Monthly Archives: July 2012

Thomas Palley

The Federal Reserve has now openly adopted a two percent inflation target, with both Chairman Bernanke and the Federal Open Market Committee publicly committing to holding inflation at that level. Though not a problem today, this two per cent target represents a policy trap that will undercut the possibility of future wage increases despite on-going productivity growth.  That promises to aggravate existing problems of income inequality and demand shortage. 

David Collins

Last year’s Occupy movement has influenced public opinion of the World Trade Organisation (WTO) for the worse, but as Russia’s imminent accession shows, the WTO remains a firm force for global economic good.

Russia’s accession in August represents a remarkable achievement in the country’s economic development and a significant opportunity for exporters and investors around the world. Changes brought by conformity to WTO rules will move the Russian economy toward an open trade and investment model of economic growth, shedding its old system of inefficient import-substitution and heavily subsidized industrialization. The World Bank estimates that Russia will gain between $53 and $177bn per year because of WTO membership, reducing poverty and raising the living standards of millions. 

Andrew Adonis on John Kay’s review of the UK equity markets and long-term decision-making

John Kay’s review of “long-termism” in UK plc is elegant but short of beef.

The critique enlarged my vocabulary and understanding of recent corporate disasters. “Some of those we interviewed attributed almost magical powers to ‘the market’,” writes Professor Kay.  “Anthropomorphisation of ‘the market’ in phrases such as ‘markets think’ or ‘the view of the market’ is common usage.  It should hardly need saying that the market does not think.”

But the recommendations are underwhelming.

Of the 17 proposals, only four have much by way of substance.

Kay argues convincingly that there are far too many mergers and takeovers as a result of the “financialisation” (another new word to me) of UK plc. So what should be done? 

Alasdair Smith

There’s a developing consensus on the need to expand public investment in theUK. Private sector expenditure is depressed in the aftermath of the financial crisis of 2008. The prospects of export growth were never strong, and have been damaged by the problems in the eurozone. The  UK prime minister  and the CBI have joined Paul Krugman, Jonathan Portes, Martin Wolf and others in seeking a good old-fashioned stimulus from public investment to fill the gap.

However, the PM seems keen that the public investment should be privately financed (“the upfront investment in infrastructure should be ripe for a non-governmental approach” was one of the less ringing phrases in his March speech), and the CBI is reported to be lobbying ministers to underwrite the private funding of public infrastructure projects. 

Kevin P. Gallagher

The development process can quickly unravel when a herd of speculative investors steers into a country. Brazil boldly attempted to regulate such speculation in 2010 and 2011. Their efforts were a modest success, but developing countries can’t bear the full burden of regulating cross-border capital flows.

“Hot money” in the form of short-term debt, currency trading, stock market, real estate speculation, all stampeded into emerging market developing countries in 2010 and 2011. Low interest rates in the developed world and higher rates in emerging markets triggered such financial flows. The fact that developing countries were growing faster than crisis-plagued industrial nations played a role as well. Via the carry trade, investors borrow dollars and buy Brazilian real. Then they short the dollar and go long on the real. Depend on the leverage factor an investor can make, well, a killing.