Thursday, June 23, 2011
Wednesday, June 22, 2011
Tuesday, June 21, 2011
Monday, June 20, 2011
Sunday, June 19, 2011
Friday, June 17, 2011
Sarkozy Develops New Fetish
It's official and now slated as a new trend that may permeate French society. It's called regulation. At an EU conference on raw materials and commodities this week, French President Nicolas Sarkozy ramped up calls for tough financial-market regulation on commodities such as oil, wheat and copper. (Sarkozy Prods Regulators)
In the week previous to the President's latest call for the regulation of commodities, he announced at an Internet fair that there should be tighter regulation of the Internet. (Sarkozy Seeks Global Net Rules)
Market concern was clearly ruffled, as Sarkozy's new spate of public speeches is showing a worrying trend, that if there's a problem or concern that develops, the solution is to to "regulate".
The French are scratching their heads, together with other pundits in the market. Jean-Paul Genet, an artist who resides in Paris, questions Sarkozy's line of attack or defense, depending on which way you look at it. "Next thing is that Sarkozy will be sending in regulators to mend broken marriages," he argues rhetorically.
Regulation has a strategic value to society if it can achieve its purpose of eliminating trade or operational violations in the market. The danger is that over-regulation can crimp an entrepreneurial spirit that is crucial for any economy to grow. Secondly, it can result in regulatory arbitrage, which is a move of capital towards regions that are "regulatory friendly". For example during the period that followed 9/11, subsequent to the implementation of Sarbanes-Oxley in the U.S., London rallied a strong challenge to New York, for the title of the financial capital of the world, as many preferred to operate outside the boundaries of burdensome regulation.
Thursday, June 16, 2011
Tuesday, June 14, 2011
Monday, June 13, 2011
Sunday, June 12, 2011
Austerity vs. Stimulus: Who is Winning the Race?
By Grant de Graf
It was George Bernard Shaw who said, "England and America are two countries separated by a common language." Today, one might describe these two financial empires as "two nations divided by a common crisis." The credit crunch brought with it a wake of independent strategies from central governments, designed to catapult economies out of the dungeons of financial doom. Remarkably, their individual approaches to resolving the crisis have been patently distinguishable and almost opposite in application. While the U.S. has adopted the classical Keynesian post-crisis approach of fiscal stimulation, Europe has chosen a course of fiscal austerity.
Keynes would have argued that it was precisely the government's policy of austerity that led to protracting the Great Depression. Only after the outbreak of World War II, which required significant levels of government spending, did the economy experience any meaningful growth. Conversely, the pro-austerity lobby argues that increasing a deficit for the burden of future generations, is financially unhealthy and undermines investment confidence. The debate over these two different approaches was initially inked in 1932, by letters published in the Times of London from John Maynard Keynes and Friedrich A. Hayek. See "Keynes vs Hayek: The Great Debate Continues"
Although Europe's embrace of austerity, may be more consistent with Adam Smith's approach to economics and his opposition to government's interference in the economy, its application to monetary policy is not. European central governments have acted aggressively in hiking interest rates in their effort to curb rising prices, a policy that is imperiled with failure. Using interest rates to control "inflation", when the "inflation" is in essence a consequence of a shortage of goods or the expectations thereof, is equivalent to using a bomb to break down an open door. See "Fool's Trap: Measuring Inflation."
Consequently, Europe has opted for the worst of both worlds, in selecting a hands-off approach to fiscal policy, where in fact the economy need's a crutch; and for active participation in interest rate manipulation, to ultimately distort the level of new investment in the economy. This will only further exacerbate an already crippled economy . The consequence of interest rate adjustment as a measure for first aid to the economy, is that it is broad-reaching and not confined to the target area requiring repair, especially when that area does not require remedy.
Secondly, the pro-austerity lobby's argument that increasing a deficit for the burden of future generations, is financially unhealthy and undermines investment confidence, is not substantiated. Everyone wants to see a reduced deficit at the end of the day. However, a crippled and devastated economy, even with a bus load of investors who are itching to participate in a promising initiative, is like scouring the horizon for buried treasure with a broken telescope.
I agree that increasing a budget deficit in times of a recession is more risky. But so is open heart surgery. In certain circumstances, there simply are no other alternatives. The real argument is whether reducing a budget deficit on its own merit, can contribute towards growth or whether the perception that it creates, will attract more investment. Even the pro-austerity lobby do not argue that there is any fundamental advantage that austerity can provide to stimulate growth, other than the positive impact that it can have on expectations; expectations that may be as consequential as sipping from a Pina Colado on a beach in Hawaii.
World Bank Global Outlook
http://en.wikipedia.org/wiki/List_of_countries_by_GDP_(nominal)
It was George Bernard Shaw who said, "England and America are two countries separated by a common language." Today, one might describe these two financial empires as "two nations divided by a common crisis." The credit crunch brought with it a wake of independent strategies from central governments, designed to catapult economies out of the dungeons of financial doom. Remarkably, their individual approaches to resolving the crisis have been patently distinguishable and almost opposite in application. While the U.S. has adopted the classical Keynesian post-crisis approach of fiscal stimulation, Europe has chosen a course of fiscal austerity.
Keynes would have argued that it was precisely the government's policy of austerity that led to protracting the Great Depression. Only after the outbreak of World War II, which required significant levels of government spending, did the economy experience any meaningful growth. Conversely, the pro-austerity lobby argues that increasing a deficit for the burden of future generations, is financially unhealthy and undermines investment confidence. The debate over these two different approaches was initially inked in 1932, by letters published in the Times of London from John Maynard Keynes and Friedrich A. Hayek. See "Keynes vs Hayek: The Great Debate Continues"
Although Europe's embrace of austerity, may be more consistent with Adam Smith's approach to economics and his opposition to government's interference in the economy, its application to monetary policy is not. European central governments have acted aggressively in hiking interest rates in their effort to curb rising prices, a policy that is imperiled with failure. Using interest rates to control "inflation", when the "inflation" is in essence a consequence of a shortage of goods or the expectations thereof, is equivalent to using a bomb to break down an open door. See "Fool's Trap: Measuring Inflation."
Consequently, Europe has opted for the worst of both worlds, in selecting a hands-off approach to fiscal policy, where in fact the economy need's a crutch; and for active participation in interest rate manipulation, to ultimately distort the level of new investment in the economy. This will only further exacerbate an already crippled economy . The consequence of interest rate adjustment as a measure for first aid to the economy, is that it is broad-reaching and not confined to the target area requiring repair, especially when that area does not require remedy.
Secondly, the pro-austerity lobby's argument that increasing a deficit for the burden of future generations, is financially unhealthy and undermines investment confidence, is not substantiated. Everyone wants to see a reduced deficit at the end of the day. However, a crippled and devastated economy, even with a bus load of investors who are itching to participate in a promising initiative, is like scouring the horizon for buried treasure with a broken telescope.
I agree that increasing a budget deficit in times of a recession is more risky. But so is open heart surgery. In certain circumstances, there simply are no other alternatives. The real argument is whether reducing a budget deficit on its own merit, can contribute towards growth or whether the perception that it creates, will attract more investment. Even the pro-austerity lobby do not argue that there is any fundamental advantage that austerity can provide to stimulate growth, other than the positive impact that it can have on expectations; expectations that may be as consequential as sipping from a Pina Colado on a beach in Hawaii.
World Bank Global Outlook
| 2009 | 2010e | 2011f | 2012f | 2013f | ||||||
| Global Conditions | ||||||||||
| World Trade Volume (GNFS) | -11.0 | 11.5 | 8.0 | 7.7 | 7.7 | |||||
| Consumer Prices | ||||||||||
| G-7 Countries 1,2 | -0.2 | 1.2 | 1.9 | 1.7 | 1.9 | |||||
| United States | -0.3 | 1.6 | 2.2 | 2.1 | 2.5 | |||||
| Commodity Prices (USD terms) | ||||||||||
| Non-oil commodities | -24.1 | 27.6 | 20.7 | -12.0 | -9.4 | |||||
| Oil Price (US$ per barrel) 3 | 61.8 | 79.0 | 107.2 | 102.1 | 98.7 | |||||
| Oil price (percent change) | -36.3 | 28.0 | 35.6 | -4.8 | -3.3 | |||||
| Manufactures unit export value 4 | -5.6 | 2.5 | 4.9 | -3.2 | 0.3 | |||||
| Interest Rates | ||||||||||
| $, 6-month (percent) | 1.2 | 0.5 | 0.7 | 1.2 | 2.2 | |||||
| €, 6-month (percent) | 1.5 | 1.0 | 1.6 | 2.1 | 2.4 | |||||
| International capital flows to developing countries (% of GDP) | ||||||||||
| Developing countries | ||||||||||
| Net private and official inflows | 3.9 | 4.8 | ||||||||
| Net private inflows (equity + debt) | 3.4 | 4.4 | 3.9 | 3.8 | 3.8 | |||||
| East Asia and Pacific | 3.6 | 5.0 | 4.2 | 3.8 | 3.6 | |||||
| Europe and Central Asia | 2.2 | 3.5 | 4.0 | 4.1 | 3.9 | |||||
| Latin America and Caribbean | 3.7 | 4.8 | 4.3 | 4.2 | 4.1 | |||||
| Middle East and N. Africa | 2.7 | 2.3 | 0.3 | 1.7 | 2.1 | |||||
| South Asia | 4.2 | 3.8 | 4.8 | 4.5 | 4.5 | |||||
| Sub-Saharan Africa | 3.9 | 3.7 | 3.9 | 4.2 | 5.0 | |||||
| Real GDP growth 5 | ||||||||||
| World | -2.2 | 3.8 | 3.2 | 3.6 | 3.6 | |||||
| Memo item: World (PPP weights) 6 | -0.8 | 4.8 | 4.3 | 4.4 | 4.5 | |||||
| High income | -3.4 | 2.7 | 2.2 | 2.7 | 2.6 | |||||
| OECD Countries | -3.5 | 2.6 | 2.1 | 2.6 | 2.5 | |||||
| Euro Area | -4.1 | 1.7 | 1.7 | 1.8 | 1.9 | |||||
| Japan | -6.3 | 4.0 | 0.1 | 2.6 | 2.0 | |||||
| United States | -2.6 | 2.8 | 2.6 | 2.9 | 2.7 | |||||
| Non-OECD countries | -1.9 | 4.2 | 4.3 | 4.8 | 4.9 | |||||
| Developing countries | 1.9 | 7.3 | 6.3 | 6.2 | 6.3 | |||||
| East Asia and Pacific | 7.4 | 9.6 | 8.5 | 8.1 | 8.2 | |||||
| China | 9.1 | 10.3 | 9.3 | 8.7 | 8.8 | |||||
| Indonesia | 4.6 | 6.1 | 6.3 | 6.5 | 6.5 | |||||
| Thailand | -2.3 | 7.8 | 3.7 | 4.2 | 4.3 | |||||
| Europe and Central Asia | -6.4 | 5.2 | 4.7 | 4.4 | 4.6 | |||||
| Russia | -7.8 | 4.0 | 4.4 | 4.0 | 4.1 | |||||
| Turkey | -4.8 | 8.9 | 6.1 | 5.1 | 5.3 | |||||
| Romania | -7.1 | -1.2 | 1.6 | 3.7 | 4.0 | |||||
| Latin America and Caribbean | -2.1 | 6.0 | 4.5 | 4.1 | 4.0 | |||||
| Brazil | -0.7 | 7.5 | 4.2 | 4.1 | 3.8 | |||||
| Mexico | -6.1 | 5.5 | 4.4 | 4.1 | 4.2 | |||||
| Argentina | 0.9 | 9.2 | 6.3 | 4.2 | 4.3 | |||||
| Middle East and N. Africa | 2.8 | 3.1 | 1.9 | 3.5 | 4.0 | |||||
| Egypt | 4.7 | 5.2 | 1.0 | 3.5 | 5.0 | |||||
| Iran | 0.1 | 1.0 | 0.0 | 3.0 | 3.0 | |||||
| Algeria | 2.4 | 3.3 | 3.7 | 3.6 | 3.5 | |||||
| South Asia | 6.2 | 9.3 | 7.5 | 7.7 | 7.9 | |||||
| India 7, 8 | 9.1 | 8.8 | 8.0 | 8.4 | 8.5 | |||||
| Pakistan 7 | 3.6 | 4.1 | 2.5 | 3.9 | 4.3 | |||||
| Bangladesh 7 | 5.7 | 5.8 | 6.2 | 6.4 | 6.6 | |||||
| Sub-Saharan Africa | 2.0 | 4.8 | 5.1 | 5.7 | 5.7 | |||||
| South Africa | -1.8 | 2.8 | 3.5 | 4.1 | 4.4 | |||||
| Nigeria | 6.7 | 7.9 | 7.1 | 7.5 | 7.3 | |||||
| Angola | 2.4 | 3.4 | 6.7 | 8.1 | 7.8 | |||||
| Memorandum items | ||||||||||
| Developing countries | ||||||||||
| excluding transition countries | 3.1 | 7.8 | 6.5 | 6.4 | 6.5 | |||||
| excluding China and India | -1.8 | 5.5 | 4.5 | 4.5 | 4.6 | |||||
Source: World Bank. Notes: PPP = purchasing power parity; e = estimate; f = forecast. 1. Canada, France, Germany, Italy, Japan, the UK, and the United States. 2. In local currency, aggregated using 2005 GDP Weights. 3. Simple average of Dubai, Brent and West Texas Intermediate. 4. Unit value index of manufactured exports from major economies, expressed in USD. 5. Aggregate growth rates calculated using constant 2005 dollars GDP weights. 6. Calculated using 2005 PPP weights. ___________________________________________________________ The World Bank reports percentage GDP growth forecast for the U.S. for 2011, 2012 and 2013 as 2.6%, 2.9% and 2.7% respectively. This is matched with a GDP growth forecast for Europe of 1.7%, 1.8% and 1.9% respectively. Although the U.S. still remains a significant contributor to nominal global GDP (see chart below), the European Union continues to lag the U.S. in its growth and contribution towards GDP, as a percentage. Europe's application of monetary and fiscal policy together with the consequence of slower growth, is no coincidence. As long as it continues to apply austerity as a measure to resolve slow growth, together with hikes in interest rates in an attempt to combat high commodity prices, it will continue to lag other economies in its contribution to GDP as a percentage. The ten largest economies in the world in 2010, measured in nominal GDP (millions of USD), according to the International Monetary Fund.  Source: | ||||||||||
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