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Why the Federal Reserve should keep its balance-sheet large

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HOW much money should exist? The Federal Reserve must soon confront this deep question. The Fed has signalled that towards the end of 2017 it will probably begin to unwind quantitative easing (QE), the purchase of financial assets using newly created bank reserves. The central bank’s balance-sheet swelled from about $900bn on the eve of the financial crisis to about $4.5trn by 2015 as it bought mortgage-backed securities and government debt (see chart). If and when the Fed shrinks its balance-sheet, it will also retire the new money it created.
Economists such as Milton Friedman popularised the study of the quantity of money in the 1960s and …

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Why the history of economic growth should be all about recessions

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Shrink wrap

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“THROUGHOUT history, poverty is the normal condition of man,” wrote Robert Heinlein, a science-fiction writer. Until the 18th century, global GDP per person was stuck between $725 and $1,100, around the same income level as the World Bank’s current poverty line of $1.90 a day. But global income levels per person have since accelerated, from around $1,100 in 1800 to $3,600 in 1950, and over $10,000 today.
Economists have long tried to explain this sudden surge in output. Most theories have focused on the factors driving long-term economic growth such as the …

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TWO months into the Trump administration and we have had more sound and fury than concrete proposals about its economic agenda. The most alarming sign so far is that America forced the G20 to drop a pledge about resisting “all forms of protectionism” from a joint statement but this may be purely symbolic.Nevertheless, Mr Trump’s determination to shake up the status quo may yet have global consequences. In a research note, Chris Watling of Longview Economics suggests thatTrump’s policies might inadvertently bring about a new international monetary order as the administration struggles to fulfil campaign promises in the light of the original misdiagnosis of the ‘trade deficit’ problem.The current monetary system emerged from the downfall of Bretton Woods in the 1970s. Under the Bretton Woods system, devised in part by John Maynard Keynes (pictured, left), currencies were fixed to the dollar (with scope for occasional devaluations or revaluations) and the dollar was fixed against gold. But this required America to act as the anchor of the system; other central banks were entitled to sell their dollars for gold. In order to maintain confidence in the system, America would have to tighten policy if its gold reserves fell; that is, subordinate domestic economic policy to international demands. …

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All around the world, the economy is picking up

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From deprivation to daffodils

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The global economy enjoys a synchronised upswing

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From deprivation to daffodils

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“IF WINTER comes,” the poet Shelley asked, “can Spring be far behind?” For the best part of a decade the answer as far as the world economy has been concerned has been an increasingly weary “Yes it can”. Now, though, after testing the faith of the most patient souls with glimmers that came to nothing, things seem to be warming up. It looks likely that this year, for the first time since 2010, rich-world and developing economies will put on synchronised growth spurts.
There are still plenty of reasons to fret: China’s debt mountain; the …

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A synchronised global upturn is under way. Thank stimulus, not the populists

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On the rise

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ECONOMIC and political cycles have a habit of being out of sync. Just ask George Bush senior, who lost the presidential election in 1992 because voters blamed him for the recent recession. Or Chancellor Gerhard Schröder, booted out by German voters in 2005 after imposing painful reforms, only to see Angela Merkel reap the rewards.
Today, almost ten years after the most severe financial crisis since the Depression, a broad-based economic upswing is at last under way (see article). In America, Europe, Asia and the emerging markets, for the first time since a brief rebound in 2010, all the burners are firing at once.

But the political mood is sour. A populist rebellion, …

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WESTERN AUSTRALIA’S iron ore and Queensland’s coal were at the centre of Australia’s recent mining boom, stoked by the red-hot growth of China’s steelmaking industry. At its height about five years ago, mining investment accounted for 9% of national GDP. But as investment started to decline in 2013, Western Australia’s debt soared. At 6.5%, its unemployment is now Australia’s highest. If the pattern of earlier booms had followed, Western Australia’s plight would have reverberated around the country and ended in a national bust. Yet the economy’s growth has stayed intact, notching up 25 years without a recession. How has Australia managed a feat that has defied most other rich countries? Australia’s mining booms over the past 160-odd years made the country feel rich and confident while they lasted. Workers made big money, and this brought prosperity to far-flung regions producing gold, coal, gas and other commodities. Recessions followed nearly all earlier booms, including the most recent one, in the 1980s, largely because the upheaval proved too big a shock for an economy that was highly regulated. When negative growth was recorded in the third quarter of 2016, some anticipated the start of another recession (technically defined as two successive quarters of …

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Economic recovery will put the theory of “secular stagnation” to the test

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Borrowed time

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IN PERIODS of economic stress all sorts of theories are entertained about the nature of the problem. When better times return, some theories fade from memory. Others linger, however. During the economic mess of the past decade, economists frightened themselves with tales of “secular stagnation”: a nasty condition that dooms its victims to chronically weak growth. Now that the economic outlook is brightening a bit—deflation has been dispatched, and for most advanced economies 2017 is forecast to bring a third consecutive year of economic growth—it is tempting to laugh off the idea of secular stagnation as a bit of crisis-induced hysteria. Tempting, but also premature.
In a time of …

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