Archive for October, 2015

INACTION may at first glance seem more timid than pulling out the monetary bazooka—but it took nerve for Haruhiko Kuroda to hold fire at the Bank of Japan’s monetary-policy meeting on October 30th. The central bank’s policy board, which Mr Kuroda effectively controls, voted 8-1 to maintain the existing programme of quantitative easing (QE, or printing money to buy bonds) at its current level of ¥80 trillion ($660 billion) a year. Given that Japan is officially back in mild deflation for the first time since 2013, when the BoJ began QE, it was a bold decision not to act. The BoJ’s mandate, after all, is to produce sustained inflation of 2%.But Mr Kuroda kept his faith in gradually recovering growth, and in a range of measures which, he believes, suggest robust underlying price rises. In July the central bank began publishing a new index of inflation, known as “new core CPI”, which strips out both the price of energy and of fresh food. It shows prices rising at a healthy pace. In August the new gauge rose by 1.1%, and in September by 1.2% (compared to falls in core CPI of -0.1% for both months).The BoJ duly highlighted the new index in its updated outlook for the economy and prices today. It slashed its forecast for CPI inflation (including energy) for fiscal 2015 from 0.7% to 0.1%, tweaked its prediction for fiscal 2016 and left unchanged its projection for fiscal …

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The trust machine

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Buttonwood

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Economies are too weak for normal monetary policy to resume

THIS was supposed to be the year when monetary policy started to get back to normal. Seven years after Lehman Brothers collapsed, central banks were expected to edge away from a policy of near-zero interest rates. But now, with the year almost over, the Federal Reserve has yet to push up rates while other rich-world central banks are focused more on easing than on tightening.
Sweden’s Riksbank extended its quantitative easing (QE) programme on October 28th. Mario Draghi, the president of the European Central Bank, has indicated that further easing may come in December, probably by adjusting the pace, scale or type of asset purchases in its QE regime. More than two-fifths of economists polled by Bloomberg forecast that the Bank of Japan would pick up the pace of its monetary easing on October 30th, after The Economist went to press. Even if policy is kept unchanged, the bank plans to expand the money supply at an …

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The trust machine

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Economic history

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An excellent primer on Franklin Roosevelt’s economics

The Money Makers: How Roosevelt and Keynes Ended the Depression, Defeated Fascism and Secured a Prosperous Peace. By Eric Rauchway. Basic Books; 305 pages; $28.99.
OLD-FASHIONED historians recoil at the idea of learning from the past to inform the present. But in “The Money Makers”, Eric Rauchway, a historian at the University of California, Davis, tries to do just that. His book looks at the economic policy of Franklin Delano Roosevelt, a four-time American president from 1933 to 1945, and how he was influenced by John Maynard Keynes, a British economist. Mr Rauchway argues that policymakers today could learn “valuable lessons” from Roosevelt, who shook up the economic orthodoxy to rescue America from the Great Depression of the 1930s and to keep the Allies going during the second world war.

In what ways was Roosevelt so radical? For one, in the depths of the Depression he launched a series of public works—building …

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GEORGE OSBORNE, Britain’s chancellor of the exchequer, has long crowed that the economy he presides over is one of the fastest-growing in the rich world. But GDP figures, published today, have given some cause for concern. They show that in the third quarter Britain’s economy grew by just 0.5% (2% in annualised terms), down from 0.9% last year.

The slowdown may be due to the strong pound. The manufacturing sector, which makes up about one-tenth of GDP, is really suffering: it has probably been in recession for the past nine months. Even services, which are not so affected by a dear currency, are not doing so well: services output increased by just 0.7%.Growth of 0.5% probably pushes back the timing of the first interest-rate rise since 2007. In a speech over the summer, Mark Carney, the governor of the Bank of England, said that at a quarterly growth rate of 0.6% the remaining "slack" in the economy would soon be squeezed out. Today's figures just miss that golden target. 

20151027 09:52:42

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Wed, 2015-11-11

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Reinventing the company

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The Chicago school of economics

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How libertarians hijacked liberal economics

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Chicagonomics: The Evolution of Chicago Free Market Economics. By Lanny Ebenstein; 278 pages; $29.99 
SINCE its foundation in 1890, the University of Chicago has built a world-class reputation for economics. Since 1969 it has produced no fewer than 28 winners of the Nobel prize for economics, including Friedrich Hayek, Milton Friedman and George Stigler, far outnumbering any other institution. Its policy prescriptions—favouring freer markets and the strict control of the money supply—are seen as having dominated economic policy across the developed world since gaining favour under Ronald Reagan in America and Margaret Thatcher in Britain.

Since the financial crisis, however, the “Chicago school” of ideas has looked to be in retreat, at least in policy terms. The collapse of Lehman Brothers in 2008 …

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Reinventing the company

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Peak profits

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Big listed firms’ earnings have hit a wall of deflation and stagnation

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NEW YORK

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THE idea that profits grow is embedded in the corporate world. Bosses’ pay rises if they boost earnings per share. Managers who admit their firms may shrink are viewed as cowards and taken outside and shot. Lenders assume that firms’ cashflows will grow, allowing them to repay debts. In a daft ritual, Wall Street analysts start most years by collectively forecasting that earnings per share will rise at double-digit rates. Actual growth has been lower but has still had a dazzling run, averaging 8% over the past 30 years for the S&P 500 index of big American firms. Even after the 2007-08 crisis floored the global economy, profits recovered smartly.
Perhaps that is why reality has yet to sink in: the …

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HOUSING bubbles have a lot to answer for. The bursting of the US ‘subprime’ bubble in 2007-2008 triggered financial panic. Soaring house prices have been blamed for widening inequality. A new paper, from researchers at Chicago and Northwestern universities, adds another item to the charge sheet: a housing boom might stop your kids going to university.At first glance, this seems surprising. For homeowning families, rising house prices should enable them to borrow more against the value of their house, helping to pay fees for university-going offspring. But tuition is not the only cost of further study. Those extra years in the library (or the bar) is time that could have been spent in a job. When they can get a decent wage without going to university, some young people will choose work over lectures.The authors argue that this is exactly the choice that many young Americans made in the early noughties. A housing boom pushed up wages in related industries, like construction and real estate. Wages may also have increased in low-skilled retail and service jobs, as upbeat homeowners spent their newfound wealth. At the same time, the growth in university attendance slowed. By 2006, the proportion of young people who had spent some time in higher education was four percentage points below where it would have been had earlier trends continued.How much of this slowdown can be …

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