A hair of the dog -- A bit more debt keeps the recovery on track

http://www.economist.com/node/21546034

A bit more debt keeps the recovery on track

Feb 4th 2012 | WASHINGTON, DC | from the print edition

AFTER three years of stagnant loan growth, The Peoples Bank in Coldwater, Ohio, has noticed a change. Clients who two years ago would not have qualified for a loan now find that they can. One customer who was working for only 35 hours a week two years ago is now working 45 to 50 hours. “That was his reason for coming in: he had steadier income,” says Jack Hartings, president of the seven-branch bank. Since the bank’s main alternative to lending money is buying Treasury bonds that yield only 1%-2%, Mr Hartings is eager to make new loans.

Across the country, bank lending, which shrank almost steadily from early 2009, is growing again (see chart), thanks to modest employment growth, stabilising home prices in many regions, and the Federal Reserve’s Herculean efforts to hold down interest rates.

Both of these sectors were helped by easier credit. Moderate job growth, skimpy pay rises and higher petrol prices held growth in income after taxes and inflation to just 0.9% last year. Consumption grew faster because households borrowed more and saved less. Saving, which had topped 5% as a share of disposable income in the wake of the recession, had fallen to 3.5% in November.

This is helping. In the fourth quarter, America’s economy grew by 2.8% at an annual rate, the fastest in an otherwise dreary year. Much of that was from inventory restocking which will not be repeated. Still, consumer spending rose at a 2% annual rate and house building expanded by 11%, the most since 2004.

This was not sustainable, and indeed the saving rate jumped back to 4% in December. Are further increases in store? If so, that would hold back consumption, which accounts for roughly two-thirds of GDP. And indeed that is the main reason recoveries after financial crises are usually sluggish: households and businesses have to hack back the debt they accumulated during the boom years, a process called deleveraging. Households have as expected reduced their debts relative to their incomes; much of that has come by defaulting on their loans. More such defaults are probably in store. The question is, will consumers also divert more of their income from consumption? That would cause the saving rate to rise further.

Nathan Sheets, an economist at Citigroup, reckons that household debt, now running at 120% of disposable income, should be 100% to 110% given the current configuration of interest rates, unemployment and asset values. This, he reckons, can be achieved with a saving rate of just 4.5%, not much higher than it is now. But the Bank Credit Analyst, a financial forecasting service, thinks households’ current net worth is more consistent with a saving rate of 6%.

A higher saving rate would be much less painful for the economy if it were achieved through increased income rather than lower spending. That could happen. The non-partisan Congressional Budget Office (CBO), in its economic outlook released on January 31st, reckoned that real disposable incomes would grow by 3% this year thanks both to faster wage growth and a big drop in inflation. That, it reckons, should support growth in consumption and overall GDP of 2%.

Plenty could go wrong with this scenario. Oil prices could spike again; banks, worried about Europe, could tighten their lending standards, as they already have done for some business loans. And at the end of 2012 an even bigger threat looms: taxes will automatically rise and spending shrink unless Congress votes to override existing legislation. The CBO reckons that would slice the deficit in half, but at the cost of pummelling the economy. For private deleveraging to proceed, public deleveraging may have to wait.

S.E.C. Is Avoiding Tough Sanctions for Large Banks

http://www.nytimes.com/2012/02/03/business/sec-is-avoiding-tough-sanctions-for-large-banks.html?hp
Since the recession began there has been some animosity between the public and Wall Street, whose speculation is often blamed for causing the 2008 recession and helped birth the Occupy movement.  This article shows that the Security and Exchange Commission had actually been avoiding punishing companies that mislead its investors, and at a time when President Obama wants to "make punishments for fraud count" this looks unsettling.  Though deregulation is part of the Anglo-Saxon model of capitalism there could be a strong public backlash against the organization because of it.

Brazil's future More personal security, less inequality

Fernando Henrique Cardoso on Brazil's future

More personal security, less inequality

The Economist: Can we start with the way Brazil’s place in the world is changing? Brazil seems to be trying to create a new sort of world power—a “soft power”.

Cardoso: In the last century Brazil’s economy grew very consistently up to 1980. Only Japan grew faster in per-capita terms. From that point on Brazil has been always looking for roles. In Brazilian people’s minds, we are a giant. But our size, for so long it was an illusion. We did not yet have the capacity to play an important role. We were all the time envisaging what we might become.

Brazil aspired to be part of the core group of the League of Nations; after the Second World War Brazil raised that possibility again [during the creation of the United Nations]. Churchill vetoed it, saying that the Americas could not speak with two voices. Churchill was wrong. So we have always aspired to a big role.
In the 19th century, because of the struggle between Spain and Portugal, we were involved in wars in the South, and the Brazilian empire was perceived by our neighbours as a trap. Then the axis moved towards the United States and Brazil became a Republic and much more quiescent—and again hesitated. To what extent would we play a hegemonic role in the region? We never assumed such a role. We preferred to be more loved than feared.

At the end of the last century, the economy became so vigorous, we had established democratic traditions and we rediscovered our cultural particularities. These give us a sense that maybe we can play a role in the area of “soft politics”: not just to be economically strong, but also because of our capacity to accept others, to be tolerant. We love to consider ourselves as open-minded, as a racial democracy. It’s not entirely true, but it’s an aspiration with some ingredients of reality. Because in fact we are more tolerant than several other countries.

Compare the United States and Brazil. Both are countries built on migration, but in Brazil migrants have fused much more, and what has been even more impressive is that the cultures have mixed. We do not have a Black culture in Brazil, and a White culture. It is senseless in Brazil to speak about a Black culture: it is our culture.

And we are very accepting of variety in religion. We are not intolerant—Brazilians are syncretists, not fundamentalists. And because we are a country composed of migration we have contacts with many different parts of the world. Lots of Brazilians are Japanese and maybe more than 10m are Arabs. More than that are Germans; there is no other country in the world with more Italians, in absolute numbers. And all this fused. We never exactly know our descendancy.

Brazil has always been in favour of multilateralism, instead of bilateral relations, and of trying to negotiate, to bridge. Brazilian diplomacy is based on that. We need to look South, to the basin of the Rio da Plata—and to America; both relations with America and the South. There are elements of flexibility in Brazilian culture; they originate with the Portuguese, not only in Brazil.

If you compare the Portuguese and the Dutch in Africa, it is quite different. The Portuguese always had sexual relations with the native people. There is a phrase I like to repeat when I’m in Spain. In the eighteenth century the Marquess of Pombal [Sebastião José de Carvalho e Melo; the first minister of the Kingdom from 1750 to 1777] sent a letter to his brother, the viceroy of the North of Brazil, saying, we have to promote the Portuguese who marry indigenous women, because it is better to have half a Portuguese than one Spaniard! They were fighting the Spanish and worried about the demographic question. They felt the children were somehow Portuguese. That was not common in the Spanish world. They kept more separate.

Then in Brazil, the dominant ruling class normally tried to disguise the fact that inequality was so high. One of the ways to disguise differences is to treat people as if they are closer than they really are, to speak as if we were equal. To some extent this is a tricky thing, even if people are not aware of it: it is a way to maintain differences without provoking a strong reaction. The traditional part of the ruling class in Brazil will always be mild, soft, always saying “please”, not ordering. This is not the same now with the new bourgeoisie: they are much more arrogant than the old traditional elite groups in Brazil. They are different; more capitalist.

The Economist: Let’s talk about those social changes. Brazil has changed an enormous amount in recent years.

Cardoso: The landmark was the new Constitution. The beginning was the struggle against the military and the strikes, and the new constitution was the baptism of a new society.

The Economist: It’s still changing. This Republic is young; the Constitution was only written in 1988. You’re working out your institutions still. You are part of that process of institution-building, possibly the most important of all Brazil’s institution-builders.

Cardoso: The sense of institution has always been very present in Brazil, compared with other parts of the New World. The Portuguese monarchy was stable, and we were heirs to the Portuguese crown. All the institutions came here with the king of Portugal and Rio [de Janeiro] became the capital of the Portuguese Empire. And simultaneously this is a highly disorganised society! It is difficult to combine these facts: that we have institutions and simultaneously we are very ready to disobey them. It’s a flexibility—the jeitinho. It is good and bad. In some aspects our legislation is wonderful but the practice is a disaster. For example, we have very strict rules for the behaviour of public servants and politicians, and with respect to public money. And in spite of that corruption is there.

The Economist: Is corruption increasing?

Cardoso: Always we have had some degree of corruption, here and there, but the system was not corrupted. Now the system allows corruption as a normal ingredient. Everyone knows that when you organise a cabinet you have to share power with parties. But you are not sharing power, you are sharing opportunities to have good contracts.

The Economist: Was that not the case for you?

Cardoso: No, no, no. Maybe in one or another case, but now the whole system is based on this. This is novel. It’s a very bad development. In the political culture flexibility has become… not flexibility, but tolerance of crime. You have institutions, you have tribunals—but nobody is in jail.

US economy ended 2011 at a healthy pace

US economy ended 2011 at a healthy pace

The final quarter of 2011 finally showed economic growth for the United States. The Fed contributes this growth to consumer spending. However, in the first part of 2012, we have not met the Fed's expected growth of 2 percent. They look into reasons which may attribute to growth and whether or not we will meet their marks by the end of the year.

Where is Syria crisis heading?

Conflict between the Syrian government and the opposition recently has resulted in 5000 deaths since last march. Meanwhile, The UN is currently trying to form a resolution towards the fighting. The "Western" portion of the UN is commited to possibly transfer power from the Syrian government because of its violence towards protestors. This article intrigued me because it gives us some thought on the aftermath of some economic systems.

Zakaria: The end of an era for Japan

For the first time in 31 years, Japan has recorded a trade deficit. In simple terms, that means Japan imported more than it exported last year. Now this is not that unusual for some rich countries: the U.S. has had a trade deficit since 1975, and yet we've grown. But the U.S. economy is not built on exports. Japan's economic rise on the other hand, has been almost entirely powered by exports.

So what has changed in Japan?

Fixing Capitalism Means Taking Power Back From Business Read more: http://business.time.com/2012/01/19/command-and-control/#ixzz1kvMsrmeM

With the global economy sputtering, and government unable to successfully address big issues like income inequality, unemployment and growing debt, it's a subject that's front and center not only the US, but also Europe and Asia.
The article points out that a important way of fixing capitalism will be reconciling the large and growing imbalances between the public and private sectors. The rise of big stateless corporations, which now rival many countries in terms of economic and political clout, poses special new challenges to governments. The author also worried about the fact that we have also lost the sight of the philosophical ideas that historically gave national governments their authority. Market neither have a conscience nor do they ensure opportunity. Rather, they seek efficiency, and efficiency loves scale, and enterprises that grow to scale become elephants stamping out opportunities around them.

The Changing Nature of Inequality

http://www.economist.com/node/21543178

This article details the changing face of the wealthiest Americans. Inequality has been rising, and the form of inequality has changed. The article talks about how Mitt Romney represents the face of the new super-rich, who have made their money in the finance sector.

Insurance enough??

Some of the largest players in the U.S banking and finance industry are hoping to be able to save their money following the Euro crisis that is currently running amuck.  Fortunately, they will likely take advantage of their right to use credit swaps in order to salvage their potential losses.  One can think of these credit swaps as a form of insurance against just this kind of things occurring.http://dealbook.nytimes.com/2012/01/29/u-s-banks-tally-their-exposure-to-europes-debt-maelstrom/?ref=business

Davos Tells EU to Fix Crisis for Good

http://www.bloomberg.com/news/2012-01-30/davos-tells-euro-leaders-to-fix-crisis-for-good-after-two-years-of-failure.html

Attitudes following the meeting of the World Economic Forum are mixed with regards to European recovery. Nearly all agree that the outlook for the next year rests on what happens in Europe, but there is disagreement over whether the policies being pursued are correct or if they go far enough. Some believe that there need to be increased guarantees surrounding debt, and that the actions of the ECB haven't solved anything, but only have given breathing room to sort out the issues.

The largest threat to European stability remains the threat of Greek default. Opinions on the fallout from a Greek default are mixed, with some in the financial community believing it would be a disaster, while others believe that it would be a manageable crisis. Whatever the case, the fact that the crisis continues to unfold year after it began is a sign that it progress has been slow going and that the end is still not yet in sight.

Some analysts believe that this respite will be short lived, and that the markets will soon react to the fact that the crisis has yet to be solved. Whatever the case be, until the issue of solvency among the European nations is settled, the crisis will continue.

National debt soars as UK adjusts to 'new equilibrium'

This article details the current economic status of the UK, specifically with the amount of debt the nation has accrued.  The total debt for the UK recently reached 1 Trillion pounds.  If one were to add the debt of the financial sector and households to this total, it would account for 500% of the nation's GDP.  What sets the UK apart from other nations that are reeling in debt, is the fact that the UK has not made progress towards attacking the debt issue.  While the US is advancing towards a solution with the defaulting of unaffordable mortgages and creation of jobs to help pay debts.  The UK in some respects is doing the opposite.  People have been saving more and spending less due to decreased incomes.  Consequently this has decreased consumption for the UK's economy.  In response to the decrease in consumerism and rising debt, the country's economic leaders have called for the "Great Deleveraging."  The UK plans to place more of a concentration on growth through exports to help right its economy.
http://www.guardian.co.uk/business/2012/jan/24/national-debt-soars-uk-new-equilibrium

Germany’s Merkel drives home need for Europe’s strugglers to reform

http://www.washingtonpost.com/business/markets/germanys-merkel-drives-home-need-for-europes-strugglers-to-reform/2012/01/25/gIQAjhgxPQ_story.html

This article is one of the continuing focus on German chancellor Angela Merkel with regards to her stance and leadership with the European debt crisis.  As Europe's economically strongest and largest nation, Germany, coupled with the French, have taken leadership positions and Europe and the world wait tensely.  Merkel is trying to take a pragmatic approach to getting Europe on efficient austerity measures.  She does not believe that increasing the amount europe is borrowing for the IMF with be successful; “It makes no sense if we keep promising more money but don’t combat the causes of the crisis.”  She also does not think that creating "eurobonds" would be beneficially and not worth the squeeze so to speak, as it would drive up Germany's comfortably low borrowing costs.  Merkel instead believes that searching through Europe's financials searching for money to attempt to tackle high unemployment in economically struggling countries.  She references Spain specifically saying that unemployment with their young adult demographics is one issue to focus on.  She stresses work force and human capital development and that trying to get out of debt by taking on new debt does not make sense.


I find it really interesting to see how Europe has put themselves in an economic whole.  I do not know enough about the situation but what did a best case scenario for the Eurozone look like?  Was it reasonable to think that everyone would be flushed with money and growth.  Also the social and historic dynamics behind the situation.  It is almost comical to think that Germany and France and working so hard to try and fix the fiscal problems of Greece and Spain, et al.  Why should they care? How tied together are all the countries now?  What would happen if Germany said forget you all and just go back to the Deutsche Mark?

State Capitalism: A Viable Alternatives ? - Debate on the The Economist

link to the article here

In class we learned about some different variations of the two extreme models of economic systems: Capitalism and Socialism. Interestingly, there is a current debate in The Economist about whether State Capitalism is a viable alternatives for the US.

Basically, State Capitalism is usually described as profit-seeking activities undertaken by the state with management of productive forces in a capitalist manner. So as we can see, state capitalism is nominally socialist.

Currently there are two sides of the debate. Representative of the motion that opposes the proposal succinctly stated: "State capitalism is not simply an economic system. It is a political invention designed to ensure that market activity and wealth serve the interests of the state and those who run it. This is the primary reason that it will not become a viable alternative to liberal capitalism" 
And the defender of the proposal stated: "State capitalism is not just a command economy ran by authoritarian elites. Democracies and autocracies follow the model. There is not one single political system within state capitalism and no single model of influence on the economy" 

These sentences are just the beginning of the debates, and there is a lot more on the web. It is really interesting to see the arguments of the two sides. It is also interesting to see that there are far more people believing in State Capitalism than those who do.

US Private Sector Emerges from Government Shadow

Overall in 2011, private sector gained a lot of strength. This is due to the shrinking of the government and the corresponding growth of the private sector. For example, private sector grew by 4.5% in the fourth quarter. Inflation also subdued during that period. However, the price index for personal consumption expenditure grew at 2.4 percent, which means that we can expect a reduction in unemployment. This helps explain why the probability of Barack Obama being re-elected has increased up to 55 percent from 52 last week.

Which Emerging Economies will Fare the Best if there is Another Recession

Who has the most wiggle room?

http://www.economist.com/blogs/freeexchange/2012/01/emerging-economies

This article is about how emerging economies can be very tied to other more developed economies, typically through exports. It has been suggested recently that the Euro Zone crisis may cause another recession. Because of this when other more developed countries get into trouble financially, there can be great consequences for this happening. It reminds me of the saying "The US sneezes and Europe catches the cold." There will be less demand for the goods and services that the developing countries are exporting, and therefore they will have a decrease in capital entering the country. In this article they make an index for "monetary manoeuvrability and fiscal flexibility" which they have coined "wiggle-room index." This attempts to measure what emerging economies will be in the best shape if there is another recession. This means that they will be able to sustain growth even through another recession. The top three are Saudi Arabia, Indonesia, and China. This was very interesting to me, because a lot of times we don't think about how one economy will hurt another, particularly when they are not in close proximity. 

Deflation

This article was quite eye-opening for me. It speaks about the deflation in our economy and the effect it will cause if it is not adjusted. I thought this related to class in the effect of the ways economic systems have evolved and changed to get better. 

"In August, the Fed's Open Market Committee announced that it would hold its balance sheet steady rather than wind it down, by using the proceeds from its huge mortgage-bond portfolio to buy long-term Treasury securities. In November, it shifted course again and began asset purchases it said would total $600 billion -- the so-called "QE2,'' or second round of quantitative easing, meant to shore up the economy by helping to keep long-term bond rates low." This is causing deflation in our economic system and could be waiting around to cause some serious trouble.

Japan's Economy Picks Up Except for Exports

http://www.reuters.com/article/2012/01/17/japan-economy-report-idUST9E7NF05H20120117

This article discusses Japan and its struggle since the tragic earthquake. After months of picking up the pieces and rebuilding their economy, Japan has begun to see growth. However, they still are not out of trouble. All though the economy is picking up, Japan's exports continue to stay low. Mostly because the euro has weakened and as a result European demand for Asian exports has slowed. This raises the issue of Japans growth and reconstruction slowing from lack of demand.  They are working to prevent deflation but if there is decrease in demand for products from Europe could it be out of their control?

The Quiet Driver of Economic Growth: Exports

http://economix.blogs.nytimes.com/2012/01/27/the-quiet-driver-of-economic-growth-exports/?ref=economy

This article is about the increasing importance of exports to the United States' economy. In recent times, foreign trade has been looked down upon due to the trade deficit. However, in the past year, exports have brought in over $2 trillion, or 14% of the GDP, which is the largest share they have held since 1929.

This suggests that the increase in economic growth that has been happening over the last few months may be at least partially a result of this increased exporting. Foreign buyers have been more willing to buy American products because the decline of the American dollar has made them less expensive. In fact, exports have been on the rise for most of the last 50 years. The strongest portions of this growth in exports is actually petroleum, metal, chemicals and agricultural products. It is the "old" economy which is making a comeback. Despite the fact that this growth may be a result of the decline of the dollar, it is still growth and therefore still beneficial to the economy.

The euro crisis returns: Italy vs. Greece

http://www.economist.com/node/21543168

This article describes signs of a continent-wide European recession and the resurgence of the euro crisis. The fiscal compact of Germany's Chancellor Merkel and the debt talks in Greece will have a lot to do with the region's crisis. Despite these major developments, the article's primary focus is on Italy and its potentially impending debt default. The article suggests that in order for Greece and other European countries to begin restructuring their economy, Merkel's fiscal compact must focus on stopping the backsliding of Italy. 

One major problem of Italy's debt is lack of demand, high interest rates and higher taxes. What would an even more centralized economic system do to Italy's economic crisis? Would this enable the country to have lower interest rates and taxes? 

Additionally, the outcome of Italy's economic future relies heavily on whether Greece will default. It's safe to guess that if Greece defaults, then the market may shift to Italy and bog down this already economically unstable country.

Come On, China, Buy Our Stuff!

http://www.nytimes.com/2012/01/29/magazine/come-on-china-buy-our-stuff.html?ref=world

While discussing the trade deficit between the USA and China, its causes and effects, this article touches some interesting discussions that we had in class:

Firstly, it mentioned how the United States gave away countless low-end manufacturing jobs by opening up the U.S. market. The same comment was made by professor Skosples last Friday.

Secondly, the writer tried to explain why American companies failed to sell their products to Chinese customers: one significant reason was due to the cultural difference in taste and also due to their spending habit. This is a classic example of the impact of customs on the production of goods and services, which define the economic system.

Thirdly, the article went on great length to how China’s currency policy had a profound impact on the U.S. economy. It brings me to question how the classic definition of economic system fits in the modern change of global economy. Property rights for example may differs greatly with the appearance of multinational companies and foreign investment