Monday, September 26, 2016

Fiscal stimulus in USA regardless of Clinton or Trump presidency

Since the global financial crisis of 2008, monetary policy has borne much of the burden of sustaining aggregate demand, boosting growth, and preventing deflation in developed economies. Fiscal policy, for its part, was constrained by large budget deficits and rising stocks of public debt, with many countries even implementing austerity to ensure debt sustainability. Eight years later, it is time to pass the baton.

As the only game in town when it came to economic stimulus, central banks were driven to adopt increasingly unconventional monetary policies. They began by cutting interest rates to zero, and later introduced forward guidance, committing to keep policy rates at zero for a protracted period.

In rapid succession, advanced-country central banks also launched quantitative easing (QE), purchasing massive volumes of long-term government securities to reduce their yields. They also initiated credit easing, or purchases of private assets to reduce the costs of private-sector borrowing. Most recently, some monetary authorities – including the European Central Bank, the Bank of Japan, and several other European central banks – have taken interest rates negative.

While these policies boosted asset prices and economic growth, while preventing deflation, they are reaching their limits. In fact, negative policy rates may hurt bank profitability and thus banks’ willingness to extend credit. As for QE, central banks may simply run out of government bonds to buy.

Yet most economies are far from where they need to be. If below-trend growth continues, monetary policy may well lack the tools to address it, particularly if tail risks – economic, financial, political, or geopolitical – also undermine recovery. If banks are driven, for any reason, to reduce lending to the private sector, monetary policy may become less effective, ineffective, or even counter-productive.

In such a context, fiscal policy would be the only effective macroeconomic-policy tool left, and thus would have to assume much more responsibility for countering recessionary pressures. But there is no need to wait until central banks have run out of ammunition. We should begin activating fiscal policy now, for several reasons.

For starters, thanks to painful austerity, deficits and debts have fallen, meaning that most advanced economies now have some fiscal space to boost demand. Moreover, central banks’ near-zero policy rates and effective monetization of debt by way of QE would enhance the impact of fiscal policy on aggregate demand. And long-term government bond yields are at an historic low, enabling governments to spend more and/or reduce taxes while financing the deficit cheaply.

Finally, most advanced economies need to repair or replace crumbling infrastructure, a form of investment with higher returns than government bonds, especially today, when bond yields are extremely low. Public infrastructure not only increases aggregate demand; it also increases aggregate supply, as it supports private-sector productivity and efficiency.

The good news is that the advanced economies of the G7 seem poised to begin – or perhaps have already begun – to rely more on fiscal policy to bolster sagging economic growth, even as they maintain the rhetoric of austerity. In Canada, Prime Minister Justin Trudeau’s administration has announced a plan to boost public investment. And Japanese Prime Minister Shinzo Abe has decided to postpone a risky consumption-tax hike planned for next year, while also announcing supplementary budgets to increase spending and boost the household sector’s purchasing power.

In the United Kingdom, the new government, led by Prime Minister Theresa May, has dropped the target of eliminating the deficit by the end of the decade. In the wake of the Brexit vote, May’s government has designed expansionary fiscal policies aimed at spurring growth and improving economic conditions for cities, regions, and groups left behind in the last decade.

Even in the eurozone, there is some movement. Germany will spend more on refugees, defense, security, and infrastructure, while reducing taxes moderately. And, with the European Commission showing more flexibility on targets and ceilings, the rest of the eurozone may also be able to use fiscal policy more effectively. If fully implemented, the so-called Juncker Plan, named for European Commission President Jean-Claude Juncker, will boost public investment throughout the European Union.

As for the United States, there will be some stimulus, regardless of whether Hillary Clinton or Donald Trump wins the presidential election. Both candidates favor more infrastructure spending, more military spending, loosening limits on civilian spending, and corporate-tax reform. Trump also has a tax-reduction plan that would not be revenue-neutral, and thus would expand the budget deficit (though the effect on demand would likely be small, given the concentration of benefits at the very top of the income distribution).

The fiscal stimulus that will result from these uncoordinated G7 policies will likely be very modest – at best, 0.5% of GDP of additional stimulus per year for a few years. This means that more stimulus, particularly spending on public infrastructure, will probably be warranted. Nonetheless, the measures undertaken or contemplated so far already represent a step in the right direction. 

Wednesday, September 21, 2016

Gold is looking less attractive relative to other financial assets

Significant upside to gold is less likely than last year.

[There is] plenty of tail risk in global economy. Therefore, buying gold as a hedge against extreme tail risk in financial markets is probably not a likely scenario. Now that other assets are offering capital gains and income, gold looks less appealing. 

Monday, September 19, 2016

Fed will raise rates in a few months

The Fed will hike slightly faster than the market probably expects.

My personal view will be as follows: most likely the Fed will skip September because there’s an election coming and because the economic data being mixed. But you can expect the Fed is going to hike this year at least once in December.

Wednesday, August 31, 2016

We have done too much monetary easing and not enough fiscal stimulus

Even the IMF suggests that there is a huge room for social infrastructure, public infrastructure...... Watch the video above for more

Thursday, August 18, 2016

Roubini does not think Trump will help blue collar workers

Monday, August 1, 2016

Changes needed in EU and EuroZone to prevent disintegration

The market reaction to the Brexit shock has been mild compared to two other recent episodes of global financial volatility: the summer of 2015 (following fears of a Chinese hard landing) and the first two months of this year (following renewed worries about China, along with other global tail risks). The shock was regional rather than global, with the market impact concentrated in the United Kingdom and Europe; and the volatility lasted only about a week, compared to the previous two severe risk-off episodes, which lasted about two months and led to a sharp correction in US and global equity prices.

Why such a mild, temporary shock?

For starters, the UK accounts for just 3% of global GDP. By contrast, China (the world’s second-largest economy) accounts for 15% of world output and more than half of global growth.

Moreover, the European Union’s post-Brexit show of unity, together with the result of the Spanish election, calmed fears that the EU or the eurozone would fall apart in short order. And the rapid government changeover in the UK has boosted hopes that the divorce negotiations with the EU, however bumpy, will lead to a settlement that maintains most trade links by combining substantial access to the single market with modest limits on migration.

Most important, markets quickly priced in the conclusion that the Brexit shock would lead to greater dovishness among the world’s major central banks. Indeed, as in the two previous risk-off episodes, central-bank liquidity backstopped markets and economies.

But the risk of European and global volatility may have been only briefly postponed. Leaving aside other global risks (including a slowdown in already-mediocre US growth, more fear of a Chinese hard landing, weakness in oil and commodity prices, and fragilities in key emerging markets), there is plenty of reason to worry about Europe and the eurozone.

First, if the UK-EU divorce proceedings become protracted and acrimonious, growth and markets will suffer. And an ugly divorce may also lead Scotland and Northern Ireland to leave the UK. In that scenario, Catalonia may also push for independence from Spain. And without the UK, Denmark and Sweden, which aren’t planning to join the eurozone, may fear that they will become second-class members of the EU, thus leading them to consider leaving as well.

Second, upcoming elections promise to be a political minefield. Austria will repeat its presidential election in September, the previous one having ended in a virtual tie, giving another chance to the far-right Freedom Party’s Norbert Hofer. The following month, Hungary will hold a referendum, initiated by Prime Minister Viktor Orb├ín, on overturning EU-mandated quotas on the resettlement of migrants. And, most important, Italy will hold a referendum on constitutional changes that, if rejected, could effectively jeopardize the country’s membership in the eurozone.

Italy currently is the eurozone’s weakest link. Prime Minister Matteo Renzi’s government has become politically shakier, economic growth is anemic, the banks are in need of capital, and EU fiscal targets will be hard to achieve without triggering another recession. If Renzi fails – as is increasingly possible – the anti-euro Five Star Movement (which recently did well in municipal elections) could come to power as early as next year.

Should that happen, the Grexit fears of 2015 would pale in comparison. Italy, the eurozone’s third-largest member, is too big to fail. But, with a public debt ten times larger than Greece’s, it is also too big to be saved. No EU program can backstop Italy’s €2 trillion ($2.2 trillion) of public debt (135% of GDP).

Moreover, elections in France, Germany, and the Netherlands in 2017 create additional uncertainties as weak growth and high unemployment in most of Europe boost support for anti-euro, anti-immigrant, anti-Muslim, and anti-globalization populist parties of the right (in the eurozone core) and of the left (on the eurozone periphery).

At the same time, Europe’s neighborhood is bad and getting worse. A revisionist Russia has become more assertive not just in Ukraine, but also in the Baltics and the Balkans. And the consequences of the continuing turmoil in the Middle East are at least twofold: renewed episodes of terrorism in France, Belgium, and Germany, which may over time dent business and consumer confidence; and a migration crisis that requires closer cooperation with Turkey, which itself has become unstable since the botched military coup.

Until the coming round of elections is over, the EU is unlikely to take any steps to complete its unfinished monetary union by introducing more risk-sharing and accelerating structural reforms to encourage faster economic convergence. Given the current slow pace of reforms (and population aging), potential growth remains low, while actual growth is on a very moderate cyclical recovery that is now threatened by post-Brexit risks and uncertainties. At the same time, high deficits and debts, together with eurozone rules, constrain the use of fiscal policy to boost growth, while the European Central Bank may be reaching the limits of what even unconventional monetary policy can do to sustain the recovery.

The eurozone and the EU are unlikely to disintegrate suddenly. Many of the risks they face are on a slow fuse. And disintegration can of course be avoided by a political vision that balances the need for greater integration with the desire for some degree of national autonomy and sovereignty over a range of issues.

But finding ways to integrate that are democratic and politically acceptable is imperative. Muddling through has resulted in an unstable equilibrium that will make disintegration of the EU and the eurozone inevitable. Given the many risks Europe faces, a new vision is needed now. 

via ProjectSyndicate

Monday, July 25, 2016

Turkey coup could lead to more authoritarian leadership