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  • IMF's Blanchard: Focus of Global Recovery Should Now Be On Supply Side

    The global economy has a supply side problem. That is, the global marketplace needs more buyers. IMF director of research Olivier Blanchard notes that while he and his team are projecting 3.6 percent growth this year, and 3.9 percent growth next year, it all depends on a "broader" recovery. First, potential growth in many advanced economies is very low. This is bad on its own, but it also makes fiscal adjustment more difficult. In this context, measures to increase potential growth are becoming more important—from rethinking the shape of some labor market institutions, to increasing competition and productivity in a number of non-tradable sectors, to rethinking the size of the government, to reexamining the role of public investment. Second, although the evidence is not yet clear, potential growth in many emerging market economies also appears to have decreased. In some countries, such as China, lower growth may be in part a desirable byproduct of more balanced growth. In others, there is clearly scope for some structural reforms to improve the outcome. Finally, as the effects of the financial crisis slowly diminish, another trend may come to dominate the scene, namely rising inequality. Though inequality has always been perceived to be a central issue, until recently it was not seen as having major implications for macroeconomic developments. This belief is increasingly called into question. How inequality affects both the macroeconomy, and the design of macroeconomic policy, will likely be increasingly important items on our agenda for a long time to come. Read the full post here . And watch Blanchard discuss the global recovery below:
  • The Rise and Fall of Real Interest Rates

    Ahead of biennial meetings with the World Bank in Washington this week, the IMF 's research department has put out an interesting analysis of interest rates around the world. In the last thirty years, real interest rates have plummeted, from an average of 5.5% in the early 1980s to 0.33% post global economic crisis. From the report: The decline in real interest rates in the mid-2000s has often been attributed to two factors: • a glut of saving stemming from emerging markets economies, especially China; and • a shift in investors’ preferences toward fixed income assets—such as bonds—rather than equity, such as stocks. Both these factors put downward pressure on real interest rates globally while the expected return to invest in equities increased. The substantial increase in saving in emerging market economies, especially China, in the middle of the first decade of the 21st century was responsible for more than half of the decline in real rates (Chart 2). This was only partly offset by the reduction in saving in advanced economies. High-income growth in emerging market economies during this period seems to have been the most important factor driving the increase in savings. The IMF is now projecting a rise in real interest rates, but not to anywhere near the levels of the 1980s: Read the report here .
  • Angus Deaton on Global Quality of Life, Health, and Wealth

    In his latest book, Princeton economist Angus Deaton argues that the world is a much wealthier and healthier place today than it was a half century ago, but that progress has not come without some setbacks, and a danger of "vast inequalities." Deaton has an introduction to the book, titled The Great Escape: health, wealth, and the origins of inequality , at Vox , where he shares this graph: The figure plots life expectancy at birth (for both sexes together) against per capita GDP in price-adjusted international dollars. Each point is a country, shown as a circle whose area is proportional to population; the lighter circles are for 1960, and the darker circles for 2010. The arrow points in the direction of progress, where both per capita incomes and life expectancy increase over time. The 2010 line is above the 1960 line so that, for a typical country, life expectancy has increased by more than would have been expected given a movement along the 1960 line. Preston suggested that movement along the curve was the effect of income on health, while the upward movement of the line could perhaps be attributed to technical progress. Death 'ages' as we move along each curve; this is the epidemiological transition. In the poorest countries, parents still live with the agony of watching their children die from long-conquered maladies like pneumonia, diarrhea, or vaccine preventable diseases like measles. In the rich countries, where disease has moved out of the bowels of children and into the arteries of the elderly, death comes from chronic diseases – heart disease and cancer – and comes to the old, not to the young. The aging of death recapitulates what happened in history, though poor countries today have achieved comparable health at much lower levels of per capita income than was the case in the rich countries in the past. When I was born in Edinburgh in 1945, life expectancy in Scotland was lower than it is in India today; when my father was born in the Yorkshire coalfield in 1918, child mortality in England was higher than it is in sub-Saharan Africa today. Progress has been repeatedly interrupted by horrors, not all of which are safely locked up in a historical museum. The Figure shows the huge increase in life expectancy in China between 1960 and 2010, most of which happened, not slowly over time, but immediately after 1960. In fact, this is not a story of progress, but of the unwinding of the disaster of the great Chinese famine. Mao’s demented attempt to catch up with rich countries in a few years, to assume leadership in the Communist world, and to preserve his own political position at home, led him to ignore the mounting evidence that millions were dying. Eventually, perhaps 30 million people died, Yang (2013). This is far from the first time in history that toxic politics has brought human catastrophe. It is sometimes hard to see the benefits that good policies bring, but the Great Leap Forward is a spectacular example of what bad policies and bad politics can do. Read the full post here .
  • Christine Lagarde: 'A New Multilateralism for the 21st Century'

    Earlier this week, Christine Lagarde gave the annual Dimbleby Lecture for the BBC, and the IMF is now making it available for viewing. It is a highly compelling lecture, as Lagarde puts the challenges of today into an historical context. She begins her lecture by discussing the state of the world 100 years ago--to the early days of 1914, "the year when everything started to go wrong." She sees many lessons from the destructive Lagarde then turns to 1944, when John Maynard Keynes and top economists from 44 nations met in Bretton Woods to "set a new course" for the global economy and global multilateral action. Coming out of the Great Recession, Lagarde urges us to take the lessons from these two historic moments, and recognize that we are moving through a period of rapid change and need to respond thoughtfully with the future in mind. "What kind of a world, do we want that to be and how can we achieve it?" she asks. Watch her call for a "New Multilateralism for the 21st Century":
  • The Challenge Ahead for Commodity-Price Dependent Latin American Economies

    Andrés Velasco , former finance minister of Chile, is not exactly bullish on growth in his country and across the region. At Project Syndicate , he lays out the challenge ahead. If Latin American economies do not diversify sufficiently, then maintaining anything close to the recent rate of growth will be difficult. Velasco: It is pretty clear by now that an extraordinarily benevolent external environment, not a revolutionary policy shift, underpinned Latin America’s rapid growth in the years following the 2008-2009 global economic crisis. As long as the price of soy, wheat, copper, oil, and other raw materials remained stratospheric, commodity-rich countries like Brazil, Chile, and Peru got a tremendous boost; even Argentina grew rapidly, despite terrible economic policies. But now “secular stagnation” – the concept du jour in US policy debates since former Treasury Secretary Larry Summers argued last November that the US (and perhaps other advanced economies) has entered a long period of anemic GDP growth – may also be coming to Latin America. The argument goes like this: high consumer debt, slowing population growth, and rising income inequality have weakened consumer demand and stimulated savings, while slowing growth in productivity and output itself has discouraged investment. So the “natural” rate of interest – the rate at which the demand for investment equals the supply of savings – has fallen, and arguably has become negative. But, because real interest rates cannot be strongly negative unless inflation is high (which it is not), there is a savings glut. With consumption and investment lagging, the US economy is bound to stagnate. But how could such a situation apply to Latin America, where GDP growth is faster, interest rates are higher, and domestic demand is stronger than in the US? Consider the region’s history. Until the recent commodity-driven boomlet, growth in Latin America was mediocre. The 1980’s are known as the “lost decade,” owing to a debt crisis and massive recessions, while the market-based reforms of the 1990’s did little to reignite short-run growth. From 1960 to 2007, only four countries in Latin America and the Caribbean – Brazil, Chile, the Dominican Republic, and Panama – grew faster than the US. So meager growth in the coming years would be a return to Latin America’s historical pattern, not a deviation from it. Read Secular Stagnation Heads South here .
  • Eichengreen: Lessons Learned From the Decade of Concern Over Global Imbalance

    At Project Syndicate , Barry Eichengreen declares the "era of imbalances is over." Ten years ago, Eichengreen notes, leading economies had rising current-account deficits--the U.S.'s rose to 5.8% of GDP--or current-account surpluses--China's hit 10% of GDP. But now, those surpluses and deficits are mostly under control. Eichengreen tries to sort out some lessons from the decade. Back in 2004, there were two schools of thought on global imbalances. The Dr. Pangloss school dismissed them as benign – a mere reflection of emerging economies’ demand for dollar reserves, which only the US could provide, and American consumers’ insatiable appetite for cheap merchandise imports. Trading safe assets for cheap merchandise was the best of all worlds. It was a happy equilibrium that could last indefinitely. By contrast, adherents of the Dr. Doom school warned that global imbalances were an accident waiting to happen. At some point, emerging-market demand for US assets would be sated. Worse, emerging markets would conclude that US assets were no longer safe. Financing for America’s current-account deficit would dry up. The dollar would crash. Financial institutions would be caught wrong-footed, and a crisis would result. We now know that both views were wrong. Global imbalances did not continue indefinitely. As China satisfied its demand for safe assets, it turned to riskier foreign investments. It began rebalancing its economy from saving to consumption and from exports to domestic demand. The US, meanwhile, acknowledged the dangers of excessive debt and leverage. It began taking steps to reduce its indebtedness and increase its savings. To accommodate this change in spending patterns, the dollar weakened, enabling the US to export more. The renminbi, meanwhile, strengthened, reflecting Chinese residents’ increased desire to consume. There was a crisis, to be sure, but it was not a crisis of global imbalances. Although the US had plenty of financial problems, financing its external deficit was not one of them. On the contrary, the dollar was one of the few clear beneficiaries of the crisis, as foreign investors, desperate for liquidity, piled into US Treasury bonds. Read A Requiem for Global Imbalances here .
  • WSJ: Other Economies Not 'Riding the Coattails' of Rebalanced U.S. Economy

    We're kicking ourselves for not buying stock in the phrase "this time is different," back in 2008. Coverage of the global economic crisis, the recession, and the meandering recovery has included that phrase frequently (even if not always with enough perspective to use it accurately). Well, here we go again. Conventional wisdom suggests that economic recovery in the U.S. has a direct positive effect on other players in the global economy--especially Asia where so many consumer products for the U.S. market are produced. While the current recovery underway in the U.S. may not be as fast as we'd like, it should be helping out China, for example. But this time is different. The Wall Street Journal 's Mike Casey tells us why:
  • British Report on Retirement Prospects Paints Bleak Picture, Except for Those Who Can Expect an Inheritance

    If you spend a lot of time pondering what adventures you will take, and what treats you will buy yourself when you retire, then Andrew Hood and Robert Joyce of the London-based Institute for Fiscal Studies have some bad news for you. Unless you have family that is flush with money, that is. This is especially true of those people born after the 1960s. The quality of life has improved--so the expectations are higher, as is spending. And the savings rate has declined, so there is less banked to pay for future expenditures. From the report: Figure 2.7 confirms that differences in income across cohorts have translated more or less fully into differences in spending. In other words, the amounts being actively saved by younger cohorts have been no higher, despite their higher incomes. The figure shows age profiles of median household saving–defined as income minus expenditure–for the same four cohorts shown in Figure 2.6. If savings rates had remained constant over time and between cohorts, we would expect to see higher absolute savings amounts among more recent cohorts, as they would have been saving the same proportion of a higher income. In fact, at almost every age, the 1960s and 1970s cohorts saved less at the median than their predecessors had; and this ‘age-adjusted’ saving gap between cohorts has been growing (to around £60 per week between the 1940s and 1970s cohorts) as has been growing (to around £60 per week between the 1940s and 1970s cohorts) as savings rates declined significantly across the population from the l ate 1990s. 16 Such a decline matters more for younger cohorts, all else equal, as it affects their accumulation of wealth over a larger portion of their lives (if the trend is persistent). For example, the median flow of active saving out of take - home income was positive up to the age of 55 for the 1940s cohort, but has been negative for the 1960s cohort since they were in their mid - 30s. Two important points are worth noting. First, the higher spending of younger cohorts relative to older ones suggests that, all else equal, they have had higher living standards early in adulthood than their predecessors had. Second, it is possible that their lower savings rates are ‘optimal’ for them if, for example, they reflect lower credit constraints during periods of temporary low income than were faced by previous cohorts. Indeed, there is evidence from the US suggesting that most individuals born between 1931 and 1941 had actually built up at least as much wealth as was optimal for them, and many appeared to have ‘over - saved’. 17 In other words, under the assumption that people generally prefer to have smooth flows of consumption over time (all else equal), they appeared to have spent too little early in life relative to the resources they will have available later. It is possible that the same is true in the UK and that the lower savings rates of later cohorts are actually a move towards optimality. 18 This does not change the implications of this analysis for the relative economic position later in life of different cohorts, but it may affect the appropriate policy response. In summary, individuals born in the 1960s and 1970s have saved no more past take - home income than their predecessors had by the same stage in life, despite having had considerably higher incomes from which to make such provisions. In addition, the lack of income growth over the past decade means that, when compared with the previous 10 - year cohort at the same age, they no longer have higher flows of income. Download the full report here . Hat tip Jason Karaian, Quartz .
  • The Economist: Average Income by Racial Group in South Africa

    This is an interesting chart from The Economist , but it does not tell a particularly positive story. It shows the average income by racial group in South Africa from the time of Nelson Mandela's birth until this year. Note first that the average income of white South Africans flatlined, and even dropped slightly, during the last decade of Apartheid. Then, all racial groups saw significant income growth following the end of the Apartheid laws. But so far in the 21st Century, the largest racial group, black South Africans, is once again being left behind. (full size chart available here )
  • Mandela At Davos 1999: A Call for Building Economic Ties and Development Cooperation

    As leaders from around the world join South Africans today to remember Nelson Mandela , the World Economic Forum offers up an important speech from 1999. At that year's World Economic Forum in Davos, Mandela addressed top politicos, bankers, and business leaders and he spoke of the need for strong global economic policy that lifted all boats: The challenges we face combine many of the great challenges that face our global society. We need social stability that is based on socio-economic development. We must nurture tolerance, collective wisdom and democracy. Like all countries, we must provide real personal safety and security against criminality and abuse of human rights. The fact that we face these global challenges at the precise moment that we have become free with the world's support, places special obligations on our new democracy. Some people argue that we should focus on our own immense problems and leave others to their own devices. That would be to turn our back on those that helped liberate us, often at great costs to themselves. It would be contrary to our morality, which will not let us desert our friends. Who, in our interdependent world, can turn their back on people in other lands when press, radio and television bring us the graphic reality of abuse, death, genocide and senseless and destructive wars? Is globalisation only to benefit the powerful and the financiers, speculators, investors and traders! Does it offer nothing to men, women and children who are ravaged by the violence of poverty! To answer "Yes" to these questions is to re-create the conditions for conflict and instability. However, if the answer is "No" then we can begin to build a better life for all humanity. Here is the full speech:
  • Marketplace: Mandela's Impact on Global Economy

    The world is mourning the death of one of the most important figures, and admired leaders, in recent memory, Nelson Mandela . Beyond his humanitarian impact and his lasting political influence in Africa and around the world, Mandela has left an important economic legacy. Marketplace's Mitchell Hartman reports:
  • Summers on Quantitative Easing, Fed Policy

    Larry Summers may not be the next Fed Chair, but it seems he is on the same page with current and future Fed leadership when it comes to quantitative easing. In an interview with Bloomberg 's Stephanie Ruhle , Summers seems pretty convinced that when we look back on this period years from now, we will be glad the Fed made the bold moves it did.
  • The Tenuous 'Quasi-Dominant Policymaking Position' of Central Banks

    Central banks have risen to positions of great power and responsibility in large developed economies. So much so that we watch their every move as if it has the potential to change everything. They not have planned on acquiring this "quasi-dominant policymaking position," as Mohamed El-Erian puts it, but this is where they are thanks to the global economic crisis. However, as El-Erian argues in a piece at Project Syndicate , they may lose their power quickly and with dangerous consequences if other policy making institutions (namely, elected leaders) don't stop relying on central banks to prop up economies, Comforted by the notion of a “central-bank put,” many investors have been willing to “look through” countries’ unbalanced economic policies, as well as the severe political polarization that now prevails in some of them. The result is financial risk-taking that exceeds what would be warranted strictly by underlying fundamentals – a phenomenon that has been turbocharged by the short-term nature of incentive structures and the lucrative market opportunities afforded until now by central banks’ assurance of generous liquidity conditions. By contrast, non-financial companies seem to take a more nuanced approach to central banks’ role. Central banks’ mystique, enigmatic policy instruments, and virtually unconstrained access to the printing press undoubtedly captivate some. Others, particularly large corporates, appear more skeptical. Doubting the multi-year sustainability of current economic policy, they are holding back on long-term investments and, instead, opting for higher self-insurance. Of course, all problems would quickly disappear if central banks were to succeed in delivering a durable economic recovery: sustained rapid growth, strong job creation, stable financial conditions, and more inclusive prosperity. But central banks cannot do it alone. Their inevitably imperfect measures need to be supplemented by more timely and comprehensive responses by other policymaking entities – and that, in turn, requires much more constructive national, regional, and global political paradigms. Having been pushed into an abnormal position of policy supremacy, central banks – and those who have become dependent on their ultra-activist policymaking – would be well advised to consider what may lie ahead and what to do now to minimize related risks. Based on current trends, central banks’ reputation increasingly will be in the hands of outsiders – feuding politicians, other (less-responsive) policymaking entities, and markets that have over-estimated the monetary authorities’ power. Read The Uncertain Future of Central Bank Supremacy here .
  • Brookings' Metro Freight Series

    The Brookings Institution 's Metropolitan Policy Program has a strong new series out called Metro Freight. The series takes an in-depth look at trade "at the metropolitan scale." As the report notes, "The rise of global value chains forces metropolitan areas to assess their relationship to the global economy." The animated video below sets up the series nicely. Take a look, and then view the report here .
  • IMF Global Financial Stability Report and 'New Risks to Financial Stability'

    The latest Global Financial Stability Report is out from the IMF . The good news cited in the report is that most markets are changing for the (long-term) better, as the global financial system "under[goes] a series of transitions along the path toward greater financial stability." The bad news is that periods of transition can also be periods of vulnerability. And so the report focuses a bit on what will happen globally when (and we now know this is not happening in the next few months) the U.S. pulls back from its accommodative monetary policy. IMF Financial Counsellor José Viñals shares the good news/bad news thinking: Here's more from the report. Financial stability challenges are also prevalent in many emerging market economies. Bond markets are now more sensitive to changes in accommodative monetary policies in advanced economies because foreign investors have crowded into local markets and may withdraw. Emerging market fundamentals have weakened in recent years, after a protracted interval of credit expansion and rising corporate leverage. Managing the risks of the transition to a more balanced and sustainable financial sector, while maintaining robust growth and financial stability, will be a key undertaking confronting policymakers. As central banks elsewhere consider strategies for eventual exit from unconventional monetary policies, Japan is scaling up monetary stimulus under the Abenomics framework, aiming to pull the economy out of its deflationary rut. Successful implementation of a complete policy package that features fiscal and structural reforms would reinforce domestic financial stability, while likely boosting capital outflows. But substantial risks to financial stability could accompany the program if planned fiscal and structural reforms are not fully implemented. Failure to enact these reforms could lead to a return of deflation and increased bank holdings of government debt, further increasing the already-high sovereign-bank nexus. In a more disorderly scenario, with higher inflation and elevated risk premiums, the risks to both domestic and global financial stability could be greater still, including rapid rises in bond yields and volatility, and sharp increases in outflows. In the euro area, reforms implemented at the national level and important steps taken toward improving the architecture of the monetary union have helped reduce funding pressures on banks and sovereigns. However, in the stressed economies of Italy, Portugal, and Spain, heavy corporate sector debt loads and financial fragmentation remain challenging. Even if financial fragmentation is reversed over the medium term, this report estimates that a persistent debt overhang would remain, amounting to almost one-fifth of the combined corporate debt of Italy, Portugal, and Spain. Assuming no further improvement in economic and financial conditions which would correspond to a more adverse outcome than the cyclical improvement built into the October 2013 World Economic Outlook baseline scenario, some banks in these economies might need to further increase provisioning to address the potential deterioration in asset quality of corporate loan books. This could absorb a large portion of future bank profits. Recent efforts to assess asset quality and boost provisions and capital have helped to increase the loss-absorption capacity of banks, but further efforts to cleanse bank balance sheets and to move to full banking union are vital. These steps should be complemented by a comprehensive assessment and strategy to address the debt overhang in nonfinancial companies. Read the full report here .
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