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Daniel Lacalle

Articles by Daniel Lacalle

Why the Central Bank “Bailout of Everything” Will Be a Disaster

13 days ago

Despite massive government and central bank stimuli, the global economy is seeing a concerning rise in defaults and delinquencies. The main central banks’ balance sheets (those of the Federal Reserve, Bank of Japan, European Central Bank, Bank of England, and People’s Bank Of China) have soared to a combined $20 trillion, while the fiscal easing announcements in the major economies exceed 7 percent of the world’s GDP according to Fitch Ratings.
This is the biggest combined stimulus plan in history. However, businesses are closing at a record pace and unemployment has reached extremely elevated levels in many countries.
There is an important risk in what I call the “bailout of everything,” or the conscious decision by governments and central banks to provide any

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Why the European Recovery Plan Will Likely Fail

18 days ago

The €750 billion stimulus plan announced by the European Commission has been greeted by many macroeconomic analysts and investment banks with euphoria. However, we must be cautious. Why? Many would argue that a swift and decisive response to the crisis with an injection of liquidity that avoids a financial collapse and a strong fiscal impulse that cements the recovery are overwhelmingly positive measures. But history and experience tell us that the risk of disappointment regarding the positive impact on the real economy is not small.
The history of stimulus plans in the eurozone should alert us against excessive optimism.
As you may remember, the European Union launched in July 2009 an ambitious project for growth and employment called the “European Economic

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The ECB Has Been Hiding Risk. They Won’t Be Able to Do It Much Longer.

May 19, 2020

Despite the unprecedented increase in the European Central Bank’s asset purchase program, the spread of southern European sovereign bonds versus German ones is rising.

The ECB balance sheet has soared to more than 42 percent of the eurozone’s GDP, compared to the Fed 27 percent of US GDP. However, at the same time, excess liquidity has ballooned to more than €2.1 trillion.

The ECB has been implementing aggressive asset purchases as well as negative rates for years, and the reality is that the eurozone economy has remained weak and close to stagnation already in the fourth quarter of 2019.
The eurozone’s main problem is that most governments have abandoned all structural reforms and bet all the recovery on monetary policy. The excessive government spending,

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Three Reasons Why the Eurozone Recovery Will Be Poor

May 12, 2020

The eurozone economy is expected to collapse in 2020. In countries such as Spain and Italy, the decline, more than 9 percent, will likely be much larger than in emerging market economies. However, the key is to understand how and when the eurozone economies will recover.
There are three reasons why we should be concerned:
The eurozone was already in a severe slowdown in 2019. Despite massive fiscal and monetary stimulus, negative rates, and the European Central Bank’s (ECB) balance sheet above 40 percent of GDP, France and Italy showed stagnation in the fourth quarter and Germany narrowly escaped recession. The eurozone weakness had already started in 2017, and disappointing economic figures continued throughout the next years. Many governments blamed the weakness

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Central Banks and the Next Crisis: From Deflation to Stagflation

April 25, 2020

All over the world, governments and central banks are addressing the pandemic crisis with three main sets of measures:
Massive liquidity injections and rate cuts to support markets and credit.
Unprecedented fiscal programs aimed at providing loans and grants for the real economy.
Large public spending programs, fundamentally in current spending and relief measures.
However, they may cause deeper problems than those they aim to solve.
When governments try to artificially boost debt and demand in a supply shock, the risk is the creation a massive deflationary spiral driven by debt saturation that is followed by stagflation when supply chains start to become insufficiently flexible.
This is a health crisis and a supply shock added to the forced shutdown of the

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Governments Are Using the Coronavirus to Distract From Their Own Failures

March 5, 2020

The Johns Hopkins University Coronavirus Global Cases Monitor shows that the mortality rate of the epidemic is very low. At the writing of this article,1 there have been 92,818 cases, 3,195 deaths, and 48,201 recoveries. It is normal for the media to focus on the first two figures, but I think that it is important to remember the last one. The recovered figure is more than ten times the deceased one. This should not make the reader ignore the epidemic, but it is worth reading the scientific study that shows that the death rate in citizens under age 60 is less than 1.3 percent, 0.2 percent in the young population, and a maximum of 4 percent on average.2
I have attended several debates in international media where scientists repeat these important factors to prevent

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