Archive for September, 2015

THE term "currency wars" has sparked a vigorous debate within the economics commentariat. The term was coined by Brazil's then finance minister, Guido Mantega, in 2010 when the real was moving sharply higher, a nice irony given the real's recent falls to record lows. Some saw it as a negative development, talking of beggar-thy-neighbour devaluations designed to grab a bigger share of world trade; eventually, this was a zero sum game since all currencies cannot devalue. The counter-argument was that, on the contrary, this was positive for the world economy. Countries were easing monetary policy, either by cutting interest rates or adopting quantitative easing, and the aggregate effect would be to boost global demand. Parallels were drawn with the 1930s when developed countries abandoned the gold standard and those that devalued first, recovered most quickly.A new (privately circulated, so no link) note from Stephen King, the senior economic adviser at HSBC, argues that the 1930s parallel is incorrect and that, currentlyattempts by individual central banks to boost growth and inflation via currency depreciation have been collectively self-defeatingThe key difference, in Mr King's view is thatIn the 1930s, currency declines weren’t just simple devaluations. They represented, instead, a seismic change in monetary regimes. The gold standard was abandoned. The anchor that had …

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United Nations member states pledged Friday to eliminate extreme poverty by 2030. That’s defined as surviving on $1.25 per person per day. What is life really like on that amount?

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According to new figures today from the Census Bureau, poverty in the U.S. was unchanged last year and the median income did not increase, although the economy created more jobs.

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THE global economy has stumbled from one pothole to the next in 2015. America's economy slowed to a crawl during an icy first quarter. Then fears of a Greek exit from the euro area worried markets. Now attention has turned to China, where the government is fumbling to contain a stockmarket rout and prevent a hard landing. In the background another ominous trend has been developing: world trade shrank on a quarterly basis in both the first and second quarter of this year: the worst performance since the height of the financial crisis. But how significant is a decline in trade for the global economy?Growth in world trade is generally a little faster than growth in global GDP. In the 1990s the former accelerated quickly relative to the latter. An era of what some have called "hyperglobalisation" began, driven forward by a number of trends: liberalisation in China and the former Soviet Union, a reduction in trade barriers and the creation of the World Trade Organisation, and the expansion of global supply chains facilitated by progress in information technology. But the faster pace of growth in trade has not been sustained. Since the global financial crisis, trade has grown only fractionally faster than GDP. Both cyclical and structural factors are contributing to a slowdown.On the cyclical side, the years of economic malaise in the euro zone are particularly important. …

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ON SEPTEMBER 17th the Federal Reserve will conclude a two-day, rate-setting meeting at which it just might raise its benchmark interest rate for the first time in more than nine years. Arguing in favour of a hike is the low unemployment rate, which fell to 5.1% in August. Arguing against it is the rate of inflation which, having come in at 0.3% year-on-year in July, is well below the 2% target that is the lodestar of Fed policy. But why does the Fed want 2% inflation in the first place?Central banks are responsible for monetary policy: roughly speaking, the job of controlling the amount of money that courses through the economy. For a long time, monetary policy consisted of little more than stabilisation of the exchange rate, which was often fixed (eg by the gold standard at the beginning of the 20th century) in order to facilitate international commerce. But exchange rates proved a poor target for policymakers. Pulling money out of the economy to buoy the currency and protect the exchange rate could send the economy into a tailspin; such policies helped create the Depression of the 1930s.After the Depression governments prioritised domestic employment. Central banks reckoned the economy followed a relationship known as the Phillips curve, which posits a trade-off between inflation and unemployment; governments could have less of one if they were prepared to accept more …

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UK Only Article: 
standard article

Issue: 

Exodus

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The Federal Reserve

Rubric: 

The Fed should wait until inflation is closer to target before raising rates

THE last time the Federal Reserve raised its benchmark interest rate, there was no one to tweet about it. That rise, in June 2006, predated Twitter’s public release by a month. Nine years on, as the Fed readies itself to raise rates again, the public debate between hawks and doves is much noisier. Markets reckon that the Fed will raise its benchmark rate at least once this year, from the 0-0.25% range it has targeted since December 2008—and perhaps do so as soon as its next rate-setting meeting on September 16th-17th. But here, it does not pay to go early: a rise now would needlessly risk America’s recovery.
On the face of it, the case for a rise looks perfectly respectable. The American economy is at its fittest in more than a decade. It grew at a 3.7% annualised pace in the second quarter of 2015; after a brutal period of post-recession deleveraging, consumers are spending again. Firms have been …

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UK Only Article: 
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Exodus

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A brief history of rate rises

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The Fed faces some disturbing precedentsrubric tag with dummy text.

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It can get uncomfortable

It can get uncomfortable

ECONOMISTS and investors are not only worried about when the Federal Reserve will start to push up interest rates. Just as important is the scale and length of the tightening cycle—how much the Fed will need to tighten policy, and how long it will take to do so. There have been 12 American tightening cycles since 1955, and they have lasted just under two years on average. In five of the past seven instances, however, the Fed has relented in a year or less, largely because inflation has been relatively subdued in recent decades.
The inflationary periods of the 1970s and early 1980s saw the biggest increases in interest rates; that helped push the mean increase over the 12 cycles to five percentage points. But the median change may be a better guide to the coming cycle; it …

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