Archive for November, 2013

THE stockmarket ploughs ahead in its merry way, in the serene confidence that the US economy has regained some momentum, the eurozone has avoided a turbulent break-up and, if all else fails, the central banks can be relied upon to keep the party going. But what if there is a risk that the market doesn’t like to think about – that the global economy could slip back into recession?Surely that can’t be right; the recovery is yet to really get going? But in his latest research note, Albert Edwards of SocGen points out thatInvestors’ perceptions of the “normal” length of an economic cycle are strongly influenced by their own working experience. In that context, the last three economic cycles have been unusally lengthy, averaging 95 months from trough to peak. But these cycles were perversions of the economic cycle, as the Fed manipulated the private sector credit cycle to extend the cycle which became known as the Great Moderation.It is now 55 months since this cycle’s June 2009 start. This is already a lengthy recovery. Ignoring the last three Fed-inspired freaks of economic cycles, the average cycle only lasted some 36 months.So where is the evidence that activity might be turning down?  Copper is often seen as an economic indicator and the chart shows, it is around 20% below its 2011 level. Dhaval Joshi of BCA Research shows that copper and the DAX (Germany’s stockmarket …

via Economic Crisis http://www.economist.com/blogs/buttonwood/2013/11/economics-and-markets-1?fsrc=rss

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IN THE years since the publication in 1936 of The General Theory of Employment, Interest and Money, John Maynard Keynes’ name has been irretrievably linked to the idea that fiscal stimulus should be used to combat recession during downturns. Such ideas came to dominate economics in the thirty years after the Second World War, so much so that Republican president Richard Nixon declared in 1971 that “we are all Keynesians now”.Although Keynes’ ideas went out of favour in the 1980s and 1990s, they came back into fashion as the financial crisis of 2007-09 unfolded. The use of fiscal stimulus to fight recessions in America, Britain and Asia led Keynes’ most prominent biographer, Robert Skidelsky, to declare the “return of the master”. Keynes’ notoriety among the public rose so much that a hip-hop video of him arguing the merits of fiscal stimulus with his rival, F. A. Hayek, went viral on YouTube back in 2010.But whether Keynes’ ideas were ever as simple or consistent as some modern-day Keynesian economists suggest is a matter of great contention. The Economist noted as long ago as the 1960s that the ideas of Keynes the man were diverging from contemporary Keynesian economics. While Keynes emphasised austerity in the good times as much as stimulus in the bad, many Keynesians considered stimulus a “one-way road” in the 1960s and 1970s. As Keynes himself wrote in 1937: “The …

via Economic Crisis http://www.economist.com/blogs/freeexchange/2013/11/economic-history-2?fsrc=rss

JAMES HAMILTON looks at some interesting new research (which derives an easy way to calculate implied forward interest rates) and finds that markets expect interest rate increases to come very gradually indeed—when, that is, the Fed finally begins raising rates. Right now, the first increase in overnight rates looks likely to occur in early 2015. Markets don’t expect rates to top the 2% mark until 2 years later, and by the end of 2018—almost a full decade after the end of the recession—the overnight rate will still be shy of 3.5%. The anticipated path of tightening is interesting, he points out, in how it contrasts with the experience of the recent past:

Once the Fed got tightening in previous episodes it didn’t mess around. In choking off the last recovery, for instance, the Fed raised rates by 18 basis points per month. If rate increases go as expected in future, by contrast, the Fed will be hiking at just 6 basis points per month. Interestingly, Mr Hamilton notes, markets did a decent job anticipating the faster pace of rate increases during previous tightening cycles.The chart of past rate rises is an interesting one. We see five tightening cycles. Recession falls quickly on the heels of three of them. One is tempted to conclude that about 60% of the time (it’s a small sample I know), the Fed overdoes it when tightening policy.And so considering the evidence, we …

via Economic Crisis http://www.economist.com/blogs/freeexchange/2013/11/monetary-policy-1?fsrc=rss

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The man who used to walk on water

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Post-crisis economics

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Britain leads a global push to rethink the way economics is taught

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FOR economists 2008 was a nightmare. The people who teach and research the discipline mocked by Thomas Carlyle, a 19th-century polemicist, as “the dismal science”, not only failed to spot the precipice, many forecast exactly the opposite—a tranquil stability they called the “great moderation”. While the global economy is slowly healing, the subject is still in a state of flux, with students eager to learn what went wrong, but frustrated by what they are taught. Some bold new projects to retune economics aim to change this.
Britain has form here. In the early 1930s economics was in a terrible state. The global economy was stuck in a rut, and economists could not explain why. Two Britons changed things. In 1933, John Maynard Keynes, an economist at Cambridge University, supplied the …

via Economic Crisis http://www.economist.com/news/britain/21590555-britain-leads-global-push-rethink-way-economics-taught-keyness-new-heirs?fsrc=rss

FOR months JPMorgan Chase has been on the verge of writing a vast check to someone or something to settle claims stemming from the financial crisis. On November 19th, after a steady drip of rumours from Washington, the bank finally announced it would pay $13 billion for the sale of shoddy mortgage-backed securities, either by itself or the two banks it acquired during the financial crisis at the government’s request, Washington Mutual and Bear Stearns.

via Economic Crisis http://www.economist.com/blogs/schumpeter/2013/11/jpmorgan-chase-s-legal-troubles?fsrc=rss

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The world in figures: Countries

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GDP growth: -1.0%GDP per head: $20,240 (PPP: $24,970)Inflation: 0.1%Budget balance (% GDP) -3.5Population: 11.1m
The bail-outs Greece received from Europe and the IMF in recent years run out in July, but more help will be needed. Negotiating the form and terms of the top-up will occupy the first half of the year, but will result in enough support to prevent a meltdown and departure from the currency bloc, probably in the form of easier terms on bilateral lending. Reforms aimed at restoring growth, including lay-offs, sell-offs and an assault on red tape, will continue, and will eventually bear fruit. But in 2014 the economy will shrink, falling to less than two-thirds of its pre-crisis peak in dollar terms.

To watch: Shadowy dawn. Greece has a history of right-wing extremism after periods of economic collapse; the neo-fascist Golden Dawn party, with its attacks on immigrants and leftists, is the latest threat. The government is prosecuting the party for criminal activities, but it retains some popular support.

via Economic Crisis http://www.economist.com/news/21588936-greece?fsrc=rss

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The world in figures: Countries

GDP growth: 0.9%GDP per head: $56,870 (PPP: $43,240)Inflation: 2.3%Budget balance (% GDP) -1.9Population: 5.7m
The governing coalition, made up of the Social Democrats, the Socialist People’s Party and the centrist Social Liberal Party, lacks a parliamentary majority and is internally weak, but will make it through to the election due in 2015. This is partly because, political manoeuvring aside, there is broad consensus on economic matters, seeking a balance between fiscal rectitude and sustainable growth. The country will be rewarded by a return to growth after double-dipping in 2012 and 2013.

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The World In

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via Economic Crisis http://www.economist.com/news/21588931-denmark?fsrc=rss