Monday, only 66% of the sampled people say they are sure to go and vote on Sunday. This figure is likely to increase during the week, but the participation will not reach the 77.7% of 2017 according to the president of Opinion.

I am not going to summarise the programs of each candidate in this article. First, most of the readers are not French. Second, it is extremely difficult to remain unbiased and precise in this exercise. Before this election, I will just share the results of a study recently published by OpinionWay that can explain why buying power is the most important factor for the French electorate.


According to this study, 36% of French people cannot make ends meet every month and 37% cannot live in dignity because of inflation. According to the survey, 60% of French people regularly give up buying hygiene products for financial reasons.


Moreover, 49% of French people say they are within 5 euros when they do their shopping, i.e. 6 points more than in 2021, and this proportion increases to 56% among the under 35s.

Update on the economic situations of Russia and European countries as the war in Ukraine continues

Week - 21/03/2022




European sanctions are beginning to be felt in Russia. The Russian central bank estimates inflation at 20% in 2022. The two main causes of this surge in inflation are the collapse of the rouble and the tensions on the supply of raw materials.


On Friday 25 March, Russian bread producers went on the offensive to obtain permission to raise prices, as bread is subsidised by the state. This producer demand is due to the rise in wheat prices which has accelerated since the beginning of the war. Ukraine and Russia are among the largest wheat producers in the world.


Faced with the risk of a general supply shortage, the Kremlin has announced that it is limiting exports. A total of 200 products, including wheat, can no longer leave the country freely.




According to the Governor of the Bank of France, François Villeroy de Galhau, France should suffer less economically than the other countries in the euro zone: "France is less dependent on Russian gas and fossil fuels. A recession is not expected, even in the worst case scenario.

The Euro Zone


According to the ECB's (European Central Bank) most negative scenario, the loss of growth in the eurozone could be as much as 2 points of GDP by 2024.


The US Vote


The US Pentagon has voted slightly less than $14 billion in aid to Ukraine. This total includes $4 billion for Ukrainian refugee aid and the rest in economic, military and humanitarian aid.


The Pentagon is also picking up $6.5 billion to fund the deployment of troops to the region and provide equipment to Ukrainian forces. 

The impact of the disconnection of Russian banks from the Swift

Week - 07/03/2022


Today, I want to share a part of a very interesting article on a different view regarding the impact of the disconnection of Russian banks from the Swift.

In my last news, I argued that the Russian banks exclusion from the Swift would have a strong negative impact on the Russian economy, considering Russia current dependence on the system (based on several articles I had read on the matter).

However, I learnt in this article that Russian banks had several solutions to overcome this exclusion. In fact the system itself  is a messaging system and messages from Russian banks could be sent in other ways, such as fax, even if it appears less secure. Moreover, the exclusion will not affect the Russian domestic banking sector. In 2014, the Central Bank of Russia actually set up a National Payment Card System (NPCS), through which all Russian domestic payments can pass.

This article shows that even renowned economists can disagree on the impact of a particular policy and that even if most economists seem to agree on a point they can be wrong. For example, many economists predicted that the rating systems for feedbacks would not work when they were first introduced. Now rating systems are used on nearly every product in the world and have a significant impact on customer decisions.

Find below part of the article:

The disconnection of Russian banks from the Swift (acronym for Society for Worldwide Interbank Financial Telecommunication) messaging system from 12 March has been described in the press as "one of the most powerful tools the Western authorities have to punish Russia". But while pulling the plug on Russian banks may send a clear political message, the economic impact of this measure alone may not be as effective as claimed.


Swift is a network linking more than eleven thousand financial institutions in over two hundred countries. Since its creation in 1973, Swift has become synonymous with international payments. But it is important to note that SWIFT does not process payments, nor does it hold or transfer funds: it only allows the exchange of secure payment messages between its members. Actual payments are processed by banks, not by SWIFT.



No national impact


It should also be noted that currencies are closed systems. When a foreign transfer is made, the currency is not physically transferred abroad. Instead, banks provide accounts to their foreign counterparts and have their own accounts with their foreign counterparts. Banks rely on the "correspondent banking" network, which involves using several banks to ensure that the payment reaches the intended account holder. This network allows banks to make payments in foreign currencies. Other payment service providers, for example money transfer agents such as PayPal or Wise, as well as emerging fintech providers, also use the interbank network. Swift is the infrastructure that underpins the correspondent banking network.


However, the impact of the ban on Russian banks may not be as relevant as expected.


Firstly, as Swift is a messaging system, messages regarding funds transfers can be circulated using other, albeit potentially less secure, networks, including instant messaging or the good old fax.


Secondly, the exclusion of Swift does not affect the Russian domestic banking sector. In 2014, the Central Bank of Russia actually set up a National Payment Card System (NPCS), through which all Russian domestic payments can pass.

Link to the full article:

Note that this article is in French and requires a subscription (this is why I couldn't published it entirely).

Economic sanctions against Russia.

Week - 21/02/2022


The countries of the Western world seem to be primarily interested in sanctioning Russia economically after its invasion of Ukraine. But, why is it difficult to economically asphyxiate Russia?


Since 2014, Russian agriculture has developed, a gas pipeline has been created with China, Moscow has exchanged a large number of its dollars for gold or yuan and has developed its trade with various emerging countries like Brazil and India. Moreover, Russia's public debt does not exceed 20% of its GDP. Russia also has a sovereign wealth fund of $180bn and financial reserves of $640bn.


The impact of European sanctions could also be limited by an economic alliance between China and Russia.


Finally, the consequences of a Russian economic suffocation would also have serious consequences in Europe, leading to higher inflation. For example, grain is at its highest price since 2012 and Brent crude is at $104.5 per barrel.



The major impact of one of the proposed economic sanctions: excluding Russia from the SWIFT international payment system.


SWIFT, the Society for Worldwide Interbank Financial Telecommunication, is a key part of the global trust - the world's largest banking and financial messaging network. It enables settlement between institutions around the world. This system allows, for example, Germany to pay for its Russian gas purchases electronically, without having to pay Gazprom in cash. Russia is the second largest user of the system in the world, with 300 member banks.


Excluding Russia from Swift would be a way of completely cutting off the country's economic relations with the rest of the world.

I wanted to add that the Student Economics Blog and I stand with Ukraine. I hope that this atrocious war will be end soon and my prayers go the Ukrainian people.

Inflation is back, as consumer prices in the US rose by 7% in 2021.

Week - 10/01/2022



Consumer prices in the United States rose by 7% in the year 2021. The country is experiencing its highest inflation since 1982. Energy prices jumped 29.3% and food prices by 6.3%. 


Many economists, including those at the White House and the US Federal Reserve Bank (Fed), thought that inflation would be transitory. However, it seems to persist and President Biden has promised to stop the spiral and the Fed is targeting 2% annual inflation.


My view: Where is inflation going?


There are reasons to believe that the price boom will fade. Much of this year's increase is due to shortages of goods that should eventually ease as companies figure out how to produce and transport what people want to buy in a pandemic-altered economy. Moreover, before the pandemic, aging populations were driving inflation steadily down as people preferred to save money rather than spend it, and this basic economic element has not changed.


However, if you are a regular reader of this blog, you know that I have been worried about rising inflation for the past year.  Extract of an article written in May 2021: "the economic context seems favourable to a future rise in prices. Indeed, the drop in prices linked to the pandemic seems to announce a mechanical readjustment of future prices.  Moreover, the decrease in production resulting from the crisis could also lead to inflation as one might expect a supply chain shortage in the future."


Today, consumers start to anticipate higher prices, which might be the beginning of long-term inflation as people might ask for increased compensations. Personally, I believe that the increasing interest in cryptocurrency is symptomatic of people's decreasing trust in government money, which might lead to long-term significant inflation.

Turkish lira edges closer to record low against dollar

Week 6/12 - 12/12/2021


File image of Turkish president Erdogan.


Turkey's lira weakened nearly 1% against the dollar on Thursday, moving closer to last week's record low.  Since the 1st of January, Turkey's lira has lost 26.6% against the dollar. Among the currencies of the major emerging countries, the Turkish lira shows the second largest decline in 2021, behind the Brazilian real (-28.5% against the dollar) and the Argentinian peso (-23.4%).

In parallel to this fall, the main sample of the Istanbul Stock Exchange, the BIST 100, deviated by 3.65% to 1,257.68 points, the lowest in a month (+0% since January).

Two major reasons:

1) A tense geopolitical context

The plunge of the Turkish currency comes at a time when Recep Tayyip Erdogan has launched, over the weekend, virulent attacks against Paris and Washington in particular. France recalled its ambassador to Ankara on Sunday after the Turkish president said Emmanuel Macron "needed mental treatment" in response to the French president's comments on Islam and the Mohammed cartoons. 


Then in a speech in Ankara on Monday, the leader went even further, comparing the treatment of Muslims in Europe to that of Jews before World War II, accusing some European leaders of "fascism" and "Nazism". He also called on his compatriots to boycott French products.


Washington has also recently and repeatedly threatened to impose sanctions on Turkey in retaliation for its purchase of a Russian-made S-400 air defense system. "You don't realize who you are dealing with," the Turkish president warned in a speech Sunday. "Whatever your sanctions are, do not be late," he added.

2) A risk of chronic Inflation

In addition to the growing geopolitical tensions between Turkey and the West, economists are concerned about the management of the country's economy. The continued fall of the currency risks fuelling chronic inflation, which jumped to a three-year high of 21.3% last month.

Erdogan's view on interest rates:

Recep Erdogan is firmly opposed to any increase in interest rates, which he has described as the "mother and father of all evils". And while his position seemed to be finally shifting on this issue, as suggested by last month's sharp rise in the main interest rate from 8.25% to 10.25%, last week's decision to keep it at that rate again disappointed the market.


What is the Turkish central bank doing ?

The independence of the Turkish central bank is weakened. Just last week the Turkish strongman declared that his country was in a "war of economic independence". Erdogan has already fired three central bank chiefs over ‘policy disagreements’ over the past couple of years and dismissed three monetary policy committee members in October.

My analysis:


What does Turkey's situation tell us?

1- The danger of inflation & low interest rates

In my opinion, Turkey's situation demonstrates the threat of "low interest rate obsession" and the growing risk of chronic inflation.

As I already wrote, to lock ourselves into a negative rate logic would be to negate the entire economy and its fundamental principles. First principle: risk has a cost. The creditor cannot be sure that he will be repaid because the solvency of any economic agent is never total. The interest rate remunerates this risk by taking inflation into account. To give up the rate is to deny the risk. The negative rate is also to renounce the idea that time has a value, the famous "Time is money". The negative rate denies the fundamental economic principle that time allows money to grow, it denies the philosophy of progress. In fact, the negative rate is a race to the bottom because it accepts the loss of money as normal. The investor invests to lose and companies produce at a loss. Stagnation becomes the ideal because it makes it possible not to lose. Some might argue that these rates, do not directly affect people like you and me. This is a mistake! Negative rates penalise the profitability of banking institutions and the prosperity of savers. Thus, "negative rates are like a supernova that will explode" (William H Gross, manager of the PIMCO investment fund) and, far from being a paradise for investment and growth, negative rates are ready to explode in mid-air. 

Therefore, while low interest rates can help to revive economic activity, they should not be used in the long term. 

2- The necessity of independent monetary policy

Turkey's situation reaffirms that the monetary policy should be independent from the government. In 1975, William Nordhaus, in "The Political Business Cycle, The Review of Economic studies", warned us that governments want the economy to be in good shape during election years and often take decisions that might not benefit the country's economy in the long term. Therefore, it is important for the monetary institutions to stay independent.

Additional information:






Shortages are holding back the recovery in Germany. Its growth is not expected to exceed 2.4% this year. 

The "made in Germany" sector is being hit hard by problems with the supply of raw materials and electronic chips, which are taking over industrial production. In the automotive industry, the consequences of the semiconductor shortage are considerable. Some production lines are interrupted, the Opel plant in Eisenach is completely shut down until the end of 2021. 




The US Congress will temporarily raise the US debt ceiling. The debt limit will be raised by $480 billion, allowing the country to meet its payments until December.


House Democratic Leader Nancy Pelosi warned on Tuesday before the vote that if the debt ceiling was not raised substantially, the impact would be "enormous" and the US would see "a loss of six million jobs".



136 countries, representing 90% of the world's GDP, have committed to harmonizing the taxation of multinationals at 15%. 


Harmonizing the taxation of multinationals should generate $150 billion in additional tax revenue (OECD).



An international consortium of investigative journalists (ICIJ) has accused several hundred politicians and public figures of having hidden assets in offshore companies, particularly for tax evasion purposes.


The accusations include Tony Blair, Shakira and Dominique Strauss-Kahn.




Australia annonced the breaking of a contract signed with France in 2019 regarding 12 sub marines for €56b. Australia signed a new contract with the United States.




Venezuela will remove 6 zeroes from its money to fight inflation.



Revolut made a new fundraising of €677m, valorising the company €28b and making it the 3rd largest fintech company in the world.

The bank funded 6 years ago now has 15 million users and lost last year €235m.



Volkswagen will no longer sell combustion engines in Europe by 2035. In the USA and China, the phase-out will take place a little later. In South America and Africa, due to the lack of political framework conditions and infrastructure, it will take a little longer.


"As a mass-market manufacturer, VW has to adapt to the different speeds of transformation in different regions. Our competitors who sell vehicles mainly in Europe, for example, will certainly face a much less complex transformation," says Klaus Zellmer, head of sales at Volkswagen.



"We must seize the moment to reinvent and rebuild a new American economy that invests in the promise and potential of every American," Joe Biden to Congress. 


The U.S. president is planning a $6 trillion investment plan. He is counting on two investment plans, included in this project, which should create millions of jobs: one "for American families" of $1.8 trillion over 10 years, and another on infrastructure, which is the subject of bitter negotiations between the administration and the opposition. 



4 months after the Brexit, the United Kingdom is facing some economic difficulties.


Sales of milk and cream have fallen by 96%, and chicken and beef by 80%. All sectors combined, 50% of exports are considered in difficulty.


Joe Biden sets a goal of reducing CO2 emissions by 50 to 52% by 2030.


To achieve this goal, the President reaffirmed his ambition of 100% decarbonized energy by 2035.



The airlines anticipate a cumulative loss of $47.7b in 2021. These losses were $126.4b in 2020.


The International Air Transport Association forecasts global passenger traffic at 43% of 2019 levels.

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