Archive for September, 2014

While doing some research for an upcoming article, I checked on the evolution of current account imbalances since the recession and was struck by how China and Europe have traded places. China’s surplus has fallen from 10% of GDP in 2007 to a little over 2% this year (I’m using data from the IMF’s April World Economic Outlook which is probably a bit out of date). China’s GDP has grown a lot in dollar terms since 2007 so the decline in the absolute size of the surplus is much less impressive, from a peak of $421 billion in 2008 to $224 billion now. In the same period, however, the euro-zone has gone from a deficit of $96 billion to a surplus of $391 billion and by next year, its surplus will exceed China’s in 2008.Given the depth of the recession Europe’s peripheral economies endured, one shouldn’t be surprised that its current account balance has improved. What is truly remarkable is that peripheral Europe’s improved current account has not come through rebalancing within the euro zone; Germany’s surplus has actually grown, from $226 billion to $284 billion. In fact, the rebalancing of the rest of Europe has occurred primarily by forcing other countries to reduce their surpluses or increase their deficits. This is an unavoidable result of the European Central Bank’s monetary policy. Since lower interest rates cannot seem to spur Germany to invest more and save less by …

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DEBT forgiveness, and the redesign of debt contracts to involve more risk-sharing, is the answer to the problem of recurrent financial crises. That is the argument of two economists, Atif Mian and Amir Sufi, in their book “House of Debt” (our Free Exchange column discussed the book here).They argue that economic recessions often follow surges in household debt. They dub their thesis “the levered losses framework”; it is based on the idea that equity losses do not affect homeowners equally. The rich tend to have a lot of equity in their homes; the poorest homeowners tend to have slivers of equity (10-20%). When house prices fall, this wipes out their stake and may force them into foreclosure. The authors illustrate this with some neat statistical analysis of individual areas of America, showing that places where the average equity stake was low suffered significantly more than the rest. One can divide workers into those who serve their local area (shops, restaurants etc) and those who serve the national population (car manufacturers, for example). Places with high leverage saw big job losses in local businesses; areas with low leverage did not. Both areas suffered equally from the effects of the fall in national demand. Furthermore, poorer homeowners tend to have a higher marginal propensity to consumer than the rich; hence their losses had a bigger impact on aggregate …

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An innovative program seeks to fight persistent poverty by helping a struggling family navigate past some of the day-to-day obstacles that keep many people poor.

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UK Only Article: 
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UK RIP?

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Neel Kashkari v Jerry Brown

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Neel Kashkari will not unseat California’s Democratic governor, but he may help his party in the long run

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LOS ANGELES

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Things are getting better, says Brown

Things are getting better, says Brown

NOT everyone likes robust debate. The chancellor of the University of California, Berkeley recently provoked ridicule by warning staff and students that there was a distinction “between free speech and political advocacy”, and that “we can only exercise our right to free speech insofar as we feel safe and respected”.
If campaigns in California were to follow these rules, they would be dull and uninformative. Happily, the race for governor is packed with political advocacy and disrespect. In a televised debate on September 4th Neel Kashkari, the Republican candidate, called Governor Jerry Brown’s plans for high-speed rail …

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Germany and the euro

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Many Germans fear that the European Central Bank is not on their side

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BERLIN

HORST SEEHOFER, premier of Bavaria, sums up German attitudes to the European Central Bank (ECB). Based in Frankfurt, but run by Mario Draghi, an Italian, the ECB said on September 4th that it would cut its interest rate to 0.05% and start buying asset-backed securities from banks to get them to lend. By opening the money tap, taking on debt and buying “junk”, Mr Seehofer told Bild, Germany’s biggest tabloid, the ECB frightens people. “It must be our job to criticise these policies.”
Like others on the centre-right, Mr Seehofer frets that a new anti-euro party, the Alternative for Germany, will poach voters by bashing the ECB. The Alternative has just got into its first state parliament and may get into two more on September 14th. But scepticism about the ECB is growing across the country. Hans-Werner Sinn, boss of …

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Slowing down

Posted: September 11, 2014 in economy
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UK RIP?

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20140913_INC676_595.png

The world economy grew 2.6% in the year to the second quarter, a slower pace than in the previous three quarters. Of the 54 countries tracked by The Economist to calculate our measure of world GDP (which collectively account for 90% of global output), half saw their growth rates fall; in seven output fell. Economic growth has been particularly disappointing in emerging markets. Brazil has slipped into recession and the economy of sanction-hit Russia has stalled. Some advanced economies have also fared badly. In Japan a new sales tax has squashed consumption. In the euro area GDP rose only 0.7% in the year to the second quarter. China accounted for 45% of world growth, more than any other country.

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20140913_INC676.jpg

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20140913

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The Economist Newspaper

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THIS month marks the peak of the Atlantic hurricane season. It also marks the sixth anniversary of the collapse of Lehman Brothers. Both types of disaster can wreak havoc on an economy. But which is worse, a cyclone or a banking crisis?Recent research suggests that it is pretty much a tie: both a banking meltdown or a hefty (90th-percentile) cyclone reduces income per person by about 7.5%. The figures come from a paper that assesses the impact of violent storms on economic activity—and compares them against other calamities. The researchers list Armaggedonish events—civil wars, global warming, currency crises and so on—and rank them in terms of ensuing economic mayhem.A full-blown financial crisis is the most destructive man-made disaster; having roughly the same impact on incomes as a 90th-percentile tropical cyclone coupled with a broad-based increase in taxation (a taxnado, perhaps). Fortunately, full-blown financial crises are exceedingly rare. But even they aren’t as harmful as a 99th-percentile storm, which equates to the combined blow of a civil war, currency crisis, weaker regulation of corporate bosses, and a small storm. (The researchers use the meteorologically-accurate term “tropical cyclone” to refer to all sorts of extreme storms, be they hurricanes, typhoons, tornados and the like).The paper calculates damage by modelling the extent to …

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