The costs of interest rate liftoff for homeowners

The results of some interesting experiments to report here from the work of my colleague Carlos Garriga and his coauthors, Roman Sustek and Finn Kydland. DA

The statement from the July meeting of the Federal Open Market Committee reveals a support for starting to increase interest rates this Fall, provided some further improvement in the labor market. Such monetary policy stance is currently held also by policy makers in the U.K., as hinted by some members of the Monetary Policy Committee, the rate-setting body of the Bank of England.

An important channel through which interest rates affect the typical household is the cost of servicing mortgage debt. Standard mortgage loans require homeowners to make nominal installments—regular interest and amortization payments—calculated so that the loan is fully repaid by the end of its term. Changes in the interest rate set by the central bank affect the size of these payments, but differently for different types of mortgage loans. In addition, the real value of these payments depends on inflation.

Mortgage contracts and debt servicing costs

Fixed-rate mortgages (FRM), characteristic for the U.S., have a fixed nominal interest rate and thus constant nominal installments for the entire term of the loan, typically 15 or 30 years. The FRM interest rate is determined at origination on the basis of the mortgage lenders’ expectations of the future path of the central bank interest rate. In contrast, the interest rate of adjustable-rate mortgages (ARM), a standard contract in the U.K., changes every time the central bank interest rate changes. The nominal installments of ARM loans are thus recalculated on every such occasion, to ensure the full repayment of the loan by the end of its term.[2]

While mortgage contracts specify nominal installments, either fixed of adjustable, the real cost of servicing mortgage debt depends on inflation. The effects of the liftoff on homeowners will therefore depend not only on the mortgage type and the future path of interest rates but also on what happens to inflation during the liftoff.

It is instructive to illustrate the effects of the liftoff on homeowners in terms of changes in mortgage debt servicing costs (DSC)—nominal mortgage payments deflated by inflation as a fraction of household real income. This variable provides a metric of the burden of mortgage debt to homeowners as it measures the fraction of real income homeowners have to give up to meet the mortgage payment obligations of their contract. The numerical examples below illustrate these points.[3]

Liftoff scenarios

Figure 1 considers two alternative paths of the central bank interest rate, a slow liftoff and a fast liftoff from the current nearly zero lower bound (ZLB). In both cases, the interest rate is assumed to revert to 4 percent, the pre-2007 crisis average. In the fast liftoff case, it reaches the half-way mark of 2 percent in two years’ time, whereas in the slow liftoff case this mark is not reached until about eight years from the start of the liftoff. 

Figure 2 plots DSC in the case of liftoff that is not accompanied by an increase in inflation. In this case the path of the nominal interest rate in Figure 1 coincides with the path of the real interest rate. Figure 3 contrasts this case with a situation where the increase in the central bank interest rate is accompanied by a one-for-one increase in the inflation rate. In this case, the real rate is left unchanged at zero percent and the path of the nominal interest rate in Figure 1 is equivalent to a path of the inflation rate. While both assumptions are extreme, they demonstrate how the effects of the liftoff depend on the inflation rate.

In both figures, the DSC under the various liftoff scenarios are compared with a baseline case, in which both the central bank interest rate and the inflation rate stay unchanged at zero percent (blue dotted line), approximately the current situation. In this case, DSC are about 20 percent due to the assumed lenders’ markup of three percentage points.

A liftoff without inflation

When inflation stays at zero percent during the liftoff (Figure 2) the real mortgage payments of existing homeowners with FRM loans are unaffected. This is because the FRM interest rate has been fixed at origination before the liftoff and inflation stays at zero percent. However, new FRM loans will be priced according to the expected path of the central bank interest rate in Figure 1 and will therefore carry a higher interest rate. The new FRM interest rate is higher the faster is the liftoff. In the case of the fast liftoff, the higher interest rate implies DSC of almost 30 percent; under the slow liftoff, DSC will be 25 percent (the solid red lines in Figure 2).

When mortgages are ARM, the liftoff affects both, existing and new homeowners. The dashed green lines plot DSC for new ARM homeowners and essentially track the paths of the central bank interest rate—DSC gradually increase from 20 percent to 32 percent under the fast liftoff and to 27.5 percent under the slow liftoff. For existing homeowners with ARM the effects depend on when the loan was originated. The more recently originated was the loan the more will the path of DSC resemble that for new loans. DSC of loans that are almost repaid will be almost immune to the liftoff. This is not only because the debt outstanding gets smaller over the life of the loan, but also because mortgage payments in later periods of the life of the loan are mostly amortization payments, rather than interest payments.

A liftoff accompanied by inflation

When the liftoff is accompanied by equivalent increase in inflation, and no change in the real rate, the impact of the liftoff on DSC is greatly attenuated (Figure 3). First, existing FRM homeowners gain from the higher inflation and these gains grow over time as persistent inflation deflates the real value of the nominal payments, which under FRM are constant. Those with the more recently originated mortgages gain the most over their homeownership tenure (the dash-dotted red lines in the figure show the case of a mortgage with 119 quarters remaining; that is 29 years and 3 quarters). New FRM borrowers, however, will face a higher mortgage rate and, as a result, initial DSC of almost 30 percent in the fast liftoff case (solid red line). But the real value of those payments will also gradually decline over time.  

For ARM homeowners, both the existing and new homeowners, there are two opposing forces in place. On one hand, higher nominal interest rates increase nominal mortgage payments. On the other hand, higher inflation reduces their real value. The first effect is stronger initially but the second effect dominates over time. Furthermore, the point where the second effect starts to bite depends on the speed of the liftoff. While in the fast liftoff case the first effect dominates for the first eight years (32 quarters), in the slow liftoff case it hardly bites at all (dashed green lines).

Policy implications

To sum up, the effects of the liftoff on homeowners depend on three factors: (i) the prevalent mortgage type in an economy (FRM vs ARM), (ii) the speed of the liftoff, and (iii) what happens to inflation during the course of the liftoff.

If inflation stays constant at near zero then in the U.S., where FRM loans dominate, the liftoff will affect only new homeowners. In the U.K., where ARM loans dominate, the negative effects will in contrast be felt strongly by both new and existing homeowners.

However, if the liftoff is accompanied by sufficiently high inflation as in our examples, the negative effects will be much weaker in both countries. In the U.S., the initial negative effect on new homeowners will be compensated by positive effects on existing homeowners. And in the U.K., provided the liftoff is sufficiently gradual, neither existing nor new homeowners may face significantly higher real costs of servicing their mortgage debt.

Therefore, if the purpose of the liftoff is to “normalize” nominal interest rates without derailing the recovery, central bankers in both countries should wait until the economies convincingly show signs of inflation taking off. Furthermore, the liftoff should be gradual and in line with inflation.

Buzz words: “If the purpose of the liftoff is to “normalize” nominal interest rates without derailing the recovery, the Federal Reserve Bank and the Bank of England should wait until the economies show convincingly signs of inflation taking off.”

Carlos Garriga

Research Officer

Federal Reserve Bank of St. Louis

(314) 444-7412

carlos.garriga@stls.frb.org

---

[2] In the U.K., the typical mortgage is the so-called standard-variable rate mortgage, which has an interest rate fixed for the first year or two. After this initial period, the interest rate can vary at the discretion of the lender, but usually the resets coincide with changes in the Bank Rate, the Bank of England policy interest rate. A “tracker” mortgage is explicitly linked to the Bank Rate. Here we abstract from these details.

[3] The examples assume that a homeowner’s real income does not change throughout the life of the loan, the loan at origination is four times the homeowner’s income, and mortgage lenders’ mark-up over market interest rates is three percentage points.r market interest rates is three percentage points.

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Billig arvesølv – dyre erfaringer

En fersk masteroppgave bekrefter at kraftselskapene som ble solgt rundt årtusenskiftet gikk på billigsalg. 

I det norske folk er det et klart flertall for at kraftverkene skal være offentlig eid. Myten om at kraftinvesteringer er pengemaskiner kan være en viktig årsak. En fersk masteroppgave jeg har veiledet bekrefter at kommunene som solgte kraftselskap og satte pengene på børsen har tapt mye.

Oppgaven viser at kommunene som solgte kan ha tapt opptil 3,7 % i årlig avkastning på å flytte pengene fra kraft til børs. Figuren viser imidlertid at meravkastningen er veldig følsom for hvor mye kjøperne betalte per kWh produksjonskapasitet.

Når prisen var høyere enn fire kroner pr kWh var det lønnsomt å selge. Prisingen av produksjonskapasiteten er altså avgjørende for om salget er lønnsomt eller ikke. Veldig få av transaksjonene gav negativ meravkastning for kjøperne; de aller fleste punktene befinner seg over null-linjen.

De få tilfellene der salgene ikke medførte tap for kommunene tyder på at det var fullt mulig å få en tilfredsstillende pris. Når så mange kommuner likevel solgte for billig er det nærliggende å peke på inkompetanse som en mulig forklaring.

For å sikre markedspris må kommunen sørge for reell konkurranse mellom kjøperne. Det krever at det er flere potensielle kjøpere med i budrunden. Er det for få interessenter blir ofte prisen lav. Dessverre bar veldig mange av disse salgene preg av manglende kompetanse. Ofte forhandlet kommunene med kun én budgiver som gjerne var langt mer profesjonell. Det er derfor ikke overraskende at prisen ble lav.

Nyere transaksjoner bekrefter dette bildet. De få transaksjonene vi har hatt i senere år kan tyde på at forventing om fremtidige kraftpriser spiller større rolle for prisingen.

Frode Kjærland, som også har hjulpet til med data til oppgaven, har påpekt at verdivurderingene som ble brukt ser ut til å være basert på noen få års regnskap. På slutten av 90-tallet var kraftprisene svært lave, og da ble verdsettingen lav. Med liten konkurranse blant kjøperne betyr verdsettingen mer og forventninger om fremtidige kraftpriser mindre. Dette kan være noe av forklaringen på at kommunene kom så dårlig ut.

Private kan i dag ikke eie mer enn én tredjedel av kraftverk. Dette er en begrensning som i mange tilfeller låser kommuner inn i krafteierskapet. Kommunene mottar i tillegg store skatteinntekter fra kraftverkene, og blir dermed dobbelt eksponert.

Dersom kommunene oppnår markedspris vil det være bedre for kommunen å selge og flytte investeringene på børs. Kraftselskap er ofte lite utsatte for økonomiske svingninger. Markedsrisikoen til de to børsnoterte kraftselskapene er bare halvparten av gjennomsnittet for børsen. Det bør gi en dobbel så høy pris per utbyttekrone sammenlignet med børsindeksen. Salg av kraftselskap vil derfor sannsynligvis gi større avkastning, uten at risikoen øker.

Salgene av kraftselskap rundt årtusenskiftet var en trist affære. Erfaringene gir nyttig lærdom ved fremtidige salg av offentlig virksomhet. Men det er fortsatt ingen grunn til å konkludere med at kraftindustrien alltid slår markedet.



Masteroppgaven:
Johansen, Kim Schjølberg; Kjæve, Morten: «Kraftselskap: En undervurdert verdiskaper? En analyse av kraftselskaper solgt i perioden 1999-2004» Masteroppgave ved UiT Handelshøyskolen 2015.



Høy pris gir dårligere avkastning for kjøper:

Kilde: Frode Kjærland, egne beregninger og Masteroppgave av Kim Schjølberg og Morten Kjæve

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On the Chinese fiscal stimulus memory hole

As evidence of China's growth slowdown mounts, Tyler Cowen asks why people no longer seem to be talking about that country's much-heralded fiscal stimulus of 2008-2009. I put the question to China expert Yi Wen, my colleague here in the research division of the St. Louis Fed. I thought it would be of some interest to share what he had to say. DA

There are several issues involved here regarding China’s economic performance and the effects of its stimulus packages.

1) As the following graph shows, 5 years after the financial crisis, U.S. industrial production remained 1.3 percent below its peak level; Industrial output in the EU remains at 12.2 percent below its level five years ago; Japan’s industrial production remains at 19.2 percent, below its level; China’s industrial output is 76.1 percent above the level five years previously. Recall that these regions were and are still china’s largest trading partners and China’s total exports have declined permanently by more than 40% since the crisis and still not recovered.

China’s industrial production therefore increased by over three quarters during a period when U.S. industrial production stagnated and EU and Japanese industrial production significantly declined. That is a conclusive success for China in this competitive struggle.

2) China’s stimulus package was designed to spend mainly on infrastructure buildup during a period when the costs of investment financing (borrowing) were the lowest. Since the operation of China’s first high-speed railroad merely six years ago, 28 Chinese provinces are now already covered by the world largest and longest high-speed rail network (more than ten thousand miles, greater than 50% of existing world capacity). If China had waited instead for 10 more years to do this, the costs would be many, many times higher.

3) Those being said, China today indeed faces the problem of excess industrial capacity, similar to US and European nations and Japan before WWI. China’s strategy to solve this excess capacity problem is to build a global infrastructure system (through so called “one belt, one road” program) that integrates the entire Eurasia continent and the Indian and Atlantic oceans transports, e.g., a full-fledged speed-train network stretching all the way south to Singapore and north to Russia and east to Europe is already under construction. This program is now backed by the newly established Asian Infrastructure Investment Bank (AIIB). This may look foolish to economists (remember China build the Great Wall for nothing J, not even shown up in GDP) but at least it will benefit global trade with significance no smaller than the Great Voyage. The age of maritime global trade (kick started by the Great Voyage) is perhaps going to be replaced or enhanced by cross continent land trade (a revision to the ancient Eurasian trade through the Silk Road).

To sum up, the Chinese appear to be more optimistic than the westerners, especially the well-trained economists, after 300 years of rejecting Capitalism (see my Working paper and forthcoming book: https://research.stlouisfed.org/wp/more/2015-006.  History will tell if they are right or not.

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Arguments for and against lift off

Should the Fed raise its policy rate this September or not? Seems like a lot of people want to know. For those not following the discussion closely, let me try to summarize what I think are the main arguments for and against a September rate increase.

The main argument for postponing "lift off" goes as follows. The Fed has a mandate to stabilize inflation and unemployment around a set of targets: 2% for inflation and (say) 5% for unemployment. We are presently a bit below the inflation target and a bit above the unemployment rate target. IF one believes that raising the policy rate will move inflation downward and unemployment upward, why would one want to do so right now? How can it make sense to undertake an action that is likely to move both inflation and unemployment further away from their targets? Better hold off for now and await incoming data. There is absolutely no sign of inflation either right now or in the future. If anything, market-based measures of expected inflation are falling.

The main argument for lift off goes as follows. While inflation and unemployment are presently away from their targets (and not by much), this does not mean that ZIRP is consistent with keeping these variables near their targets in the near and medium term. ZIRP has been helpful in bringing unemployment down, but its trajectory is such that it may very well fall below its "natural" rate. IF one believes in the Phillips curve, then undershooting the unemployment rate target will manifest itself as inflationary pressure. And while inflation is presently low, there are reasons to believe this to be transitory. If it is, and if unemployment continues to fall, the Fed may find itself with inflation running above target. At that point the Fed would have to  raise its policy rate much more aggressively than it is contemplating now. Better to raise a modest 25 bp in September (at press conference) rather than wait for December or later (there is no press conference scheduled for the October FOMC meeting). The Fed can keep its policy rate low, or even reverse course as economic conditions dictate. This is still a very easy monetary policy. And it is not unreasonable for the Fed to act in a manner that prevents it from falling "behind the curve" (as it has arguably done in the past).

Of course, both of these views are predicated on essentially the same theoretical (essentially New Keynesian) framework. If you don't buy into this framework (for what it's worth, I do not), you're likely to have a different set of policy recommendations. Feel free to propose yours below!

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How to create a modularized ear project in maven

This post is one way of creating a typical javaee6 maven project that contains ear, web, ejb and api. The output of course is an ear file that contains (web, ejb and api).

How it looks like (assuming our top project is named ipiel):
+ipiel
 +ipiel-ear
 +ipiel-web
 +ipiel-api
 +ipiel-ejb

*Note that ipiel, can also be a child of a another project, which could be a main project where ipiel is just a component.

How to create the 5 listed maven projects above (I'm assuming you have eclipse with maven plugin installed):
1.) ipiel (the main pom project)
  a.) In eclipse create a new maven project, skip archetype selection so it will only create a maven project that has a src folder no main/test.
  b.) groupId=com.ipiel
       artifactId=ipiel
       packaging=pom
       version=leave the default

2.) ipiel-api (where interface is declared that is shared between ejb and web)
  a.) Right click the ipiel project and select new->maven module
  b.) Since this will contain java files, select maven-archetype-quickstart, you can filter "quickstart"
  c.) groupId=com.ipiel
       artifactId=ipiel-api
       packaging=jar
       version=leave the default
  d.) Create a class Bird and add a method fly.

3.) ipiel-ejb (the backing/manage bean)
  a.) Right click the ipiel project and select new->maven module
  b.) Since this will contain java files, select maven-archetype-quickstart, you can filter "quickstart"

  c.) groupId=com.ipiel
       artifactId=ipiel-ejb
       packaging=ejb
       version=leave the default
  d.) Add dependency to ipiel-api, and implement the Bird interface, in a class let's say Eagle.

<dependency>
 <groupId>com.ipiel</groupId>
 <artifactId>ipiel-api</artifactId>
 <version>0.0.1-SNAPSHOT</version>
</dependency>

4.) ipiel-web (the ui project, where you define your xhtml files)
  a.) Right click the ipiel project and select new->maven module
  b.) In the maven filter enter "web" and select org.codehaus.mojo.archetypes webapp-javaee6.
       It's a simple web archetype and we need to add some files to it.
    1.) Add a new source folder /src/main/resources.
    2.) Inside /src/main/resources create 2 folders /META-INF and /WEB-INF
    3.) Normally we have beans.xml and web.xml inside /WEB-INF folder and /META-INF contains MANIFEST.MF
  c.) groupId=com.ipiel
       artifactId=ipiel-web
       packaging=war
       version=leave the default
  d.) Make sure that you add maven-war-plugin in pom.xml.

<plugin>
 <artifactId>maven-war-plugin</artifactId>
 <version>2.2</version>
 <configuration>
  <!-- In version 2.1-alpha-1, this was incorrectly named warSourceExcludes -->
  <packagingExcludes>WEB-INF/lib/*.jar</packagingExcludes>
  <archive>
   <manifest>
    <addClasspath>true</addClasspath>
    <classpathPrefix>lib/</classpathPrefix>
   </manifest>
  </archive>
 </configuration>
</plugin>

  e.) The web project is also dependent on ipiel-api, since it needs to call it's backing bean from the ipiel-ejb project.

5.) ipiel-config (where I normally place persistence and resource files)
  a.) groupId=com.ipiel
       artifactId=ipiel-config
       packaging=pom
       version=leave the default
  b.) Create a new maven module, and select maven-archetype-quickstart, you can filter "quickstart"
I defined where my resources are in this project:

<build>
 <resources>
  <resource>
   <directory>src/main/resources</directory>
   <filtering>true</filtering>
  </resource>
 </resources>
</build>

6.) ipiel-ear (the output project)
  a.) Create a new maven module project, skip archetype selection, so we have a basic maven project
  b.) groupId=com.ipiel
       artifactId=ipiel-ear
       packaging=ear
       version=leave the default

  c.) 

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Moralsk feilspor om Hellas

Kalle Moene mener i sin kronikk lørdagens DN at Tyskland og EU er ansvarlig for gresk gjeldsoppbygging og korrupsjon. Dersom Moenes hypotese er sann, hvordan forklarer vi at ingen andre europeiske land er i samme situasjon som Hellas?

Uansett om Tyskland og EU skulle ha et moralsk ansvar, så er det et feilspor. Den greske tragedien løses ikke ved å vifte med pekefingeren, uansett hvem vi peker mot. Poenget som jeg ikke tror det er uenighet om, er at Hellas trenger reformer og erfaringen viser at landet ikke er i stand til å gjennomføre disse selv. Det er sannsynligvis heller ikke særlig kontroversielt å hevde at gjelden som grekerne er i stand til å betjene uten slike reformer er nær null. Det er også et faktum at det per i dag ikke finnes vilje til å låne Hellas mer penger.

DN har skrevet om studien til Carmen og Trebesch (CT) som viser at gjeldsnedskriving gir best effekt på BNP, men vi må huske på at gjelden allerede er nedskrevet. Hellas tilhører nå det lille mindretallet i CT’s utvalg der sanering ikke hadde positiv effekt. CT’s resultater er dermed ikke lenger relevante for Hellas.

Krisen skyldes at hellas ikke har klart seg etter en betydelig nedskriving og restrukturering av gjeld. Å slette gjeld nå, uten å få noe igjen i form av reformer, vil være uansvarlig. Det viktigste for Hellas nå er en overkommelig gjeldsbetaling. Den nominelle gjelden er av liten betydning. Det er kontantstrømmen som teller.

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Is Germany's Trade Surplus a Problem?

Ben Bernanke's recent post "Germany's Trade Surplus is a Problem" got me thinking about "global imbalances" again. I'm still not sure what to make of the issue. May as well think out loud.

The word "global imbalance" sounds ominous. What does it refer to? Let's start by thinking "locally," as in an economy consisting of you and me. Suppose we both work producing a good that each of us desire. From my perspective, any goods you ship to me are "imports." From your perspective, the goods shipped to me constitute "exports." If you export more than you import--so that your net exports are positive--you are running a trade surplus and I am running a corresponding trade deficit. This is the definition of "imbalanced" trade.

There is the question of how goods are paid for and how any imbalance is financed. Suppose we live in a common currency area. One possibility is that is that we pay for our shipments fully with money. At the end of the day, your trade surplus implies that you acquired more money from me than I acquired from you. Putting things this way leads us to question the notion of "imbalanced" trade. Sure, I acquired more goods from you--but you acquired more money from me in exchange. It all balances out, doesn't it?

Yes, it does. But it's still true that you exported more goods than you imported. And that extra money you acquired...what do you plan to do with it? Sit on it forever? (Actually, I explore this possibility here.) More likely than not, you are planning to spend it one day. When that day comes, I will be induced to sell you more goods than I buy from you. It will then be my turn to run a trade surplus--an act that renders trade "balanced" in the long-run.

Nothing fundamental changes in the story above if my trade deficit is instead financed by me paying you with a private or government debt instrument, or by me issuing you a personal IOU.

But what if the pattern of trade just described persists? What if you just keep sending me more goods than I send you? Then you are running a persistent trade surplus and I am running a persistent trade deficit. You are acquiring more money and securities, while I am depleting my money and possibly issuing debt.

Well, that's right...but so what? Maybe I am young and you are middle-aged: my growth prospects look great and yours appear diminished. I am a vibrant emerging economy and you are an advanced mature economy. Maybe it makes sense for the mature slow-growing economy to lend goods (especially capital goods) to the fast-growing economy. Indeed, Kollman et. al. (2015, pg. 53) estimate that strong growth from emerging economies contributed significantly to the German trade surplus, especially in the 2001-08 period. (Labor market reforms and an increased private saving rate are estimated to have had a larger impact since 2008.)

If we abstract from credit risk--the possibility that I or some other emerging economy may falter in some manner and fail to repay, then a persistent trade imbalance looks like an all-around good thing--something to be welcomed, not discouraged. And even if debtors do fail to repay, so what? Creditors presumably enter into lending arrangements knowing there is a risk of default. (Things become more complicated when we add elements like governments prone to bail out creditors, and creditors that become overzealous in their desire to make collections. But I'll leave this story for another day.)

So what is the problem with Germany's trade surplus? Let's say you're Germany and I'm a country in the periphery--e.g., one of the so-called PIGS. Both you and I are wobbled by the 2008 financial crisis, but me (a debtor) relatively more so than you (a creditor). Suppose, for example, my growth prospects are suddenly diminished--I'm looking more like the mature slower-growth you lately.

Since our growth prospects are now more aligned, there's not much of a rationale for you to run trade surpluses and for me to run trade deficits--at least, not with each other. What this means is that you should no longer work so hard to make goods for my market. And because I now borrow fewer goods from you, I'll have to work a little harder myself to make up the difference. Except that you go and spoil everything by wanting to remain super busy. So you continue to work hard to export goods to me. And because my market is flooded with your goods, there is no real opportunity (or maybe even desire) for me to work harder--it's tough to compete with you. Your trade surplus translates into a lack of demand in the periphery. Why don't you use your surplus to build yourself a bridge, or something? That'll be good for you and it'll be good for me.

That's the Bernanke point of view in a nutshell. I don't think it's entirely wrong, but I do have a problem with the story. Recall where I wrote "there's not much of a rationale for you to run trade surpluses and for me to run trade deficits, at least not with each other?" Well, that's pretty much what happened--with some delay and to an approximation--between  Germany and the rest of the EMU. That is, while Germany continued to run trade surpluses in the post 2008 period, these surpluses were not made at the "expense" of other EMU countries--see the following figure.

Germany's trade surplus is presently around 200B EUR. But its trade surplus with the rest of the EMU is only 30B EUR, which is only about 1% of German GDP. This is down from a peak of about 100B EUR in 2007. Here's another way of looking at it:

So given that Germany's trade surplus with the rest of the EMU is greatly diminished, maybe it's not the problem Bernanke thinks it is. (Whether the earlier surpluses are presently a problem is a different matter of course.)

I'm more inclined these days not to view trade imbalances as intrinsically desirable or undesirable in of themselves. If they are associated with a problem, I think they're more likely symptomatic than causal. To me, it makes sense that a mature economy like Germany should help finance growth in emerging economies. And should economic weakness in the periphery lead to trade becoming more balanced, this is no reason to cheer. After all, balanced trade is also an outcome associated with financial autarky.

Adopting this view does not preclude recommending some of the policies that Bernanke advocates. If the present low yields on safe assets like U.S. treasury debt and the German bund are the byproduct of malfunctioning financial markets leading to a "safe-asset shortage," then a wide class of theories suggest the potential benefits of a debt-financed expansionary fiscal policy (e.g., see here) and not necessarily because such policies stimulate "aggregate demand" (e.g., see here).

Whether additions to the public debt are used to finance public infrastructure spending, purchases of private securities, tax cuts, or something else, is something policymakers must weigh. But these decisions are likely not as important as just "getting the debt out there." The added supply is needed to prevent the seemingly insatiable private demand for the product from driving yields to zero (and lower). As the evidence suggests, in very low yield environments, excess demand for government debt is deflationary. And unexpectedly low inflation is not the tonic that economic theory prescribes for indebted countries struggling to recover from a severe recession.

***

PS. Bernanke also suggests Germany's trade surplus would have been lower if Germany had its own currency, which would presumably now be stronger than the euro against other currencies. But take a look at Switzerland, where the trade balance has grown in the face of a first stable, then strengthening, Swiss franc.

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