Archive for May, 2016

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The Brexit debate

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The Treasury says Brexit would be an economic disaster, but Brexiteers do not agree

THE government’s strategy for winning the referendum on Britain’s membership of the European Union has long been to focus on the risk that Brexit poses to the economy. A month ago George Osborne, the chancellor, published a long-term Treasury study which came up with a “central case” estimate that leaving the EU would make Britain’s GDP 6% smaller by 2030 than remaining would—a figure that he translated into an annual cost of £4,300 ($6,200) per household. Brexiteers sneered that Treasury forecasts were usually wrong and also pointed to the huge uncertainty in any attempt to look 15 years ahead.
Now Mr Osborne has fired a second shot at his opponents, with a Treasury paper on the short-term impact of Brexit that is, if anything, even gloomier. This new study considers three factors that it calls a transition effect, an uncertainty effect and a financial-conditions effect. …

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When the drugs don’t work

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Free exchange

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When periods of economic growth come to an end, old age is rarely to blame

IN JUNE America’s economic expansion will be seven years old. That is practically geriatric: only three previous ones lasted longer. The record boom of the 1990s survived only ten years.
It is tempting to look at that ten-year mark as something like the maximum lifespan of an expansion in America, and to worry, correspondingly, that the current expansion’s days are running short. But are they? At a press conference in December Janet Yellen, chairman of America’s Federal Reserve, declared: “I think it’s a myth that expansions die of old age.” Yet die they do. Either Ms Yellen is wrong, or someone is bumping off otherwise healthy expansions before their time.

Like death, recessions (commonly defined as two consecutive quarters of falling GDP) are a part of life. Supply shocks occasionally prompt them: soaring oil prices in 1973 hit consumers in rich economies like an enormous tax rise, for …

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He can, Carney

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Mark Carney’s job is to identify threats to Britain’s economy. Brexit is exactly that

BREXITEERS are livid about comments made at a press conference on May 12th by Mark Carney, the governor of the Bank of England. He presented the bank’s latest inflation report, and then went on to concede that a vote to leave the European Union could “possibly” tip Britain into a “technical recession” (defined as two consecutive quarters of negative growth) and destabilise financial markets. Jacob Rees-Mogg, a Conservative MP and prominent Brexit campaigner, said that Mr Carney “should be fired” for his comments.
The accusation against Mr Carney is that, by focusing on the problems associated with Brexit, he has taken a political position and thus compromised the bank’s independence. But this is to misunderstand how the Bank of England works. Every inflation report sets out the big risks facing the British economy—the usual suspects recently have been the euro crisis and China’s …

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The war within

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Banks and state aid

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Italy has been flirting with a banking crisis—and Brussels is partly to blame

ATLAS could hold up the sky. Atlante, Italy’s bank-rescue fund, looks like a weakling. The fund, which raised €4.25 billion ($4.9 billion) last month, almost half of it from Italy’s two largest banks, has two purposes. One is to act as an emergency investor in banks starved of funds; the other is to kick-start a market in dud loans clogging up banks’ balance-sheets. On both counts, the fund has not done enough to calm nerves. Italy should have acted sooner to sort out its banks. But Europe’s approach to financial crises is also to blame.
Italian officials talk about the fund as a “game-changer”—partly because it has already pulled off a rescue of Banca Popolare di Vicenza (BPVi), a regional bank whose initial public offering (IPO) flopped. But that only underlines how close Italy has come to disaster. BPVi’s IPO had been fully, and foolishly, underwritten by UniCredit, Italy’s largest bank: …

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The war within

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Buttonwood

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Ideas for reducing the debt burden

DEBT levels grew spectacularly in the rich world from 1982 to 2007. When the financial crisis broke, worries about the ability of borrowers to repay or refinance that debt caused the biggest economic downturn since the 1930s.
It could have been worse. The danger was that, as private-sector borrowers scrambled to reduce their debts, the resulting contraction in credit would drive the world into depression. Fortunately, this outcome was averted. First, the governments of rich countries allowed their debts to rise, offsetting the reduction in private debt. In addition, emerging markets (notably China) continued to borrow. So there was no global deleveraging; quite the reverse (see chart). Central banks also helped, slashing interest rates to zero and below. Although lower policy rates have not always resulted in cheaper borrowing costs (in Greece, for example), debt-servicing costs have fallen in most developed countries.

Although this approach …

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Trump’s triumph

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China’s financial system

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It is a question of when, not if, real trouble will hit in China

CHINA was right to turn on the credit taps to prop up growth after the global financial crisis. It was wrong not to turn them off again. The country’s debt has increased just as quickly over the past two years as in the two years after the 2008 crunch. Its debt-to-GDP ratio has soared from 150% to nearly 260% over a decade, the kind of surge that is usually followed by a financial bust or an abrupt slowdown.
China will not be an exception to that rule. Problem loans have doubled in two years and, officially, are already 5.5% of banks’ total lending. The reality is grimmer. Roughly two-fifths of new debt is swallowed by interest on existing loans; in 2014, 16% of the 1,000 biggest Chinese firms owed more in interest than they earned before tax. China requires more and more credit to generate less …

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CRAIG WRIGHT claims to have founded the cryptocurrency. Our technology and business affairs editors debate whether his 'proofs' add up. Plus China's looming debt crisis – and the economics of Game of Thrones

20160503 19:23:11

Comment Expiry Date: 

Wed, 2016-05-18

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