Italy Suffers Recession Alone

Article link: https://www.bloomberg.com/news/articles/2019-02-22/italy-suffers-recession-alone-in-economic-political-isolation


In my previous blog, I discussed the narrow miss Germany had with a recession. Italy, on the other hand, was not as lucky. In fact, Italy was the only country in the EU to have two straight quarters of contraction. As the economy of each nation in the EU tend to fluctuate with one another, Italy's lone recession signals a self-inflicted problem.

Economic turmoil isn't the only difficulty Italy is facing. Italy is also facing political challenges as tensions with France have grown and some nations have shown distaste towards their budget. This could cause further economic headwinds for Italy as political actions could be taken.

Although growth in the EU has declined overall, Italy is predicted to remain behind the other 18 nations, growing only 0.2%, This is most likely attributed to Italy's debt, high unemployment, and domestic policies.

No Recession this Year

According to fund manager Janus Henderson the risk for a recession in 2019 is small. However, he believes that global growth will be very low. This slowdown can be seen in some of the global growth numbers that are already coming out.  Europe which has been growing slowly is expected to grow at only 1.3% in 2019, which is a decrease in previous estimates. China's growth also slowed dramatically in the second half of 2018 and there have been no signs of a turnaround.

In the USA the fed had stated that they are holding interest rates steady for the time being. this is a change from their early statements. Indicating that they might be seeing some softness in the economy as well. The fed will release the minutes form their meeting on Wednesday and the markets will be monitoring them closely.

https://www.cnbc.com/2019/02/18/no-recession-but-global-growth-will-slow-down-janus-henderson-says.html

world economy

The long running trade war between usa and china as well as UK leaving Brexit has made consumers and business doubt the future of the economy. These two parts are major reasons why world growth will be very low in this coming year. The macro economic indicators though seem to show a soft landing not a huge recession like some feared at the end of 2018.




https://www.cnbc.com/2019/02/18/no-recession-but-global-growth-will-slow-down-janus-henderson-says.html

Bill Gates in favor of raising the capital gains tax

With budget deficits running high in the US and the national debt reaching a staggering $22 million last week, the outspoken billionaire Bill Gates has recommended looking towards capital gains to get the wealthy to pay higher taxes. Increase of tax burdens on the rich has become a fascinating debate in recent times, with proposals ranging from Congresswoman Alexandria Ocasio-Cortez' (D-NY) call for a top marginal tax rate of 70%, to Senator Elizabeth Warren's (D-MA) 2% wealth tax plan, to Senator Bernie Sanders (I-VT) vocal support of raising the estate tax. Gates' proposal for the capital gains tax hence joins the rest in what will likely be a hot topic in the next election cycle.

Gates argues that if we want to see the top 1 percent paying a larger chunk of the taxes as in a progressive system, the goal should be to raise the capital gains tax which is at 20% right now. By ending the divide between capitals gains income and ordinary income, i.e. that former being taxed at the rate of the latter, the tax system will not just become simpler but also raise greater amounts to help lower the budget deficit. This will happen because as of now, tax liabilities tend to get shifted to the capital gains column by hedge funds. While this is an interesting take on taxing the rich, it can be argued (in an overgeneralized manner) that this will only discourage savings and investments in the US. However, it might just garner support for equalizing the rates of income and capital gains taxes, and not just simplifying the tax system but also getting more taxes from those at the top. In any case, the debate on these various tax proposals in the coming months is certainly something that needs to be followed.

Article link: https://www.bloomberg.com/news/articles/2019-02-17/gates-says-capital-gain-taxes-best-way-to-tap-big-fortunes

Jack Ewing, a writer for the New York Times, describes the impact of the American China trade war on the German economy.  The 4th quarter seems to show the first impacts of  Trumps trade tariffs.  Growing near the slowest rate in the EU only just beating out Italy.  With completely stagnant growth in the 4th quarter Germany the economic data coming out of German steel manufacturing was bad news for all of Europe. As the largest economy in Europe, Germany has historically picked up the slack of the struggling nations in the union, however as they are adversely affected by tariffs placed on Chinese goods. German auto manufacturers saw a noticeable demand drop in the Chinese market.  The numbers for quarter 4 were just barley above the threshold to classify the economy as in recession but the base of the German economy is very sound.  There has been little impact on investing and unemployment rates which remain some of the lowest in the EU. Part of the fear in the German market is the uncertainty in the future effect and actions taken by either side in Trumps trade war with China. 

https://www.nytimes.com/2019/02/14/business/germany-economy.html

Poland Is Europe's Growth Champion. Can This Continue?

An article written by Marcin Piatkowski discuss Poland's economic and social success and how over the past 30 years, they have not been receiving the attention they deserve. The author argues the Polish economy has been key to the European success story. This has not always been the case and in 1989, Poles earned less than citizens in Gabon, Ukraine, and Suriname. But since that year, the country has increased its GDP per capita by almost 150%. Looking at 2018, the average level of income in Poland exceeded two-thirds of those in the Eurozone.

Despite having almost no natural resources, Poland was able to grow and flourish through egalitarian, well-educated and socially mobile population. Poland caught up to the robust democratic West and has transitioned through many different governments since 1990. The country adopted economic policies for building infrastructure, foreign debt restructuring, and an increased focus in education and open privatization process. After abandoning planned economic practices from the end of WWII, high-quality policy makers like finance ministers and central bankers led the economic revival. Poland's investment in infrastructure such as broadband and adoption of the market system has contributed to their success.

Poland might have issues continuing their success given their aging population and low level of innovation. Furthermore, the EU is key to their success and without the union, Poland risks reverting to dark periods of economic history.

https://www.theglobalist.com/poland-economy-gdp-european-union/

China considering measures to adjust lending rates for companies: central bank official

China is considering measures to drive adjustments in financial institutions’ lending rates for companies to improve credit flow into the economy.The head of the People’s Bank of China’s monetary policy department, said that despite rising expectations of a central bank interest rate cut, it is “more urgent” to allow financial markets, rather than the PBOC, to determine lending rates.Chinese authorities have struggled to increase lending to try to boost China’s slowing economy, which has been hit by weak domestic demand and the trade war with the United States. But they have shied away from aggressive easing, including benchmark interest rate cuts, amid concern that doing so could put pressure on China’s yuan.In 2018, China’s economy grew 6.6 percent, its slowest pace in 28 years, weighed down by weak investment and faltering consumer confidence. Growth is expected to slow further to 6.3 percent this year.

https://www.reuters.com/article/us-china-economy-lending/china-considering-measures-to-adjust-lending-rates-for-companies-central-bank-official-idUSKCN1Q305W

Amazon Hasn't Paid Any Federal Income Tax in 2017 or 2018

Amazon hasn't paid any income tax within the last two years, even though they have received federal tax credits in the past two years. Not only is Amazon the third-most valuable company in the world, but they also earned an estimate of $10 Billion dollars last year. Amazon is clearly a successful company and its earnings, despite losing $241 million in 2014, has topped their losses. However, some of Amazon's earnings have come from outside the U.S, where they paid little to no taxes. The U.S. tax code does allow companies that have lost money to reduce future taxable income, but Amazon's most recent financial statement says that they have $1.4 billion left in tax credit to offset any tax bill that they might have in the future. They are planning to add more job opportunities to offset for not paying taxes.

Even though they still have money for tax credits and have not paid income tax in the last two years, they are avoiding paying taxes. Should Amazon be held to the same standard as any other U.S citizen when it comes to paying taxes? Are they subject to tax evasion? Any other U.S citizen would be, why not Amazon?

https://www.cnn.com/2019/02/15/tech/amazon-federal-income-tax/index.html

Fed Gov. Brainard sees 'downside risks' increasing, says balance sheet runoff should end this year

Federal Reserve Governor Leal Brainard said on Thursday that she is growing more concerned about economic growth, particularly the impact that the global slowdown will have on the United States. The same morning, she said she will be watching the developments in the retail industry because the sales came up well short of market expectations. Overall, the downside risks have definitely increased relative to the outlook for continued growth. The Fed said in January that it would be patient in continuing interest rate hikes. Brainard says she is comfortable waiting and learning as more data comes in about the economy. She did indicate that the Fed should be nearing the end of the program to reduce bond holdings on its balance sheet which once stood at 4.5 trillion and is now around 4 trillion. In her own view she believes that the balance sheet normalization process should come to and end later this year.

I have a few questions about the Fed and their intended policies. The Fed pre-great recession had a less than 1 trillion on their balance sheet (Federalreserve.gov). If it has taken 10 years to roll off 500 billion then I hardly expect they can roll off at an increased rate by the end of the year. I may not understand exactly how the roll off works but removing 3 trillion in bad bonds by the end of the year sounds impossible, so it will be interesting to see how the market responds. At the same time, the Fed is being cautious about hiking rates. I believe that accelerated rate hikes and accelerated roll offs would spook investors about how solid our domestic market is but may be necessary to prevent future failures. I don't believe that the Fed can sustain a massive bailout as of right now and if a huge recession all of the sudden came into our lives the Fed wouldn't be able to help really. I doubt there will be a great collapse like in 2008 where we will need this, I just think that a continuous push for economic growth may over extend the Untied States and the Fed wont be there to bail the economy out again. 

https://www.cnbc.com/2019/02/14/fed-gov-brainard-downside-risks-have-definitely-increased-on-the-economy.html

China's Top Problem Isn't The Trade War

China's top long-term economic problem is probably not what you have seen dominate social media recently. It is not the ongoing trade war with the United States. It is the rapid rise of housing prices. Soaring new home prices are lining landlords pockets, while young people's dreams of forming a family are deteriorating. The average price of new homes in China has increased for 44 straight months. These increased prices are making homes just too expensive for the average citizen of China. This in turn hurts the country's long-term growth prospects. In fact it hurts much more than the current trade war. The article states that unlike the trade war, housing affordability constraints could be here to stay. The author notes that the middle-income trap and the Lewis point could be factors impacting this issue. It also is noted that this is a product of deliberate land policies that favor rich landholders over the average citizen. China has done this by creating "ghost cities". These are cities full of vacant buildings and apartments that are too expensive for the average worker. They are merely viable because landlords expect to sell them one day at higher prices. Meanwhile this creates a housing shortage that subsequently pushes prices up in the rest of the housing market. This is bad news for young families looking to start a family. Could this explain the drop of marriage rates by 30% the past five years? Low marriage rates are not good for China's long-term economic growth. This could lead to lower birth rates and a shrinking labor force. Not something China wishes for as it tries to compete with labor-rich countries. Soaring new home prices are a grave concern for China going forward. If they hope to continue to grow economically, it is imperative that they fix this problem.

https://www.forbes.com/sites/panosmourdoukoutas/2019/02/17/chinas-top-problem-isnt-the-trade-war/#6f137479ecfc

China and U.S. to Continue Trade Talks Next Week

The trade war with China continues with both sides trying to reach an agreement before the March 2 deadline. If the deadline is not met Trump has threatened to raise tariffs an additional 15 percent. Though if a deal seems imminent Trump would be willing to extend the deadline. Trump claims that the talks are going well and has emphasized that the deal will cover the "theft" and "unfairness" that is present in China's trade policy. One of the Trump administration's main focuses is restricting the Chinese government from investing large sums of funds into "advanced manufacturing sectors" that rival American companies. This point is important to both China and the U.S. as both see it as a matter of national security. China's involvement with high tech industries seem to remain an issue and will be an enormous barrier moving forward in the trade talks.



Article: China and U.S. to Continue Trade Talks Next Week

A Bold New Plan to Tackle Climate Change

The problem of climate change has long been a tricky issue. Partly because it is an economic issue, security issue, equity issue, and many more, but also because the industries that stand to lose from the rise of more environmentally friendly activities have extremely powerful lobbies.
This article from The Economist details the rise of an equity-based response to climate change. Admittedly, the plan is currently in its early stages and is vague on cost and nature, but the equity approach to climate change seems to have at least some merit. The idea of decreasing economic inequality while at the same time reducing the carbon dependence of the state may sound good to some of the masses that could attain jobs in the growing "green energy" sector, but does that discount the coal workers and the coal lobby? Certainly the wealthy coal industry wouldn't have much of an incentive to cooperate, and this approach of mobilizing a group of people who are more passionate and better funded than those in the carbon energy industry seems far fetched.
Additionally, an appeal to the masses might serve to alienate those who work relatively low-paying jobs for coal or natural gas producers. As well as being incredibly expensive, convincing people to get behind it en masse is a task equally as daunting as creating a functioning piece of legislation.

https://www.economist.com/finance-and-economics/2019/02/07/a-bold-new-plan-to-tackle-climate-change-ignores-economic-orthodoxy

JP Morgan rolls out the First US banked-backed Cryptocurrency

On Thursday, February 14th, JP Morgan Chase announced that they are launching the first US bank-backed cryptocurrency. The product will be known as the "JPM Coin", which is a digital token that will be used to instantly settle transactions between clients and its wholesale payments business. JP Morgan currently moves roughly $6 trillion around the world each day for corporations. In the current financial system, it costs a lot of money and takes a great deal of time to send wires, especially cross-border. Western Union, widely known for its cross-border wire payments, currently charges around 15% of the total transaction in fees and takes several days to receive the payment. This is absurd.

With the creation of the blockchain, the current financial system will have the opportunity to utilize this technology to better their infrastructure. This will allow corporations to send money cross-borders in a real-time settlement, and for a very small fraction of the price as well. Blockchain now puts SWIFT in a sticky situation because countries and institutions have been using SWIFT  to send wires across borders for quite some time now. SWIFT's biggest competitor could soon be digital currencies. It is unclear when the final product will be available, however, JP Morgan is currently running a trial with the JPM Coin.



https://www.cnbc.com/2019/02/13/jp-morgan-is-rolling-out-the-first-us-bank-backed-cryptocurrency-to-transform-payments--.html