Opinion

The Great Debate

from Edward Hadas:

Why the global recovery is so slow

By Edward Hadas

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

The International Monetary Fund recently engaged in what has become an annual ritual. For the fourth year in a row, it reduced its forecast for world GDP growth. The 0.7 percentage point average decline from the earlier estimate to the new 3.4 percent growth projection is not huge, but the persistent disappointments make many economists uneasy.

Larry Summers has an explanation for the problem in rich countries, which he calls secular stagnation. The former U.S. treasury secretary’s argument has several strands, but his main thesis is that investment has been too low for almost two decades because prevailing interest rates have been too high and because politicians have not permitted sufficiently large government deficits. Controversially, he suggests that growth has been painfully slow whenever financial bubbles are lacking, as in the years since the 2008 crisis.

Summers’ complaints about monetary and fiscal policy seem excessive. Before the crisis, central banks were widely praised for generating steady, non-inflationary growth around the world. That does not make them sound too tough. And the fiscal deficits since the crisis in many developed countries have been the largest ever in peacetime as a share of GDP. That hardly sounds inadequate.

A more plausible financial explanation for the disappointing global recovery starts with balance sheets that have been distorted by more than two decades of increasing borrowing. Many households, companies and governments have been left under financial pressure. Their spending is likely to be restrained without a massive reduction in debt – whether through write-offs, repayments using newly created money, or inflationary erosion.

Should economists be “imagineers” of our future?

By Mark Thoma
The opinions expressed are his own.

This essay is a response to Roger Martin’s “The limits of the scientific method in economics and the world” (part one and part two), recently published on Retuers.com.

Roger Martin is unhappy with the state of economics. One charge is that:

[an economist] predicts a future that is based on the past.  And when it is anything but, he returns to the same tools to do it again, believing that in doing so he is being meritoriously scientific. … Extrapolating the future to be a straight-line projection of the past is neither accurate, nor is it helpful in creating better understanding and newer ideas.

As I will discuss further below, I agree that macroeconomists need to fix their models. But I don’t think that predicting the future based upon “a straight-line projection of the past” is the problem. Let me explain why, first in a relatively narrow sense, and then more broadly.

Political strategy in the Budget Control Act era

By Keith Hennessey
The opinions expressed are his own.

I cover three topics in this post: what important players won in this deal, the core concepts and tradeoffs within the deal, and what the different strategies might be this Fall under this bill when it becomes law. The President’s priorities

The President knows he will get debt limit increases through early 2013 no matter what House conservatives/Tea Party members do. Those Members can no longer “hold a debt limit increase hostage” before the 2012 election.

We could also describe this as eliminating liquidity risk through 2012.

Assuming someone doesn’t find a way out of the enforcement mechanisms in the bill (1 in 3 chance), there will be at least $2.1 T in deficit reduction over the next 10 years as a result. While I think that’s a big policy benefit, I’m not sure how important that is substantively to the President. (Is he for stimulus? Austerity? Who knows at this point.)

from MacroScope:

The IMF to turn on the rich

The latest International Monetary Fund meeting ended with emerging market powers getting a pledge from the organisation for stronger and "more even-handed" scrutiny of what is going on in large advanced economies.

As Reuters correspondents Lesley Wroughton and Emily Kaiser report here, the decision is a response to long-running frustrations among emerging economies, which reckon the Fund has  not been tough enough on its biggest shareholders, led by the United States.

The move reflects a number of things. First, it shows the growing clout of emerging economies within international institutions. The G-20, for example, is arguably now more influential than the old , richer G7. Secondly, it graphically underlines the current world-turned-upside-down state of the global economy, in which profligate rich economies are struggling to keep above water while supposedly poorer and less-developed ones enjoy solid growth and relatively stable finances. This graph makes the point:

from MacroScope:

Who will win this year’s Nobel Prize for Economics?

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And the Nobel laureate for economics in 2010 is?

Thomson Reuters expert David Pendlebury might have an idea. At least one of the picks from his annual predictions of winners (economics, chemisty, and so on) has won a Nobel prize over the years. Here is his short-list for economics this year.

* Alberto Alesina of Harvard University in Massachusetts for research on the relationship between politics and macroeconomics, especially politico-economic cycles.

* Nobuhiro Kiyotaki of Princeton University and John Moore of Britain's University of Edinburgh and the London School of Economics for their Kiyotaki-Moore model, which describes how small shocks to an economy may lead to a cycle of lower output. It described Japan's real-estate crisis in the 1990s and could describe some of the causes of the recent U.S. recession.

from Jeremy Gaunt:

The rule of three

It is beginning to look like financial markets cannot handle more than three risks. First we have, as MacroScope reported earlier,  Barclays Wealth worrying about U.S. consumers, euro zone debt and Asian overheating.

Now comes Jim O'Neill and his economic team at Goldman Sachs, with three slightly different notions about risks in the second half, this time in the form of questions. To whit:

1) How deep will the U.S. economic slowdown be and what will  the policy response be? (That's two questions, actually, but let's not nitpick).

from MacroScope:

What are the risks to growth?

Mike Dicks, chief economist and blogger at Barclays Wealth, has identified what he sees as the three biggest problems facing the global economy, and conveniently found that they are linked with three separate regions.

First, there is the risk that U.S., t consumers won't increase spending. Dicks notes that the increase in U.S. consumption has been "extremely moderate" and far less than after previous recessions. His firm has lowered is U.S. GDP forecast for 2011 to 2.7 percent from a bit over 3 percent.

Next comes the euro zone. While the wealth manager is not looking for any immediate collapse in EMU, Dicks reckons that without the ability to devalue, Greece and other struggling countries won't see any great improvement in competitiveness. Germany, in the meantime, has sped up plans to cut its own deficit.  It leaves the Barclays Wealth's euro zone GDP forecast at just 1 percent for next year.

from MacroScope:

Spend Save Man Woman

Far from being lauded as a virtue, China's high savings rate has been blamed for the economic imbalances underlying the global financial crisis. The criticism being that the Chinese spend too little and rely too much on exporting to Western consumers.

The IMF and World Bank have long called for Beijing to ramp up social spending so its citizens will feel less need to save for a rainy day and instead consume more.

But in their intriguingly named paper,  'A Sexually Unbalanced Model of Current Account Imbalances', New York-based researchers Du Qingyuan and Wei Shang-Jin suggest China's gender imbalance could also be a significant factor in the persistence of its high savings rate. spendsavemanwoman

from MacroScope:

Political economy and the euro

The reality of  'political economy'  is something that irritates many economists -- the "purists", if you like. The political element is impossible to model;  it often flies in the face of  textbook economics;  and democratic decision-making and backroom horse trading can be notoriously difficult to predict and painfully slow.  And political economy is all pervasive in 2010 -- Barack Obama's proposals to rein in the banks is rooted in public outrage; reading China's monetary and currency policies is like Kremlinology; capital curbs being introduced in Brazil and elsewhere aim to prevent market overshoot; and British budgetary policies are becoming the political football ahead of this spring's UK election. The list is long, the outcomes uncertain, the market risk high.

But nowhere is this more apparent than in well-worn arguments over the validity and future of Europe's single currency -- the new milennium's posterchild for political economy.

For many, the euro simply should never have happened --  it thumbed a nose at the belief that all things good come from free financial markets; it removed monetary safety valves for member countries out of sync with their bigger neighbours and put the cart before the horse with monetary union ahead of fiscal policy integration. But the sheer political determination to finish the European's single market project, stop beggar-thy-neighbour currency devaluations and face down erratic currency trading meant the  currency was born and has thrived for 11 years.

from Global Investing:

What’s on your reading list?

If anyone needed a reminder that Christmas and NewYear holidays are almost here, Societe Generale has provided it. Analyst Dylan Grice has picked up the mantle of the departed James Montier to offer a seasonal reading list for those with a fixation about investment and economics.

True, some people might prefer to immerse themselves in a rollicking sea tale from Patrick O'Brian or a good old  Sookie Stackhouse vampire mystery. But we know that Reuters blogs' readers are a discriminating lot with a keen understanding of and passion for finance. So here is Dylan's list of six must-reads:

1. Manias, Panics and Crashes, by Charles P. Kindleberger;
2. The Essays of Warren Buffet, edited by Richard Cunningham;
3. Reminiscences of a Stock Operator, by Edwin Lefevre;
4. Fooled by Randomness, by Nassim Taleb;
5. The Case against the Fed, by Murray Rothbard;
6. Judgement under Uncertainty: Heuristics and Biases, eds Kahneman, Slovic and
Tversky.

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