The global economy
performed a bit like a Rube Goldberg contraption during the first quarter of
2015, although it’s doubtful many countries found humor as economic, financial,
and political events triggered other economic, financial, and political events
across the world.
Europe heads into deflation
“The whiff of deflation is
everywhere,” reported The Economist
early in 2015:
“Even in America, Britain,
and Canada – all growing at more than 2 percent – inflation is well below
target. Prices are cooling in the east with Chinese inflation a meager 0.8
percent. Japan’s 2.4 percent rate is set to evaporate as it slips back into
deflation; Thailand is already there. But it is the euro zone that is most
striking. Its inflationary past – price rises averaged 11 percent a year in
Italy and 20 percent in Greece in the 1980s – is a distant memory. Today, 15 of
the area’s 19 members are in deflation; the highest inflation rate, in Austria,
is just 1 percent.”
Low energy prices
contributed to persistently low levels of inflation in many countries, although
oil prices were slightly higher toward the end of the first quarter.
The Swiss take pre-emptive action
In mid-January, anticipating
the European Central Bank (ECB) was about to try to head off deflation with a
round of quantitative easing (QE) that would reduce the value of the euro, the
Swiss National Bank (SNB) announced it would no longer cap the value of the
Swiss franc at 1.2 per euro. The response was exceptional and unexpected.
Experts speculated the SNB planned for the franc to lose value against the euro.
Instead, it gained more than 30 percent. The Swiss market lost about 10 percent
of its value on the news, and U.S. markets slumped, too.
The ECB commits to a new round of QE
The SNB may have
miscalculated the effect of de-capping its currency, but it was correct about
the ECB and QE. After months of dithering and debate, the ECB announced it was
committed to a new round of QE and would spend about $70 billion a month through
September 2016. Global markets cheered. Stock markets in Europe ascended to a
seven-year high. The euro descended to an 11-year low.
Disparate central bank policies trigger currency issues
Divergent monetary policy
– the Federal Reserve ended a round of QE just before the Bank of Japan and the
ECB introduced new rounds of QE – proved to be a pressure cooker for
currencies. With the dollar rising and the euro falling, countries with
currency pegs were forced to follow suit. U.S. dollar-linked countries
generally tightened monetary policy, even if it might hurt their economies, and
euro-linked countries pursued looser monetary policy. The Economist reported that, “Denmark has had to cut interest rates
three times, further and further into negative territory, in order to
discourage capital inflows that were threatening its peg against the euro.”
Interest rates fall lower and lower and lower
Thanks to quantitative
easing, lots of banks in the United States and Europe have a lot of cash tucked
away in their central banks’ coffers. The Economist reported:
“…negative interest rates
have arrived in several countries, in response to the growing threat of
deflation… Banks, in effect, must pay for the privilege of depositing their
cash with the central bank. Some, in turn, are making customers pay to deposit
cash with them. Central banks’ intention is to spur banks to use “idle” cash
balances, boosting lending, as well as to weaken the local currency by making
it unattractive to hold. Both effects, they hope, will raise growth and
inflation.”
In the Euro area, Germany,
Denmark, Sweden, Switzerland, the Netherlands, France, Belgium, Finland, and Austria
have issued bonds with negative yields. Why would anyone be willing to pay to invest
in bonds? The Wall Street Journal
suggested one possibility: Investors think yields have further to fall.
healthcare?
revolution? Really?
We may be taking part in a revolution and not even realize it! The way healthcare
is provided in the United States has been changing. In the past, Americans
participated in fee-for-service healthcare. You might think of it as healthcare
a la carte. Hospitals and doctors were reimbursed for each test and treatment,
which created incentives to do more rather than less, and may have caused the
system to perform less efficiently.
The
Economist
recently reported, as a result of the Affordable Care Act, hospitals and
doctors are being paid by results. Instead of getting a fee for each service,
they receive a flat fee for all services performed:
“There are also incentives
for providers which meet cost or performance targets, and new requirements for
hospitals to disclose their prices which can vary drastically for no clear
reason… The upshot is there are growing numbers of consumers seeking better
treatment for less money. Existing health-care providers will have to adapt or
lose business. All sorts of other businesses, old and new, are seeking either
to take market share from the conventional providers or to provide the software
and other tools that help hospitals, doctors, insurers, and patients make the
most of this new world.”
A key to making the transition from
fee-for-service to alternative healthcare payment models will be providing
doctors with support and guidance as they adopt new systems. A Rand study evaluated episode-based and
bundled payments, shared savings, pay-for-performance, fees/taxes, and retainer-based
practices as well as accountable care organizations and medical homes. The
study found, “There was general agreement among physicians that the transition
to alternative payment models has encouraged the development of collaborative
team-based care to prevent the progression of disease.”
Weekly Focus – Think About It
--Terry Pratchett, English author
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