Monetary policy

By Thomas I. Palley

In his novel, The Jungle, the American muckraking author Upton Sinclair wrote about the horrendous work and sanitary conditions in the Chicago meat packing industry of the early 20th century. It is sometimes said Sinclair aimed for the heart but hit the stomach. That is because he aimed for progressive social and economic change, but instead his work prompted the founding of the Food and Drug Administration.

The same problem of missing the target confounds current discussions of the eurozone’s problems. What the euro lacks is a government banker, not a lender of last resort as is widely claimed. 

By Xhanti Payi

One of the most difficult struggles being fought by those who wish to attract investment into Africa is to destroy the widely held belief that Africa is one big country. Africa in reality is a collection of widely diverse and exciting countries, with varying prospects and challenges.

So apart from the argument that an African Monetary Union (AMU) would be a bad idea if the example of the European Monetary Union is anything to go by, there is a case to be made that a monetary union may interrupt the fight against negative sentiment about Africa that is born out of this that arbitrary aggregate approach. With that said, the idea of an African Monetary Union is a product of history, and arguing against it requires understanding of its context. 

By Thomas I. Palley

The eurozone‘s public finance crisis continues to fester, reflecting both political and intellectual failure. The intellectual failure is that the crisis has been interpreted exclusively as a debt crisis when it is also a central bank design crisis resulting from the euro’s flawed architecture. The flaw is the inability of eurozone governments to harness the central bank’s power to assist government finances. This systemic weakness explains why US and UK government bonds are weathering the storm, whereas Spain confronts default rumours despite having roughly similar debt and deficit profiles. 

By James Park

With the demise of Lehman Brothers in 2008 and the subsequent septic shock that stemmed the flow of liquidity in the financial system, the Federal Reserve responded with an unprecedented infusion of liquidity that has continued into this year.

However, this heightened rate of infusion is scheduled to finish in July. With the looming end of the second dose of quantitative easing (QE2) the media has latched onto the analogy of Bill Gross, Pimco’s co-chief investment officer, of QE2 and subsequent liquidity pumping efforts as a Ponzi scheme. The recent exit of Pimco (one of the world’s biggest bond fund managers) from US Treasuries underscores Mr Gross’s huckster metaphor.

While there is an element of warranted alarm, seeing the crisis through the clinical prism of blood composition and stem cells may provide a more balanced view. 

By Eswar Prasad and Karim Foda

Despite a number of recent shocks, the global economic recovery is getting on to a firmer footing.

The latest update of the Brookings Institution-FT Tracking Indices for the Global Economic Recovery (TIGER) indicates that resurgent job growth and rising business and consumer confidence are solidifying the recoveries in many advanced economies. Emerging markets are still doing well but some of the shine is coming off these economies as they tighten policies to cope with inflationary pressures.

The Overall Growth Index for the G20 economies shows a slight uptick in recent months, led by a gradual rebound in real activity. After the initial post-recession surge, financial markets have pulled back a bit, at least in terms of growth in stock market indexes and valuations. One bright spot is the resurgent business and consumer confidence in both advanced and emerging economies. 

Shankar Acharya

Suddenly this month the esoteric world of international finance is resonating to the clash of currencies. On September 27 Brazil’s finance minister stated that an “international currency war” has erupted. In its October 16 issue the London Economist put “Currency wars” on its cover, with evocative imagery of an aerial dogfight between paper planes of currency notes from different countries. 

The US Fed’s policy-setting committee (FOMC) undertook large asset purchases last year, buying $1.7 trillion of mortgage-related and Treasury bonds. Last month, the Fed reaffirmed the easing bias and indicated that it could start buying vast quantities of government debt if unemployment did not improve. 

By Eswar Prasad and Karim Foda

The October 2010 TIGER update paints a sobering picture of a global economy that has lost momentum and is teetering between a slowdown and at best a tepid recovery. Advanced economies are stuck in a funk and even the dynamic emerging markets have lost some of their swagger.

The Global Financial Index took a beating in 2010 Q2 roughly around the initial period of the European debt crisis and has continued to weaken. Stock markets around the world remain in a state of torpor after a correction that signals a reversal of the optimism that led to their getting ahead—perhaps too far ahead—of improvements in real economic activity.

Credit growth, the latest addition to the TIGER financial (and overall) index, fell sharply towards the end of 2009, but has since begun to rebound, especially in emerging markets. Emerging market bond spreads and the TED spread have remained flat this year indicating that, despite the correction, financial markets are not under huge stress. 

Shankar Acharya

These are uncertain times for global economic governance. For over six decades after the second world war the west framed the rules of engagement for the global economy.

In the initial years, the United States was the preeminent power, which oversaw the creation of the Bretton Woods system (International Monetary Fund and World Bank) and the initial rounds of trade liberalization under the newly-born General Agreement on Tariffs and Trade (which became the World Trade Organization at the end of the Uruguay Round in 1993).

As Europe recovered from the ravages of war and Japan launched on its high growth phase, these new leviathans (especially Europe) increasingly asserted themselves and won greater voice and roles in world economic governance. But it was still an essentially western enterprise, with a demilitarized Japan content to go along in return for an American nuclear umbrella.

The Soviet Union and its satellites were not an integral part of this economic system and the developing countries didn’t carry significant economic clout, not even the populous Asian giants of China and India. 

By Brendan Brown

There is a magic monetary wand out there which could accelerate economies along the road to prosperity out of the widespread destruction wrought by the global credit bubble.

This wand is not the creation of another monetary time-bomb labelled “quantitative easing”; rather the source of magic is an emergency conversion of banknotes.