The Great Debate UK

Latvia: Apocalypse (not quite) now . . .

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Morten Hansen

-Morten Hansen is head of the economics department at the Stockholm School of Economics in Riga. The opinions expressed are his own.-

Latvia, with its 18 percent year-on-year economic decline, ruthless budget cuts to meet the demands stated by the IMF-EU bailout package and recurring rumours of devaluation, may be the most written about country in the world right now, at least on a per capita basis.

Yet life goes on here and journalists I speak to seem somewhat disappointed when I cannot confirm sighting starvation or death in the streets…. Admittedly, it is very hard to be optimistic but it was clearly a positive sign when the parliament approved yet another round of budget cuts including across-the-board 20 percent wage cuts in the public sector and a 10 percent cut in pensions, which should release another tranche of much-needed money from the IMF and the EU. These cuts are tough but necessary as Latvian public finances were unsustainable – even in the years of growth rates of 9, 10, 11 percent the country still ran budget deficits.

Whatever the value of the currency, the public sector needs serious reform, which is why I am somewhat annoyed by the incessant rumours of devaluation emanating from in particular Sweden and the UK. The currency and the public sector are not linked to each other and should be treated as separate issues.

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Get ready for the “Great Immoderation”

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The recession will soon be dead, laid to rest alongside the idea of the "Great Moderation", a set of hopeful assumptions that underpins expectations about economic growth and asset valuations.

This, when investors, bankers and executives ultimately realise it will cause them to pull in their horns, take less risks and be less willing to pay high prices for assets.

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Uncertain Fed support sinks bonds

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The bond market's adverse reaction after the Fed announced no new asset purchase facilities or bond buyback programs highlights the fundamental difference between interest rates and quantitative easing (QE).

Rate cuts provide ongoing support for an indefinite period until the Federal Open Market Committee chooses to reverse them. In contrast, QE programs provide a one-off, time-limited boost that has to be continually reapplied to have the same effect.

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World stuck with the dollar, more’s the pity

jimsaftcolumn5-- James Saft is a Reuters columnist. The opinions expressed are his own --

The dollar is, and will remain, the U.S.'s currency and its own and everyone else's problem.

The idea of creating a global currency, as espoused by China earlier this week, is interesting, has a certain amount of merit and is simply not going to happen any time soon.

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Time to rethink inflation targeting

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It is time to add another victim to the ever-growing list of institutions (Bear Stearns, Lehman Brothers) and theories (value at risk, fair value accounting and originate to distribute) which have been tested by the financial crisis and found wanting. The central bank practice of inflation targeting -- the jewel in the crown of modern monetary economics -- has palpably failed.

Over the last two decades, inflation targeting has emerged as the most popular strategy for monetary policy among the world's major central banks, and become something of a state-of-the-art choice among theorists and central bankers.

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Too many hopes pinned on EU bank

paul-taylor-- Paul Taylor is a Reuters columnist. The opinions expressed are his own --

It works more like a sprinkler than a power hose, but the European Investment Bank has a role to play in preventing a financial inferno from sweeping across central and eastern Europe.

The trouble is that politicians have overloaded the European Union's long-term lending arm with exaggerated expectations, calling on it like a fire brigade in every emergency, from saving credit-starved small firms to greening the car industry, combating the energy crisis and fighting climate change.

from The Great Debate:

Fighting deflation globally ain’t easy

James Saft Great Debate -- James Saft is a Reuters columnist. The opinions expressed are his own --

With the U.S., Japan and Britain -- nearly 40 percent of the global economy -- facing the threat of deflation, it's going to be just too easy for one, two or all three of them to get the policy response horribly wrong.

The global economy is so connected, and our experience with similar situations so limited that the scope for error is huge.

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