Posts Tagged ‘The Economist’

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AS EXPECTED, the Federal Reserve announced on September 20th that it will soon begin reversing the asset purchases it made during and after the financial crisis. From October, America’s central bank will stop reinvesting all of the money it receives when its assets start to mature. As a result, its $4.5trn balance-sheet will gradually shrink. However, the Fed did not give any clues as to what the endpoint for the balance-sheet should be. This is an important question. There are strong arguments for keeping the balance-sheet large. In fact, it might be better were the Fed not shedding any assets at all. Most commentators view a large balance-sheet, which is the result of quantitative easing (QE), as an extraordinary economic stimulus. Janet Yellen, the Fed’s chair, seems to agree: at a press conference after the Fed announcement, she said the balance-sheet should shrink because the stimulus it provides to the economy is no longer needed. But the claim that the balance-sheet is stimulating the economy is far from an established fact. The theoretical case for it is weak (Ben Bernanke, Mrs Yellen’s predecessor, famously quipped that QE “works in practice, but it doesn’t work in theory”). While most studies have shown that QE brought down long-term interest rates, it may have worked by …

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This week “The Economist explains” is given over to economics. Today’s is the third in a series of six explainers on seminal ideas.IN THE depths of the Great Depression, more than a quarter of America’s workers could not find employment. There was not enough demand for the goods and services they could supply. Today America’s workforce can produce more than 17 times as much, but unemployment is under 5%. Somehow demand, so inadequate in the 1930s, is sufficient to match a massively increased supply of goods and services eight decades later. This happy outcome would have surprised some economists of the 1930s, who worried about a “secular” (ie, persistent) stagnation of demand. But it would have been no surprise at all to an older generation of economists, led by Jean-Baptiste Say. His best-known work, “A Treatise on Political Economy”, ran to six editions between 1803 and 1841. It contained much of what became known as Say’s law, the notion that supply creates its own demand.Say and his intellectual allies pointed out that people would not go to all the trouble of producing a good or service, unless they intended to obtain something of equal value in return. So each addition to supply is accompanied by an intended addition to demand. Moreover, the act of production creates an …

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Stanley Fischer and the twilight of the technocrat

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Remote control

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Closing in on cancer

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IN 2004 Stanley Fischer described the wonder he felt as an economics student in the 1960s. “You had a set of equations”, he said, “that meant you could control the economy.” Technocracy—the dream of scientific government by a caste of wise men—arose in the 20th century, as rapid change rendered the world unfathomably complex; in economics, it came of age in the Keynesian revolution of the 1930s. On September 6th, after a remarkably distinguished career in public service, Mr Fischer, an intellectual heir to Keynes, announced his imminent retirement as the vice-chairman of the Federal Reserve. It is …

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The Fed prepares for its balance-sheet—and its board—to shrink

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Switching to autopilot

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The Federal Reserve

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Closing in on cancer

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Switching to autopilot

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WASHINGTON, DC

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NINE years ago, in the autumn of 2008, the Federal Reserve was fighting a financial collapse. To stave off disaster, it lent aggressively—to banks, to money-market funds, even to other central banks. As a result, its balance-sheet ballooned. At the start of September 2008, the month when Lehman Brothers collapsed, the Fed’s assets totalled $905bn (at the time, about 6% of GDP). By December they had more than doubled in size, to $2.1trn. That was only the start. As its …

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IF THERE is a consensus at the moment, it is that the global economy is finally managing a synchronised recovery. The purchasing managers' index for global manufacturing is at its highest level for six years; copper, the metal often seen as the most sensitive to global conditions, is up by a quarter since May. 

But Steen Jakobsen of Saxo Bank thinks this strength will not last. His leading indicator is a measure of the change in private sector credit growth. This peaked at the turn of the year and is now heading down sharply. Indeed the change in trend is the most negative since the financial crisis (see chart). Since this indicator leads the economy by 9-12 months, that suggests a significant economic slowdown either late this year or early  in 2018. He says thatThis call for a significant slowdown coincides with several facts: the ECB’s QE programme will conclude by end-2017 and will at best be scaled down by €10 billion per ECB meeting in 2018.  The Fed, for its part, will engage in quantitative tightening with its announced balance sheet runoff. All in all, the market already predicts significant tightening by mid-2018.Given the role played by central banks in propping up the economy and markets since 2009, it is certainly plausible that their role will be vital …

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Political leaders must learn to appreciate the virtues of budget deficits

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The borrowers

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What machines can tell from your face

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GOVERNMENTS do not always make the best budget managers. Assuming it avoids an accidental debt default, America will run a bigger budget deficit this year than the last, despite a booming economy. Germany runs a surplus—but scrimps on critical investments and annoys its euro-area neighbours in the process. Japan, cowering under a mammoth public-debt pile, is weighing raising its consumption tax, though the last rise strangled a tenuous economic recovery. It is awkward, therefore, that the role of fiscal policy as a recession-fighting tool is only growing. The next downturn will be a painful and dangerous learning experience for many politicians.
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THE last time Australia suffered a recession the web browser had just been invented and Bryan Adams topped the charts. Figures released today will show that its economy has racked up the longest stretch of growth in modern history: 104 quarters. The Netherlands, the previous title-holder, dipped into recession—defined as two consecutive quarters of contraction—after 103. In these 26 years, Australia has navigated the Asian financial crisis, the collapse of the dotcom bubble and the Great Recession, largely without scars. Its once-in-a-generation mining boom ended in 2014. Yet it has managed to avoid a bust. How did it break the record for economic growth?Its success was built on the structural reforms of the 1980s and ’90s, when trade barriers crumbled and foreign-exchange controls were removed. A floating dollar cushioned the economy against external aches; inflation stabilised around a target band of 2-3%; and government finances greatly improved. By the time the global financial crisis hit, Australia had enjoyed over a decade of budget surpluses and net debt had been eliminated. It helped that China’s demand for commodities was fuelling a mining boom that created jobs and pushed up wages. Australia’s terms of trade soared as it churned out coal and iron ore to feed its neighbour’s …

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