Opinion

The Edgy Optimist

In emerging countries, focus on progress — not market volatility

Zachary Karabell
Feb 4, 2014 20:43 UTC

The start of the year has not been an easy one for financial markets. The Federal Reserve is continuing its policy of trimming its bond purchases by $10 billion a month, and the immediate result has been a sharp pullback of the currencies, and to some degree equities, of countries such as Indonesia, Turkey, India, South Africa and Argentina. The reason? According to traders, commentators, and even the head of Brazil’s central bank, Fed policy will trigger interest rate rises around the world, staunching the flow of easy money that has purportedly fueled global growth — and leading to struggles everywhere.

That thesis is hardly new. It was widely circulated last summer, when the Fed first hinted that it might begin to wind down its more aggressive measures to stimulate economic activity, which it introduced after 2009. In this reading, the boom times of many countries around the world has had nothing to do with the change in economic fortunes, or skilled leadership, or shifting global sands. It was and is simply a derivative of U.S. policies.

This view has wide play, and goes nearly unchallenged. That does not make it correct.

Indeed, it is likely wrong for at least two major reasons: it forgets that financial markets are not perfect proxies for real world economies, and it misses the fundamental transformation in countries around the world that has taken place over the past few decades and is about to accelerate this year.

As I wrote in a column last August, a U.S.-centric view extends well back into the 20th century, and the only wrinkle today is that China has now entered the mix. Low and behold, China, too, has recently seen some slowing of its growth, largely because of the determination of the Chinese government to shift the mix of its economic growth from state-led infrastructure and exports to domestic consumption. That transition will, inevitably, result in diminishing demand for commodities and raw materials, and that demand had also been a key factor in the strength of other economies, including many of the ones above.

Fed tells markets: There is no certainty

Zachary Karabell
Sep 20, 2013 16:00 UTC

So the Federal Reserve did not taper after all, as we know from its mini-bombshell of an announcement on September 18th. Having signaled in May and June that the central bank was likely to pare back its monthly purchases of $85 billion in mortgage and treasury bonds, the bank and its chairman Ben Bernanke essentially said “Never mind,” and decided that now was not the time after all.

The reaction was swift, vociferous and excoriating. The financial community reacted as if it had been stabbed in the back. One longtime trader and respected commentator announced that he was “absolutely disgusted” by the decision or lack thereof. The best line came from a strategist at a leading investment house who said, “I am perplexed and baffled. I do this for a living. I shouldn’t be so confused and confounded.”

Actually he should be. We all should be. The Fed’s decision is a much-needed slap in the face to the financial world. The Fed’s statement was laden with typically stolid prose, but if you could have distilled it and the subsequent press conference by Bernanke, the message would have been simply this: “There is no certainty. Get over it.”

What difference does it make who runs the Fed?

Zachary Karabell
Aug 2, 2013 17:43 UTC

As this week’s release of government numbers on unemployment and jobs highlight, the American economy is puttering along in the slow lane. And while few things in life are more frustrating than being stuck in the passenger seat of that car, it certainly beats crashing.

The second gear syndrome of our current economic life doesn’t sit well in a culture that demands more. Our macroeconomic numbers may be stable, but they obscure vast differences in affluence and opportunity, depending on where you live, what you do, what ethnicity you identify with, and how educated you are. The official unemployment rate, now at 7.4 percent, has been ticking down, but it is simply a statistic. It says nothing about the quality of those jobs, hours worked, wages paid, and needs met. Those are the questions we need to attend to.

Instead, in Washington at least, the economic discussion is currently dominated by the debate over who will be the next chair of the Federal Reserve. The story has the perfect makings of a Washington horse race. The lead contender, Larry Summers, engenders passions both for and against, while the main challenger, longtime Fed governor Janet Yellen, has captured the anti-Summers vote. Meanwhile, former Fed governor and current head of TIAA-CREF Roger Ferguson, has emerged as a compromise candidate, though no one is quite clear how his name first surfaced, and the New York Times is reporting Obama is interviewing only three people — Summers, Yellen and Donald Kohn, a former Fed vice chairman.

Fighting inflation. But where is it?

Zachary Karabell
Jan 18, 2013 19:08 UTC

Earlier this week the Bureau of Labor Statistics released its monthly inflation report. The numbers came in at 1.7 percent a year for all items. Excluding the ever-volatile food and energy, it was 1.9 percent.

That’s about as low as inflation has been in the last 50 years.  Only 1986 (1.1 percent), 1998 and 2001 (1.6 percent), 2008 (0.1 percent) and 2010 (1.5 percent) have come in lower, and a few years in the mid-2000s registered the same.

The disappearance of inflation over the past 20 years, however, has barely dented the pervasive belief that inflation remains one of the greatest threats to economic stability. These convictions persist in spite of all evidence to the contrary: Inflation is nowhere visible. For many, that is just proof that we are living in a lull — a phony war soon to be disrupted when that age-old enemy reappears and wreaks havoc.

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