Archive for December, 2015

MY COLUMN this week sets out three possible scenarios for the American economy in 2016, in the aftermath of the Fed's first rate hike in more than nine years. Each scenario corresponds to an understanding of why it is that near-zero interest rates are so difficult to leave behind; economies eventually managed the trick in the decades after the Depression, but those that have sunk to the zero lower bound in recent years have been unable to escape it for long. 

What strikes me as interesting, and what motivated the column, is that our understanding of the pull of near-zero rates has evolved since late 2008, and continues to evolve, in a very ominous direction.Back in late 2008 and early 2009, when rates around the rich world fell below 1%, the framework most economists reached for was what you might call the traditional Hicks-Krugman story of the liquidity trap. John Hicks's analysis of the work of John Maynard Keynes first set out the concept of a liquidity trap in 1937. Paul Krugman borrowed and updated that framework in 1998 in an analysis of the Japanese economy. This story is one in which a really nasty economic shock knocks an economy into a bad equilibrium; rates fall to zero, at which point monetary policy loses its punch. Real rates can't go low enough to stimulate the economy, which remains stuck with a shortfall in demand. …

via Economic Crisis http://ift.tt/1NTUxU5

UK Only Article: 
standard article

Issue: 

Brazil’s fall

Fly Title: 

Free exchange

Rubric: 

The Fed has at last raised rates. What happens next?

IT IS more than two weeks since the Federal Reserve raised interest rates for the first time in over nine years, and the world has not (yet) ended. But it is too soon to celebrate. Several central banks have tried to lift rates in recent years after long spells near zero, only to be forced to reverse course and cut them again (see chart). The outcome of America’s rate rise, whatever it may be, will help economists understand why zero exerts such a powerful gravitational pull.
Recessions strike when too many people wish to save and too few to spend. Central banks try to escape the doldrums by slashing interest rates, encouraging people to loosen their grip on their money. It is hard to lower rates much below zero, however, since people and businesses would begin to swap bank deposits for cash or other assets. So during a really nasty shock, economists agree, rates cannot go low enough to revive demand.

There is significant …

via Economic Crisis http://ift.tt/22yuM3j

EMERGING markets have given the global economy most of its muscle since the recession ended in 2009. But in 2016 rich countries will account for their largest share of global growth this decade. The BRICs are in a sorry state. Brazil’s government has been both incompetent and corrupt. Russia’s has been no better, with a dose of military malevolence thrown in. China will perform reasonably well in 2016—if you believe the government’s numbers. By that reckoning, its GDP will rise by around 6.5%. The reality almost certainly will be lower. China is mired in debt and has mismanaged its currency and stockmarkets, sending shocks through the global economy. India looks perkier: it will grow by more than 7%. But that is worse than its average of 8.5% growth between 2005 and 2010. All said, the BRICs will make up only 16% of worldwide growth in 2016.Against all this, the rich world will look solid, if unspectacular. America’s economy will expand by around 2.5%, and the American jobs machine will crank out at least 2m new positions for a sixth straight year—the first time that has happened since the 1990s. Europe will no longer be threatened by recession or deflation, and the euro zone’s most obvious time-bomb, Greece, has been defused for now. The global economy as a whole is forecast to grow by 2.7% in 2016, and it hasn’t …

via Economic Crisis http://ift.tt/1MGHwch

UK Only Article: 
standard article

Issue: 

Brazil’s fall

Fly Title: 

Brazil’s crisis

Rubric: 

A former star of the emerging world faces a lost decade

Location: 

RIO DE JANEIRO

Main image: 

20160102_FBD001_0.jpg

THE longest recession in a century; the biggest bribery scandal in history; the most unpopular leader in living memory. These are not the sort of records Brazil was hoping to set in 2016, the year in which Rio de Janeiro hosts South America’s first-ever Olympic games. When the games were awarded to Brazil in 2009 Luiz Inácio Lula da Silva, then president and in his pomp, pointed proudly to the ease with which a booming Brazil had weathered the global financial crisis. Now Lula’s handpicked successor, Dilma Rousseff, who began her second term in January 2015, presides over an unprecedented roster of calamities.
By the end of 2016 Brazil’s economy may be 8% smaller than it was in the first quarter of 2014, when it last saw …

via Economic Crisis http://ift.tt/1R7JkkW

MANY suspect governments of protecting increasingly wrinkly electorates over the young within the big austerity packages imposed since the financial crisis and recession. While youths have had a particularly rough ride within labour markets, the overall effects of the response to the crisis are a bit more complicated. A new issue of Fiscal Studies, an economic journal, published today compares the austerity packages implemented in six European countries (Britain, Italy, France, Spain, Ireland and Germany) and would seem to provide fodder for those who think the young have been given a raw deal.First, look at investment. When there is a hole to be plugged, governments might be tempted to slash investment spending and maintain current spending. This is politically easier; current benefit claimants will squawk more loudly than those who might have used the now-cancelled roads. The papers show that in all countries other than France and Germany investment spending was cut more quickly than current spending–future generations are the main losers of this prioritisation.Next, look at the packages of tax-and-benefit changes that governments used to curtail borrowing. The collection of papers compare net household incomes in 2014 with what they would have been if no policy changes had been made after the recession (2015 for Britain). They find that in France, Ireland and …

via Economic Crisis http://ift.tt/1M4HJG8

UK Only Article: 
standard article

Fly Title: 

Trotting towards a bail-out

Rubric: 

Mismanagement and magical thinking are driving the rainbow nation into a debt crisis

Main image: 

20151212_map501.jpg

“OUR sovereignty in South Africa was incredibly hard won, steeped in blood and pain,” said Trevor Manuel, the country’s former finance minister, recalling the debt crisis he had inherited at the end of apartheid in 1994. Faced with a contracting economy, rising public debt and spiralling debt-service costs, the new democracy seemed to be heading towards an IMF bail-out that would have entailed it handing over control of its economy to international creditors. Instead, as Mr Manuel recounted in an interview with the Daily Maverick, a news website, in 2014 on the eve of his retirement from politics, South Africa cut state spending to ensure “we weren’t going to become a client state of anybody.”

Two decades later the country is again moving towards the edge of an economic precipice. Public debt is rising fast, as are the costs of servicing it. The economy has …

via Economic Crisis http://ift.tt/1NRZtMm

BACK in 1935, George Dangerfield wrote a book about the pre-1914 period called "The Strange Death of Liberal England". In this, he pointed out that Edwardian Britain, often portrayed as an Arcadian era before the horrors of the Somme, was in fact marked by violent protests – over women's suffrage (hunger strikes and bombs), workers' rights (frequent strikes) and Irish home rule (the threat of mutiny and civil war). The cracks in the system were already apparent.The high point for liberal democratic triumphalism is often seen as the fall of the Soviet Union and the publication of "The End of History and the Last Man", Francis Fukuyama's 1992 influential book. A quarter of a century later, and democracy looks a lot less healthy, an argument I have returned to often in this blog (and a book). Voters have become disillusioned with the parties of the centre-left and the centre-right and a good chunk of them have been on the hunt for something new. This proportion of the electorate is around a quarter to a third, and the impact of extremist parties very much depends on the vagaries of the electoral system. But first-past-the-post systems create only temporary respite, as it is possible for the leadership of mainstream parties to be captured by the far-left and far-right, as has already happened in Britain and may be happening in America, with the rise of Trump, Carson and …

via Economic Crisis http://ift.tt/1HQFpHI