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Monthly Archives: July 2012
Chinese companies seeking opportunities abroad are now primarily motivated by the search for resources with showcase examples in Africa and Latin America and a notable victim of politics being Cnooc’s pursuit of Unocal in the United States. That failure contrasts with the Cnooc’s attempted $15bn acquisition of Nexen’s oil and gas assets, which if approved by the Canadian Government could represent a landmark shift in how Canada views the US and China.
This assumption is currently far from being satisfied. The euro area financial market, in all segments and maturities – including the very short term money markets – does not function properly, as banks deposit their excess liquidity with the central bank instead of lending to other banks. Cross-border banking flows have dried up. Households and firms across the union borrow at rates which depend more on the respective sovereign risk — just look at Spain, today, for example — than on their intrinsic creditworthiness. Interest rate decisions made by the central bank are not able to affect monetary conditions in the desired way in a large part of the euro area.
Look for the Fed in the next few weeks to go further in revising down its job, growth and inflation forecasts for 2012. Given the institution’s dual mandate of price stability and maximum employment, this will inevitably raise expectations of additional policy activism.
Having exhausted long ago the effectiveness of traditional monetary policy tools, the Fed has no choice but to consider another mix of unconventional measures – specifically, additional purchases of securities, a lower interest rate on excess reserves, an even more aggressive communication policy, and enhanced access to the discount window.
It is perfectly legitimate for Mr Lula to express his affection and admiration for Mr Chavez. Affects – like love – are blind and deserve respect. But it is not legitimate for Mr Lula to intervene in another country’s elections. That’s not what democrats do. And Mr Lula knows it. Or he should know it.
America’s economic debate is stuck in a time warp. The prescriptions of free market economics peddled by the Republicans – slash taxes and spending, end financial and environmental regulations – are throwbacks to the 1920s. The other side is only a little better. In Paul Krugman’s telling, we are in the 1930s – and there are no structural challenges, only shortfalls in aggregate demand. We need to move beyond these increasingly irrelevant ideologies.
We need new economic strategies to overhaul broken systems of finance, labour markets, taxation, ecological management, budget management and investment incentives. Those challenges cannot be fixed through lowering taxes on the rich or higher fiscal deficits to create aggregate demand. The new approaches must be long-term, structural, sensitive to inequalities of skills and education, aligned with the need for more sustainable technologies and “smarter” infrastructure (empowered by information technology) and congruent with long-term demographic trends. It’s time we moved beyond the Republican Party economics of the 1920s and the Democratic Party economics of the 1930s, to a new macroeconomics for the 21st century.
We are now a year and a half into what many persist in calling the Arab Spring even though there is no end in sight to the turbulence and it is hardly certain to have a happy ending.
Dismal jobs numbers reflect a fundamental lack of economic growth. Three full years have now passed since the trough of the recession. But, the US grew at only 1.9 per cent and an estimated 1.5 per cent for the first and second quarters of this year, respectively. For the full year, the consensus estimate is only 2 per cent. Such figures, well below the economy’s long run growth potential, are just not good enough to offset population growth and improve labour markets.
The obvious question is: why such a weak recovery? The answer traces back to the catastrophic 2008 credit market collapse. Namely, that the financial damage which it inflicted on consumers, lenders and homeowners has not been fully remedied. And, therefore, each of these three, broad sectors is struggling.
The problem, then, is not so much that policy hasn’t worked but, instead, that we expect too much from it. Stagnation is a lot better than Depression but there are still plenty of people out there who believe that, with a bit more effort and a few more macroeconomic policy wheezes, the good times will return – despite the evidence of persistent “optimism bias” in official forecasts based on no more than blind faith in the potency of policy.
Friday’s disappointing employment report out of the US is unsettling even for those of us that have consistently worried, and warned about the country’s weak job picture. It comes at a time when many people are understandably giving up hope of any major policy initiative out of Washington. And it confirms that this closely-watched release should be interpreted beyond its traditional role as a lagging indicator; these days, it is also a leading indicator for economic and political issues, both domestic and global.
With economies stagnant and interest rates near zero, central banks are trying new ways to induce banks to lend and companies to borrow. Promoting financial stability and restarting growth are the priorities, not inflation control. This creates two major problems. First, economic theory is lacking, but it is difficult to move cautiously given the relentless clamour for policies to promote growth. The second problem is how to coordinate monetary and financial policy.
In Britain, the current separation of the Monetary Policy Committee and Financial Policy Committee risks policy gaps and inconsistencies. But it is not too late to change this situation, by creating a single, accountable Monetary and Financial Policy Committee, with a solid quotient of external members and a dual mandate for inflation control and financial stability.
The creation of a eurozone banking union raises the vital “ins and outs” question. The UK, and others with their own currencies, will not be included and the European Banking Authority is still empowered to mkae rules for the single financial market as a whole. So there are some awkward negotiations ahead, and the UK will need some security for its banks within the single market. Arguing for the interests of British banks may go against the grain just now but the UK chancellor will have to do so – up to a point.
The world economy of this decade resembles that of the 1980s in many ways. On one count, it will probably be as sluggish as the 1980s. However, that decade witnessed the rise of the East Asian tigers. China has a much bigger economy than the tiger economies and export cannot be a long-term driver of its growth. It is likely that the country’s economy will continue to turn to domestic consumption to look for growth.