Electric vehicles, corporate debt, etc.
Studies in this week Gathering of Hutchins find in certain circumstancesstances rising electric vehicle use could increase the production of electricity from coal, the level of indebtedness of non-financial corporations does not reliably predict recessions, and more.
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Promoting the use of electric vehicles and pricing carbon are both policies aimed at reducing greenhouse gas emissions, but under certain circumstances they may actually increase coal-fired power generation, meet Kenneth Gillingham and Stephanie M. Weber of Yale and Marten Ovaere of the University of Ghent. To meet the demand for electricity, suppliers look first to the most efficient sources – renewables and high-efficiency natural gas – then to coal, and finally to the more expensive option, state-of-the-art natural gas power plants. When carbon is taxed at the moderate levels seen in pricing policies like those of cap-and-trade systems in California and the Northeast and those implicit in the Obama administration’s Clean Power Plan, suppliers are likely to turn to coal instead of natural gas to meet additional demand for electricity. A higher carbon price (which would discourage the use of coal altogether) or no carbon price (which would encourage producers to switch to coal long before an increase in demand from electric vehicles) would allow promoting electric vehicles to be much more efficient at reducing emissions than carbon prices seen in the recent past in the United States, they say. “Our results reinforce the simple fact that the benefits of electric vehicles will be much greater if they are sequenced after the decommissioning of coal-fired plants,” they conclude.
The increase in debt of non-financial corporations preceded the global financial crisis of 2008-2009. Concerns are resurfacing today as non-financial corporate debt hit an all-time high of nearly 100% of nominal GDP in the second quarter of 2020. Federal Reserve’s Stephanie E. Curcuru and Mohammed R. Jahan-Parvar analyze 12 economies advances and 43 recessions to determine whether credit booms to non-financial corporations predict recessions or increase their severity. The authors find that the level of credit to non-financial corporations is not a reliable indicator of the likelihood of a recession or its severity. They conclude that the build-up of credit to non-financial businesses in early 2020 is not necessarily a sign that the COVID-19 recession will be particularly long or deep like the global financial crisis. In fact, countries with larger increases in non-financial corporate debt between 2017 and 2020Q2 did not experience more substantial GDP losses between 2019Q4 and 2020Q3.
When Congress created the Paycheck Protection Program (PPP) in 2020, the Fed created a PPP Liquidity Facility (PPPLF) to lend funds to banks that make PPP loans.; the banks used these loans as collateral. Analyzing bank reports on financial health in 2020, Jose A. Lopez and Mark M. Spiegel of the Federal Reserve Bank of San Francisco find that increasing one standard deviation of banks’ participation in PPP and PPPLF increased the growth of their loans to small businesses and farms by 30 percentage points and 9.1 percentage points, respectively. As the PPP increased loans for banks of all asset sizes, the The Fed’s PThe PPLF only stimulated lending by small and medium-sized banks, suggesting that liquidity was particularly important for these banks. The PPPLF has played an important role in reducing the financial vulnerability of banks through their PPP loans: although participating banks experienced lower growth in total capital ratios, risk-adjusted capital ratios increased, reflecting the fact that PPP loans were guaranteed by the US Treasury.
Chart source: The Wall Street Journal
“Due to large budget deficits and rising federal debt, a narrative has emerged that the Federal Reserve will succumb to pressure to keep interest rates low to help service debt and keep government buying. assets to help fund the federal government. My goal today is to put an end to this narrative for good. It is simply wrong, ” says Christopher Waller, member of the Board of Governors of the Federal Reserve.
“Monetary policy has not been and will not be conducted for these purposes. My colleagues and I will continue to act only to achieve our congressionally mandated goals of maximum employment and price stability. The Federal Open Market Committee (FOMC) determines the appropriate monetary policy actions only to move the economy forward toward those goals. Deficit financing and debt servicing issues play no role in our political decisions and never will. ”