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  • Andy Xie: 'Australian economy is probably a bubble on top of China's overinvestment bubble'

    Australia sat out the global economic crisis as much as any major economy could. Thanks to mining wealth and ripple effects from China, Australia has seen strong growth while trading partners in the West have struggled. But Chinese economist Andy Xie , Director at Rosetta Stone Advisors , warns that Australia may be due for a financial crisis of its own in the coming year. Writing at The Big Picture , Xie outlines the threat to an economy that may have become too closely tied to China's fortunes and easy credit: The Australian economy has boomed more than any other developed economy over the past decade. Its nominal GDP has doubled in a decade, and its currency value against the U.S. dollar has doubled too. As a result, its per capita income is much higher than in the United States or Europe. Its property is the most expensive among developed economies. The price of its main export, iron ore, appreciated ten times at its peak, which justified some of its prosperity. Foreign investment in its mining sector has played a more important role. It has caused the Australian dollar to appreciate strongly despite its current account deficit and higher inflation than elsewhere. The strong currency has attracted financial capital from retail investors in China and Japan. The snowball effect on the financial side has made the Australian economy strong despite the recent tumbling of the price of iron ore. As mentioned, the investment flow is sticky due to the long cycle of mining asset development. So much capital inflow has pumped up Australia’s monetary system, creating an environment of easy credit. This is the factor behind the real estate and consumption booms. If capital inflow is a bubble, Australia’s property market must be a bubble, too. When the capital inflow reverses, the bubble will pop. The Australian economy is probably a bubble on top of China’s overinvestment bubble. The latter’s unwinding will sooner or later trigger the former to do so, too. Among the mining investors I have met there is strong hope that China would soon introduce a stimulus like in 2008. This is why the price of iron ore has rebounded by 40 percent recently. Bottom fishers came in to speculate on China’s possible stimulus before or soon after the 18th Party Congress. They are likely to be disappointed. The last stimulus has made the overinvestment situation so severe that another round is just plain wrong. Also, it would trigger severe inflation and currency devaluation. I just don’t see it happening. Read A Hard Landing Down Under here .
  • Lagarde Implores Policymakers to Follow Central Bankers' Lead and Push Recovery

    IMF Managing Director Christine Lagarde was at the Peterson Institute in Washington yesterday, where she urged policymakers to put their feet on the gas pedal. Lagarde argued that recent monetary policy moves have presented an opportunity to build momentum (and, in turn, growth). Let me begin by saying that many of the right decisions have been taken. Most recently, initiatives by major central banks—the European Central Bank’s OMT bond-purchasing program, QE3 by the U.S. Federal Reserve, the Bank of Japan’s expanded Asset Purchase Program—are big policy signals in the right direction. They point the way forward and create an opportunity to build on what has been done; an opportunity to make a decisive turn in the crisis. Just as the Central Banks were misguided during the Great Depression and accelerated that crisis, it may well be that Central Banks will have played a significant role in pulling the global economy out of this great recession. But we should not get ahead of ourselves. The global economy is still fraught with uncertainty, still far from where it needs to be. The situation is a bit like a jig-saw puzzle. Some of the pieces are in place and we know what the picture should look like. But, to complete the picture, we need all the pieces to come together. That will depend on delivering on the policy commitments that have been made and in that respect, there is still a long way to go. You can read the full speech here . And watch Lagarde's address below:
  • Boston Fed President: U.S. Economy 'Treading Water,' Calls for More Fed Action

    With the U.S. economy effectively stalled, Boston Fed President Eric Rosengren is calling for the Fed to do more to spur economic growth. In an interview with the Binyamin Applebaum of the New York Times , Rosengren, who is not currently one of the voting member of the Federal Open Market Committee (the five voting slots rotate among Fed branch presidents), called for the Fed to buy more mortgage bonds and Treasury securities. And then buy some more. Until... “You continue to do it until it’s clear that you’re no longer treading water,” Mr. Rosengren said in an interview. “You continue to do it until you have documented evidence that you’re getting growth in income and the unemployment rate consistent with your economic goals.” The government estimated that payrolls increased by 163,000 in July, more than in the last several months and more than analysts had predicted. But Mr. Rosengren emphasized that several indicators, including the unemployment rate and the share of the population in the work force, had retreated to their levels at the beginning of the year. “For the last seven months we’ve been treading water. That’s different from what we expected at the beginning of the year,” he said. “I think it’s time to swim to shore.” Read Fed Officials Underscore Divisions Over Action here .
  • European Central Bank Interest Rate Below 1% for First Time

    There has been a lot of action in central banks around the world today. The European Central Bank followed the plan laid out at last week's EU summit and lowered interest rates to .75%. ECB president Mario Draghi called on Europe's banks to focus on the "soundness of [their] balance sheets as he announced the rate cut. Draghi: Based on our regular economic and monetary analyses, we decided to cut the key ECB interest rates by 25 basis points. Inflationary pressure over the policy-relevant horizon has been dampened further as some of the previously identified downside risks to the euro area growth outlook have materialised. Consistent with this picture, the underlying pace of monetary expansion remains subdued. Inflation expectations for the euro area economy continue to be firmly anchored in line with our aim of maintaining inflation rates below, but close to, 2% over the medium term. At the same time, economic growth in the euro area continues to remain weak, with heightened uncertainty weighing on confidence and sentiment. We have implemented both standard and non-standard monetary policy measures. This combination of measures has supported the transmission of our monetary policy. All our non-standard monetary policy measures are temporary in nature and we maintain our full capacity to ensure medium-term price stability by acting in a firm and timely manner. Let me also remind you of the decision taken by the Governing Council on 22 June 2012 concerning further measures to increase collateral availability for counterparties. Let me now explain our assessment in greater detail, starting with the economic analysis . On a quarterly basis, euro area real GDP growth was flat in the first quarter of 2012, following a decline of 0.3% in the previous quarter. Indicators for the second quarter of 2012 point to a renewed weakening of economic growth and heightened uncertainty. Looking beyond the short term we expect the euro area economy to recover gradually, although with momentum dampened by a number of factors. In particular, tensions in some euro area sovereign debt markets and their impact on credit conditions, the process of balance sheet adjustment in the financial and non-financial sectors and high unemployment are expected to weigh on the underlying growth momentum. Read the full release here . Meanwhile, central banks in the UK and China also cut rates today in an effort to counter expected slowdowns. The FT has a helpful summary of the day's events here .
  • The Far Reach of the European Central Bank's Monetary Policy

    In Europe, all eyes are on Thursday's pending announcement from the European Central Bank on policy moves to halt economic slowdown. That the ECB will cut interest rates below 1% for the first time seems to be accepted. But that may not be enough, as Paul Carrel reports for Reuters . Whatever the ECB decides to do will have an impact on markets globally, and on the U.S. economy. The Wall Street Journal 's Brian Blackstone discusses the potential ripple effects of the ECB's moves:
  • Roubini: Europe 'has an austerity strategy but no growth strategy'

    Nouriel Roubini is afraid Europe may be headed toward a very rude awakening to what he calls a "short vacation." At Project Syndicate , he credits Mario Draghi and the European Central Bank with taking important measures that staved off major problems like a liquidity run on Europe's banks. But the positive impact of those moves may have been temporary, and now, Roubini argues, the short-term approach by Europe's policymakers could have medium and long term negative impact on growth and economic stability. To make matters worse, the eurozone depends on oil imports even more than the United States does, and oil prices are rising, even as the political and policy environment is deteriorating. France may elect a president who opposes the fiscal compact and whose policies may scare the bond markets. Elections in Greece – where the recession is turning into a depression – may give 40-50% of the popular vote to parties that favor immediate default and exit from the eurozone. Irish voters may reject the fiscal compact in a referendum. And there are signs of austerity and reform fatigue both in Spain and Italy, where demonstrations, strikes, and popular resentment against painful austerity are mounting. Even structural reforms that will eventually increase productivity growth can be recessionary in the short run. Increasing labor-market flexibility by reducing the costs of shedding workers will lead – in the short run – to more layoffs in the public and private sector, exacerbating the fall in incomes and demand. Finally, after a good start, the ECB has now placed on hold the additional monetary stimulus that the eurozone needs. Indeed, ECB officials are starting to worry aloud about the rise in inflation due to the oil shock. The trouble is that the eurozone has an austerity strategy but no growth strategy. And, without that, all it has is a recession strategy that makes austerity and reform self-defeating, because, if output continues to contract, deficit and debt ratios will continue to rise to unsustainable levels. Moreover, the social and political backlash eventually will become overwhelming. Read Europe's Short Vacation here .
  • Econographics: Good Magazine's History of the Recession

    We're always on the lookout for different approaches to telling recent economic history. The spring 2012 issue of Good magazine features a fairly concise history, using a mix of text from Tim Fernholz and great visualizations from Dylan Lathrop . The feature presents the before, during, after, and future of the global economic crisis. And a lot of Lathrop's visualizations are simple, but useful, timelines. Here's one sample: Read It's All About the Benjamins here.
  • Karl Smith: 'The speed limit on the economy is extremely high'

    At Modeled Behavior , Karl Smith shares two graphs. He asks us to look at what happened to the output gap after 1983: ...and then at the output gap for now: ..and he asks us to consider whether we could see a rapid recovery over the next year. Smith says it si possible. Not likely, but possible. Read How Fast, Recovery here . (Hat tip, Mark Thoma )
  • Jeffrey Sachs Calls on Nations to Pay Down Debt, AND Strengthen Public Policy Apparatus

    In his latest book, The Price of Civilization: Reawakening American Virtue and Prosperity , Jeffrey Sachs calls on Americans to recognize that we are connected to other countries' problems in direct ways, and that our behavior as consumers and citizens have a significant impact on global development. And he offers up his prescription for working toward a cure to the global economic crisis. He discussed the state of the global economy, and specifically the euro-zone debt crisis, in an interview with Parminder Bahra of the Wall Street Journal:
  • The IMF Growth Tracker Showing Moderating Growth Across Global Economy

    The IMF's World Economic Outlook shows a worrying global economic slowdown, led by Europe and the US. Among the many causes cited for slowing economic activity is the lack of demand in the private sector. The IMF's researchers suggest that they expected a quicker "handover from public to private demand." The tsunami and earthquake damage in Japan also bears some of the blame, as do disruption in oil supplies in North Africa this year. A lasting, and troubling factor is the lack of confidence on the part of consumers and businesses in developed economies of the West. The ripple effects of the dip in confidence are being felt around the globe. Note the impact on growth, as shown in the IMF's Growth Tracker : From the report: Worryingly, various consumer and business confidence indicators in advanced economies have retreated sharply, rather than strengthened as might have been expected in the presence of mostly temporary shocks that are unwinding. Accordingly, the IMF’s Growth Tracker (Figure 1.4, top panel) points to low growth over the near term. WEO projections assume that policymakers keep their commitments and the financial turmoil does not run beyond their control, allowing confidence to return as conditions stabilize. The return to stronger activity in advanced economies will then be delayed rather than derailed by the turmoil. Read the World Economic Outlook, and watch video of the IMF staff discussing their findings, here .
  • Roubini's Steps for Avoiding a Depression

    In the period before the global economic crisis of 2008, Nouriel Roubini was tagged "Dr. Doom" by many media outlets. The label was often dismissive, but it became more of a badge of honor after crisis hit. Roubini has remained vigilant about the vulnerability of the financial markets. His concern now is a global depression. In order to avoid depression, Roubini says there must me a multi-national approach. While austerity measures in many countries are necessary, he argues that other nations must postpone austerity in order to inject stimulus into the global economy. Writing at Project Syndicate , Roubini outlines several other steps: Second, while monetary policy has limited impact when the problems are excessive debt and insolvency rather than illiquidity, credit easing, rather than just quantitative easing, can be helpful. The European Central Bank should reverse its mistaken decision to hike interest rates. More monetary and credit easing is also required for the US Federal Reserve, the Bank of Japan, the Bank of England, and the Swiss National Bank. Inflation will soon be the last problem that central banks will fear, as renewed slack in goods, labor, real estate, and commodity markets feeds disinflationary pressures. Third, to restore credit growth, eurozone banks and banking systems that are under-capitalized should be strengthened with public financing in a European Union-wide program. To avoid an additional credit crunch as banks deleverage, banks should be given some short-term forbearance on capital and liquidity requirements. Also, since the US and EU financial systems remain unlikely to provide credit to small and medium-size enterprises, direct government provision of credit to solvent but illiquid SMEs is essential. Fourth, large-scale liquidity provision for solvent governments is necessary to avoid a spike in spreads and loss of market access that would turn illiquidity into insolvency. Even with policy changes, it takes time for governments to restore their credibility. Until then, markets will keep pressure on sovereign spreads, making a self-fulfilling crisis likely. Agree or disagree with Roubini, by proposing specific steps, he does allow for a meaningful discussion. Two big questions raised by his proposals are 1) is a coordinated global policy possible in today's political climate, and 2) if so, then how might it come about? Read How to Prevent a Depression here .
  • Glaeser: 'Cities are the Economic Heartland of America'

    Harvard economist Edward Glaeser has a new book out, Triumph of the City: How Our Greatest Invention Makes Us Richer, Smarter, Greener, Healthier and Happier . In the book, he challenges some of our conventional wisdom about cities. Or at least it challenges the political and media narratives about cities Healthier? Greener? Glaeser made the case for cities on The Daily Show . Note how he argues that cities are the "economic heartland America" (at 4:15): The Daily Show With Jon Stewart Mon - Thurs 11p / 10c Edward Glaeser www.thedailyshow.com Daily Show Full Episodes Political Humor & Satire Blog The Daily Show on Facebook Hat tip to Greg Mankiw .
  • Roger Altman on the Federal Deficit, Stimulus, and Government Options in Spurring Recovery

    Bloomberg's Hans Nichols reports that Roger Altman is being considered to replace Lawrence Summers as the director of the President's National Economic Council . We remember Altman as Deputy Secretary of the Treasury during the first two years of the Clinton Administration. Now he is chairman of Evercore Partners , the investment banking boutique that he founded. As we were looking for more information on Altman, we came across this interview with Charlie Rose from July 2009. In this excerpt, Altman is discussing the deficit and some of the other key issues he will have to consider if he does end up as a key adviser to President Obama: Watch the full interview here .
  • St Louis Fed President Tells Dow Jones That No More Fed Aid is Needed

    James Bullard , president of the Federal Bank of St. Louis , believes the Fed has done its job in working to right the economy. And though the recovery is not exactly humming along, Bullard views the recent "mixed " reports on housing and jobs as relatively positive, and he sees signals that we are in a "soft patch in the recovery." He spoke with Dow Jones Newswires' Michael Derb y about the state of the economy:
  • The Fed's Options

    The Federal Open Market Committee is set to meet tomorrow to discuss the state of the US economy and ways to push recovery. The Financial Times is now reporting that the Fed will "downgrade its assessment" of the economy . So that opens up questions of what tools the Fed may use to stimulate the sluggish recovery. Will the Fed be able to inject additional fiscal stimulus measures? Is additional quantitative easing a possibility? The University of Oregon's Tim Duy is expecting a "small change." Bottom Line: The incoming data appears largely consistent with the Fed's priors - especially expectations of glacially slow improvement in the labor market. Yet the probability of any upside risk to the forecast have diminished markedly. The V-shaped recovery has not emerged. The elimination of that upside risk argues for additional easing, but the Fed appears hesitant to do more. Uncertainty about the effectiveness of additional easing argues against more action, especially given relatively quiescent financial markets and positive, albeit lackluster, growth. Moreover, any additional action now is essentially a promise to do more later, even if growth remains along its current trajectory. All of these points argue against additional easing tomorrow, and that remains my baseline scenario. The case becomes muddied by internal, staff level pressure to do more now, combined with rising expectations of imminent easing given the steady flow of leaks to the press. This opens the possibility of a small policy adjustment that eliminates that passive reduction of the balance sheet. Any more is off the table. Read Tim Duy's Fed Watch here .
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