Macro signs: Eying Europe’s bad news
President Obama’s latest stimulus plan involved some big numbers but it did little to lift the mood of investors.
Instead, investor attention shifted to Europe where a WSJ report said “stress tests”, published more than a month ago, underestimated some lenders’ holdings of potentially risky government debt.
Concern over the European banking sector was further aggravated by Germany’s banking association saying the country’s 10 biggest banks may need 105 billion euros of additional capital under Basel III.
In a light week for macroeconomic data it seems bad news overseas is translating into investors taking their money off the table at home.
More gloom comes from Nouriel Roubini, a professor at New York University. At the annual Ambrosetti conference on Lake Como he said the U.S. has run out of bullets in its arsenal to fight off a recession, writes the Telegraph.
“We have reached stall speed. Any shock at this point can tip you back into recession,” said Roubini.
Transforming the FIRE Economy
What went wrong and where we should go are topical post-crisis discussions and many books have been dedicated to tackle this question.
Eric Janszen, U.S.-based economic analyst, is the latest in analysing the crisis and its aftermath. He thinks that the problems of the global economy are rooted in the flaws of the debt-driven FIRE Economy (Finance, Insurance and Real Estate) and the only way out of the crisis is to change the fundamental approach.
“The entire economic system has been glued together by one profound fantasy: Finance can substitute for production, and credit for savings. Private debt, of households and businesses, and public debt, of governments federal, state, and local, foreign and domestic, piled up like snow by a blizzard of lending through mortgages, bonds offerings, and securitizations over decades. It then avalanched upon us,” Janszen wrote in his new book.
In his view, reindustrialisation is the key and the absence of a fundamental change will sow seeds for future crises.
“If we continue on our current path, we will recreate a version of the economy that just failed, except it will be one with new potential for mayhem in the future, that of a government debt crisis instead of the private debt crisis we had in 2008 and 2009,” Janszen says.
“We can nurture the seeds of a new American industrial economy — a productive economy that generates profits from technological industries such as computers, biology, medicine, and high-technology materials — by cultivating next-generation transportation, energy and communications infrastructure… We all must work to phase out the FIRE Economy and develop the TECI Economy.”
Please check the Author, you are referring to him three times, all the time the spelling differs.
Thank you
Sovereign wealth fund under discussion… in Rwanda
A number of African nations have established or are having debates about establishing sovereign wealth funds to manage their mainly resource-based wealth.
It may be surprising however to hear Rwanda — an aid-dependent nation racked by the 1994 genocide — is considering one. Its foreign minister Louise Mushikiwabo says a sovereign fund would help develop its economy and ease dependency on aid.
“We should not rely on someone else’s money. It’s about our own dignity. We’re looking at every policy — economic policy and foreign policy — to make sure Rwanda stands on its feet. Technology is one sector we’re looking at in Rwanda and how to use our own innovation,” Mushikiwabo tells Reuters during her visit to our London office.
The landlocked nation has been also looking at the agricultural sector as well as methane gas, of which the country plans to become an exporter in the future.
Mushikiwabo says one plan under discussion is to create a fund that has a size of $2 per working population (Rwanda’s total population is about 10 million). She adds that Rwanda is in close cooperation with Singapore — which has one of the world’s biggest sovereign wealth funds, sourced from its export windfall revenues – in building human capacity and skills.
So what’s the timeframe? Mushikiwabo says in the next 10 years, given the country’s strategy to become a middle-income country economy by 2020.
Will food prices rise?
The Becker-Posner Blog has an interesting debate posted on the question of food shortages and their accompanying price rises. As usual, it is a to-and-fro between economist and Nobel laureate Gary Becker and his University of Chicago colleague Richard Posner, a U.S. appellate judge.
Becker reckons that some commodity prices will rise as the global economy recovers but that food is different.
“Rapid growth in future world GDP is likely to greatly raise the prices of oil and other fossil fuels, unless concerns about global warming induce major steps to reduce the demand for these fuels. Rapid growth in world output is also likely to sharply raise the demand for cereals, meat, and other foods in developing countries. However, I have tried to show why food is different from fossil fuels and minerals, like copper, in that the supply of food is not limited by natural bounds on overall quantity. Rather, the efforts and ingenuity of farmers and researchers are able to greatly increase world food supply to meet even very large increases in the world demand for food.”
Posner is not so sure, questionning the impact of technology on food production::
“Technological innovations may hold down increases in the price of food that are due to the increased demand for a rich diet as multiplied by increase in population. But those innovations may create substantial externalities even if they do not push up prices (indeed, the less the increase in prices, the greater the output of agricultural commodities and hence the greater the externalities). As more and more countries adopt the most efficient methods of agricultural production, and thus for example converge on the optimally genetically modified variants of crops, genetic diversity will decline, which will increase the potential damage from blights…. Agriculture is a heavy user of water, moreover, and global warming appears to be reducing the supply of water usable for irrigation by reducing the size of glaciers. The run off from the seasonal melting of glaciers provides a more usable supply of water than rainfall, because the water from a melting glacier is channeled, while rain that falls outside a river or other body of water is difficult to store for use in irrigation.
I am one of those timid souls who worry about the downside of technological advance and economic growth. I find the prospect of continued increases in population and income, and of the technological innovations necessary to cope with those trends, unsettling.”
You can read the full arguments on their blog here. But which side are you on?
