Wednesday, December 14, 2016

Roubini on Trumps Carrier deal and US Dollar


Trump saved 1K jobs in Indiana and already DESTROYED 370K jobs given the Trump-led dollar appreciation.
Trump pictured with Robert Kiyosaki of the Rich Dad Poor Dad author

Monday, December 12, 2016

Asians wondering about the political changes and Trump tsunami

Monday, November 21, 2016

Donald Trump, Markets and Janet Yellen


When Donald Trump defeated Hillary Clinton in the United States’ presidential election, the market’s immediate negative response was to be expected. But by the next day, the market’s downward turn had already reversed itself.

US equities and bond yields rallied after Trump delivered a victory speech that seemed to signal that he was tacking to the center, which investors had originally expected him to do this summer, after he won the Republican nomination and entered the general election campaign. In his speech, Trump promised to be a president for all Americans, praised Clinton for her past public service, and vowed to pursue massive fiscal-stimulus policies centered on infrastructure spending and tax cuts for corporations and the wealthy.

Markets will give Trump the benefit of the doubt, for now; but investors are now watching whom he appoints to his administration, what shape his fiscal policies actually take, and what course he charts for monetary policy.

They may be watching monetary policy most closely. During his campaign, Trump threatened the US Federal Reserve’s independence, and heaped criticism on Fed Chair Janet Yellen. But Trump is a real-estate mogul, so we cannot immediately assume that he is a true monetary-policy hawk, and not a closet dove. His campaign rhetoric may have been directed at the Republican Party base, which is full of Fed-bashing gold bugs.

Trump could appoint hawks to the two Fed Board seats that are currently vacant, and he will certainly replace Yellen when her term expires in 2018. But it is unlikely that he will force her to resign before then, because markets would punish such an obvious violation of central-bank independence.

Even if Trump does choose a hawk to replace Yellen, his appointee would be only primus inter pares on the Federal Open Market Committee. Yellen’s successor would not be able simply to impose his or her view on the FOMC’s seven-member Board of Governors and five Reserve Bank presidents.

While the Fed did resemble an absolute monarchy under former Chairman Alan Greenspan, it became more of a constitutional monarchy under Greenspan’s successor, Ben Bernanke. Under Yellen, it might best be described as a democratic republic. This transformation cannot be reversed: each FOMC member holds strong views about which direction monetary policy should take, and each is willing to dissent when needed.

This means that a radical hawk appointed by Trump could end up in the minority, and would be consistently outvoted by the FOMC’s dovish majority. Of course, Trump may be able to change the Fed Board’s composition over time, by appointing new governors when Stanley Fischer, Lael Brainard, Daniel K. Tarullo, and Jerome H. Powell’s terms end. But if he takes this route, the market will still police the Fed’s actions. If continued low growth and low inflation do not justify rapid interest-rate increases, a hawkish Fed that raises rates anyway will face harsh disciplining by the market – and, by extension, so will Trump.

Moreover, premature and excessive hawkishness would strengthen the US dollar and sharply increase the US trade deficit, undermining Trump’s stated goal of creating jobs and boosting incomes for his blue-collar, working-class electoral base. If Trump cares about his base – or if he at least wants to avoid a political backlash from it – he should appoint dovish Fed governors who will favor easy-money policies that weaken the dollar. Ironically, President Barack Obama’s appointees, such as Brainard and Tarullo, are actually ideal for Trump’s agenda.

If Trump does choose a more hawkish monetary-policy approach, it will have an ambiguous impact on the dollar, owing to his other proposals’ downstream effects. Looser fiscal policy and tighter monetary policy should, as in former President Ronald Reagan’s first term, strengthen the dollar; but if Trump pushes the US toward protectionism, he will generate economic and geopolitical tail risks that would weaken the dollar and increase US country risk.

Similarly, Trump’s fiscal policies would also weaken the dollar over time – after an initial significant appreciation – as the substantially higher deficit spending would be financed either with easy money or bond issues that increase US sovereign risk. The net impact of all these factors on the dollar will all depend on how loose fiscal policy becomes, and on how tight monetary policy becomes.
Fake news or real views Learn more

Trump’s proposed policy mix would also have an ambiguous – and modest – impact on growth, if he appoints hawks to the Fed. Looser fiscal policy would help short-term economic growth; but tighter monetary policy would undercut those gains. Similarly, if Trump really does want to redistribute some income from capital to labor, and from corporate profits to wages (admittedly a big “if”), his policies could boost consumption; but his populist, protectionist policies would undermine business confidence, and thus capital expenditures, while reducing consumers’ purchasing power through higher inflation.

Equity markets will undoubtedly favor Trump’s proposals to loosen fiscal policy, deregulate business and finance, and cut taxes. But investors will be on the lookout for protectionism, Wall Street- and immigrant-bashing, and overly aggressive monetary hawkishness. Only time – and the market – will tell if Trump has struck the right balance. 

Monday, November 14, 2016

What Trump will do once in the White House


Now that Donald Trump has unexpectedly won the US presidency, it is an open question whether he will govern in accordance with his campaign’s radical populism, or adopt a pragmatic, centrist approach.

If Trump governs in accordance with the campaign that got him elected, we can expect market scares in the United States and around the world, as well as potentially significant economic damage. But there is good reason to expect that he will govern very differently.

A radical populist Trump would scrap the Trans-Pacific Partnership (TPP), repeal the North American Free Trade Agreement (NAFTA), and impose high tariffs on Chinese imports. He would also build his promised US-Mexico border wall; deport millions of undocumented workers; restrict H1B visas for the skilled workers needed in the tech sector; and fully repeal the Affordable Care Act (Obamacare), which would leave millions of people without health insurance.

Overall, a radical Trump would significantly increase the US budget deficit. He would sharply reduce income taxes on corporations and wealthy individuals. And while he would broaden the tax base, increase the carried-interest tax, and encourage companies to repatriate foreign profits, his plan would not be revenue-neutral. He would increase military and public-sector spending in areas such as infrastructure, and his tax cuts for the rich would reduce government revenue by $9 trillion over a decade.


A radical Trump would also drastically change the current monetary-policy approach – first by replacing US Federal Reserve Chair Janet Yellen with a monetarist hawk, and then by filling current and upcoming Fed Board vacancies with more of the same. Moreover, he would repeal what he could of the 2010 Dodd-Frank financial reforms; gut the Consumer Financial Protection Bureau; cut alternative-energy subsidies and environmental regulations; and slash any other regulations that supposedly hurt big business.

Finally, a radical Trump’s foreign policy would destabilize America’s alliances and escalate tensions with rivals. His protectionist stance could incite a global trade war, and his insistence that allies pay for their own defense could lead to dangerous nuclear proliferation, while diminishing American leadership on the world stage.

But it is actually more likely that Trump will pursue pragmatic, centrist policies. For starters, Trump is a businessman who relishes the “art of the deal,” so he is by definition more of a pragmatist than a blinkered ideologue. His choice to run as a populist was tactical, and does not necessarily reflect deep-seated beliefs.

Indeed, Trump is a wealthy real-estate mogul who has lived his entire life among other rich businessmen. He is a savvy marketer who tapped into the political zeitgeist by pandering to working-class Republicans and “Reagan Democrats,” some of whom may have supported Vermont Senator Bernie Sanders in the Democratic primary. This allowed him to stand out in a crowded field of traditional pro-business, pro-Wall Street, and pro-globalization politicians.

Once in office, Trump will throw symbolic red meat to his supporters while reverting to the traditional supply-side, trickle-down economic policies that Republicans have favored for decades. Trump’s vice-presidential choice, Mike Pence, is an establishment GOP politician, and his campaign’s economic advisers were wealthy businessmen, financiers, real-estate developers, and supply-side economists. What’s more, he is reportedly already considering mainstream Republicans for his cabinet, including former Speaker of the House Newt Gingrich, Tennessee Senator Bob Corker, Alabama Senator Jess Sessions, and former Goldman Sachs executive Steven Mnuchin (who also advised his campaign).

The traditional Republicans and business leaders Trump will likely appoint will then shape his policies. The executive branch adheres to a decision-making process whereby relevant departments and agencies determine the risks and rewards of given scenarios, and then furnish the president with a limited menu of policy options from which to choose. And, given Trump’s inexperience, he will be all the more dependent on his advisers, just as former Presidents Ronald Reagan and George W. Bush were.

Trump will also be pushed more to the center by Congress, with which he will have to work to pass any legislation. House Speaker Paul Ryan and the Republican leadership in the Senate have more mainstream GOP views than Trump on trade, migration, and budget deficits. Meanwhile, the Democratic minority in the Senate will be able to filibuster any radical reforms that Trump proposes, especially if they touch the third rail of American politics: Social Security and Medicare.

Trump will also be checked by the American political system’s separation of powers, relatively independent government agencies such as the Fed, and a free and vibrant press.

But the market itself will be Trump’s biggest constraint. If he tries to pursue radical populist policies, the response will be swift and punishing: stocks will plummet, the dollar will fall, investors will flee to US Treasury bonds, gold prices will spike, and so forth. If, however, Trump blends more benign populist policies with mainstream pro-business ones, he will not face a market fallout. Now that he has won the election, there is little reason for him to choose populism over safety.

The effects of a pragmatic Trump presidency would be far more limited than in the radical scenario. First, he would still ditch the TPP; but so would Hillary Clinton. He claimed that he would repeal NAFTA, but he will more likely try to tweak it as a nod to American blue-collar workers. And even if a pragmatic Trump wanted to limit imports from China, his options would be constrained by a recent World Trade Organization ruling against “targeted dumping” tariffs on Chinese goods. Outsider candidates often bash China during their election campaigns, but quickly realize once in office that cooperation is in their own interest.

Trump probably will build his wall on the Mexican border, even though fewer new immigrants are arriving than in the past. But he will likely crack down only on undocumented immigrants who commit violent crimes, rather than trying to deport 5-10 million people. Meanwhile, he may still limit visas for high-skill workers, which would deplete some of the tech sector’s dynamism.
You can help trump extremism Learn more

A pragmatic Trump would still generate fiscal deficits, though smaller than in the radical scenario. If he follows the Congressional Republicans’ proposed tax plan, for example, revenue would be reduced only by $2 trillion over a decade.

To be sure, the policy mix under a pragmatic Trump administration would be ideologically inconsistent and moderately bad for growth. But it would be far more acceptable to investors – and the world – than the radical agenda he promised his voters. 

Monday, October 24, 2016

Wealth management industry to face challenges from Robo Advisors

In the new abnormal of low growth, ageing and low interest rates the wealth management industry will be disrupted.  So finding high returns will become a challenge.

Emerging markets will grow faster than advanced economies. So their savings will add to wealth and will have to be managed.

Fintech may disrupt the wealth industry but incumbents who embrace it will be the winners rather than outsiders. Innovate, survive and thrive or stay behind the curve and become obsolete and disrupted. 


Sunday, October 16, 2016

Donald Trump warns of a global conspiracy of bankers

Monday, October 10, 2016

UK to face slow growth for next five years

The U.K. is really shooting themselves in the foot and it is going to get ugly. The risk is that the U.K. will stagnate at 1 percent growth for the next five years.

Monday, October 3, 2016

Eurozone in a slow motion collapse


The Eurozone is a slow motion train wreck but the eurozone is not going to collapse over the short term. The eurozone could collapse years from now.

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




Monday, July 18, 2016

Nouriel Roubini joins ACGM as Chief Economic Advisor

Nouriel Roubini has joined ACGM, the investment banking boutique as its Chief Economic Advisor. ACGM has released a press release on this announcement. 

Based in New York, Nouriel will provide his highly prized economic insights to the firm and to investment banking clients and investors.
His extensive research focuses on International Macroeconomics, Fiscal Policy, Political Economy, Growth Theory and European Monetary Issues; the knowledge and experience he has developed over the course of his distinguished academic and policy career will be invaluable to ACGM and its clients. Nouriel's global outlook and wide-ranging work on Emerging Markets make him an excellent fit for the role; ACGM focuses on three special areas of expertise: Emerging Markets, Financial Institutions and Restructuring & Special Situations.
During his distinguished career, Nouriel has earned many notable accolades, but he is perhaps best known for foreshadowing the U.S. housing market crash of 2007-2008; he first warned of the crisis in an IMF position paper published in 2006. Nouriel's policy experience is extensive: from 1998 to 2000, he served as the senior economist for international affairs on the White House Council of Economic Advisors, working during the administration of President Bill Clinton, and then the senior advisor to the undersecretary for international affairs at the U.S. Treasury Department, alongside Timothy Geithner, helping to resolve the Asian and global financial crises, among other issues. The International Monetary Fund, the World Bank and numerous other prominent public and private institutions have drawn upon his consulting expertise.
In May 2016, he sold Roubini Global Economics, an independent, global macroeconomic and market strategy research firm, which he cofounded and where he continues to serve as Chairman. The firm's website, Roubini.com, has been named one of the best economics web resources by Bloomberg Businessweek, Forbes, The Wall Street Journal and The Economist. Nouriel's views on global economic issues are widely cited by the media, and he is a frequent commentator on various business news programs. He has been the subject of extended profiles in The New York Times Magazine and other leading current-affairs publications. The Financial Times has also provided extensive coverage of his perspectives. In 2011 and 2012, he was named one of the Top 100 Global Thinkers by Foreign Policy magazine. In 2013, Nouriel was awarded the Award for Excellence in Global Thinking by the Global Thinkers Forum. He has appeared before Congress, the Council on Foreign Relations and the World Economic Forum at Davos.
Upon announcing the appointment of Nouriel as Chief Economic Advisor, Carlos Abadi, ACGM's CEO, highlighted the invaluable expertise which is now available to ACGM's clients and professionals.
"We are honored to welcome Nouriel to our team; his research-driven insights and real-world policy experience will be highly valued by ACGM and our clients, as we seek timely, quality information to inform decision making."
Nouriel received his undergraduate degree from Bocconi University in Milan, Italy, and his Ph.D. in Economics from Harvard University in 1988. 

Monday, July 11, 2016

Solutions to contain backlash to Globalisation needed

The United Kingdom’s narrow vote to leave the European Union had specific British causes. And yet, it is also the proverbial canary in the coalmine, signalling a broad populist/nationalist backlash — at least in advanced economies — against globalisation, free trade, offshoring, labour migration, market-oriented policies, supranational authorities and even technological change.

All these trends reduce wages and employment for low-skilled workers in labour-scarce and capital-rich advanced economies, and raise them in labour-abundant emerging economies. Consumers in advanced economies benefit from the reduction in prices of traded goods; but low- and even some medium-skilled workers lose income as their equilibrium wages fall and their jobs are threatened.

In the Brexit vote, the fault lines were clear: Rich versus poor, gainers versus losers from trade/globalisation, skilled versus unskilled, educated versus less educated, young versus old, urban versus rural, and diverse versus more homogenous communities. The same fault lines are appearing in other advanced economies, including the United States and continental Europe.

With their more flexible economies and labour markets, the US and the UK have recovered more strongly than continental Europe in terms of GDP and employment since the 2008 global financial crisis. Job creation has been robust, with the unemployment rate falling below 5 per cent, even if real wages are not growing much.

Donald Trump has based his campaign on "Making America Great Again" by getting jobs back in USA
Yet in the US, Mr Donald Trump has become the hero of angry workers threatened by trade, migration and technological change. In the UK, the Brexit vote was heavily influenced by fear that immigrants from low-wage EU countries (the proverbial “Polish plumber”) were taking citizens’ jobs and public services.

In continental Europe and the eurozone, however, economic conditions are much worse. The average unemployment rate hovers above 10 per cent (and much higher in the eurozone periphery — more than 20 per cent in Greece and Spain) with youth unemployment over 30 per cent. In most of these countries, job creation is anaemic, real wages are falling and dual labour markets mean that formal-sector, unionised workers have good wages and benefits, while younger workers have precarious jobs that pay lower wages, provide no employment security, and offer low or no benefits.

Politically, the strains of globalisation are twofold. First, establishment parties of the right and the left, which for more than a generation have supported free trade and globalisation, are being challenged by populist, nativist/nationalist anti-establishment parties. Second, establishment parties are being disrupted — if not destroyed — from within, as champions of anti-globalisation emerge and challenge the mainstream orthodoxy.

Establishment parties were once controlled by globalisation’s beneficiaries: Capital owners; skilled, educated and digitally savvy workers; urban and cosmopolitan elites; and unionised white- and blue-collar employees. But they also included workers — both blue- and white-collar — who were among the losers from globalisation, but who nonetheless remained loyal, either because they were socially and religiously conservative, or because centre-left parties were formally supporters of unions, workers’ rights and entitlement programmes.

After the 2008 financial crisis, globalisation’s losers started to organise and find anti-establishment champions on both the left and the right. On the left, the losers in the UK and the US, especially young people, found champions in traditional centre-left parties: Mr Jeremy Corbyn in the UK’s Labour Party and Mr Bernie Sanders in America’s Democratic Party.

The deepest fault lines emerged among centre-right parties. These parties — the Republicans in the US, the Tories in the UK and centre-right parties across continental Europe — confronted an internal revolt against their own leaders. The rise of Mr Trump — anti-trade, anti-migration, anti-Muslim and nativist — is a reflection of an uncomfortable fact for the Republican establishment: The party’s median voter is closer to those who have lost from globalisation. A similar revolt took place in the UK’s Conservative Party, with globalisation’s losers coalescing around the party’s “Leave” campaign or shifting allegiance to the populist anti-EU UK Independence Party.

In continental Europe, where multi-party parliamentary systems are prevalent, political fragmentation and disintegration are even more severe than in the UK and the US. On the EU’s periphery, anti-establishment parties tend to be on the left: Syriza in Greece, Italy’s Five Star Movement, Spain’s Podemos, leftist parties in Portugal. In the EU core, such parties tend to be on the right: Alternative for Germany, France’s National Front, and similar far-right parties in Austria, the Netherlands, Denmark, Finland, Sweden and elsewhere.

But, despite the growing number, organisation and mobilisation of globalisation’s losers, globalisation itself is not necessarily doomed. For starters, it continues to yield net benefits for advanced and emerging markets alike, which is why the losers still tend to be a minority in most advanced economies, while those who benefit from globalisation are a large — if at times silent — majority. In fact, even the “losers” benefit from the lower prices of goods and services brought about by globalisation and technological innovation.

This is also why populist and anti-establishment parties are still a political minority. Even Syriza, once in power, backpedaled and had to accept austerity, as an EU exit would have been much costlier. And Spain’s recent general election, held three days after the Brexit referendum, suggests that, despite high unemployment, austerity and painful structural reforms, moderate, pro-European forces remain a majority.

Even in the US, Mr Trump’s appeal is limited, owing to the demographic narrowness of his electoral base. Whether he can win the presidential election in November is highly doubtful.

This is also why pro-European centre-right and centre-left coalitions remain in power in most of the EU. The risk that anti-EU parties may come to power in Italy, France and the Netherlands — among others — is rising, but still remains a distant possibility.

Finally, economic theory suggests that globalisation can be made to benefit all as long as the winners compensate the losers. This can take the form of direct compensation or greater provision of free or semi-free public goods (for example, education, retraining, health care, unemployment benefits and portable pensions).

For workers to accept more labour mobility and flexibility as creative destruction eliminates some jobs and creates others, appropriate schemes are needed to replace income lost as a result of transitional unemployment. In the continental EU, establishment parties remain in power partly because their countries maintain extensive social welfare systems.

The backlash against globalisation is real and growing. But it can be contained and managed through policies that compensate workers for its collateral damage and costs. Only by enacting such policies will globalisation’s losers begin to think that they may eventually join the ranks of its winners.

Monday, June 27, 2016

Brexit is the beginning of the breakup of EU

I don’t expect a global recession or another global financial crisis. I think the impact of Brexit is significant but not of the same size and magnitude of the one we had 2007 to 2009. 

However, I would say it is a major, significant financial shock, as the reaction of the markets on Friday suggested. It creates a whole bunch of economic, financial, political and also geopolitical uncertainties.







At some point in the future, the Scots might decide to go for another referendum and it may be the break-up of the United Kingdom. Then the Catalans in Spain might say ‘me too’ and that might lead to the break-up of Spain.

Some of the Nordic members of the European Union might say ‘without the UK the European Union is mostly the Euro-zone, so what’s in it for me?’

Monday, June 6, 2016

Populists and Productivity by Nouriel Roubini

Since the global financial crisis erupted in 2008, productivity growth in the advanced economies – the United States, Europe, and Japan – has been very slow both in absolute terms and relative to previous decades. But this is at odds with the view, prevailing in Silicon Valley and other global technology hubs, that we are entering a new golden era of innovation, which will radically increase productivity growth and improve the way we live and work. So why haven’t those gains appeared, and what might happen if they don’t?

Breakthrough innovations are evident in at least six areas:

-    ET (energy technologies, including new forms of fossil fuels such as shale gas and oil and alternative energy sources such as solar and wind, storage technologies, clean tech, and smart electric grids).
-    BT (biotechnologies, including genetic therapy, stem cell research, and the use of big data to reduce health-care costs radically and allow individuals to live much longer and healthier lives).
-    IT (information technologies, such as Web 2.0/3.0, social media, new apps, the Internet of Things, big data, cloud computing, artificial intelligence, and virtual reality devices).
-    MT (manufacturing technologies, such as robotics, automation, 3D printing, and personalized manufacturing).
-    FT (financial technologies that promise to revolutionize everything from payment systems to lending, insurance services and asset allocation).
-    DT (defense technologies, including the development of drones and other advanced weapon systems).

At the macro level, the puzzle is why these innovations, many of which are already in play in our economies, have not yet led to a measured increase in productivity growth. There are several potential explanations for what economists call the “productivity puzzle.”

First, some technological pessimists – such as Northwestern University’s Robert Gordon – argue that the economic impact of recent innovations pales in comparison to that of the great innovations of the First and Second Industrial Revolutions (the steam engine, electricity, piped water and sanitation, antimicrobial drugs, and so on). But, as economic historian Joel Mokyr (also at Northwestern) has argued, it is hard to be a technological pessimist, given the breadth of innovations that are occurring and that are likely to occur in the next few decades.

A second explanation is that we are overlooking actual output – and thus productivity growth – because the new information-intensive goods and services are hard to measure, and their costs may be falling faster than standard methods allow us to gauge. But if this were true, one would need to argue that the mis-measure of productivity growth is more severe today than in past decades of technological innovation.

So far, there is no hard empirical evidence that that is the case. Yet some economists suggest that we are not correctly measuring the output of cheaper software – as opposed to hardware – and the many benefits of the free goods associated with the Internet. Indeed, between search engines and ubiquitous apps, knowledge is at our fingertips nearly always, making our lives easier and more productive.

A third explanation is that there is always a lag between innovation and productivity growth. In the first Internet revolution, the acceleration in productivity growth that started in the technology sector spread to the overall economy only many years later, as business- and consumer-facing applications of the new digital tools were applied in the production of goods and services far removed from the tech sector. This time, too, it may take a while for the new technologies to become widespread and lead to measured increases in productivity growth.

There is a fourth possibility: Potential growth and productivity growth have actually fallen since the financial crisis, as aging populations in most advanced economies and some key emerging markets (such as China and Russia), combined with lower investment in physical capital (which increases labor productivity), have led to lower trend growth. Indeed, the hypothesis of “secular stagnation” proposed by Larry Summers is consistent with this fall.

A related explanation emphasizes the phenomenon that economists call hysteresis: A persistent cyclical downturn or weak recovery (like the one we have experienced since 2008) can reduce potential growth for at least two reasons. First, if workers remain unemployed for too long, they lose their skills and human capital; second, because technological innovation is embedded in new capital goods, low investment leads to permanently lower productivity growth.

The reality is that we don’t know for sure what is driving the productivity puzzle or whether it is a temporary phenomenon. There is most likely some merit to all of the explanations on offer. But if weak productivity growth persists – and with it subpar growth in wages and living standards – the recent populist backlash against free trade, globalization, migration, and market-oriented policies is likely to strengthen. Thus, advanced economies have a large stake in addressing the causes of the productivity slowdown before it jeopardizes social and political stability. 

Monday, May 23, 2016

US Fed is is going to hike only once this year

The Fed is going to hike only once, not four times, this year, not even two times. It’s a central bank “not just for the U.S. economy but also for the global economy,” which is why it’s “more likely to go more slowly.

Monday, May 2, 2016

World economies to stay in a New Mediocre instead of New Normal


The International Monetary Fund and others have recently revised downward their forecasts for global growth- yet again. Little wonder: The world economy has few bright spots - and many that are dimming rapidly.

Among advanced economies, the United States has just experienced two quarters of growth averaging 1%. Further monetary easing has boosted a cyclical recovery in the eurozone, though potential growth in most countries remains well below 1%. In Japan, "Abenomics" is running out of steam, with the economy slowing since mid-2015 and now close to recession. In the United Kingdom, uncertainty surrounding the June referendum on continued European Union membership is leading firms to keep hiring and capital spending on hold. And other advanced economies - such as Canada, Australia, Norway - face headwinds from low commodity prices.

Things are not much better in most emerging economies. Among the five BRICS countries, two (Brazil and Russia) are in recession, one (South Africa) is barely growing, another (China) is experiencing a sharp structural slowdown, and India is doing well only because - in the words of its central bank governor, Raghuram Rajan - in the kingdom of the blind, the one-eyed man is king. Many other emerging markets have slowed since 2013 as well, owing to weak external conditions, economic fragility (stemming from loose monetary, fiscal, and credit policies in the good years), and, often, a move away from market-oriented reforms and toward variants of state capitalism.

Worse, potential growth has also fallen in both advanced and emerging economies. For starters, high levels of private and public debt are constraining spending - especially growth-enhancing capital spending, which fell (as a share of GDP) after the global financial crisis and has not recovered to pre-crisis levels. That falloff in investment implies slower productivity growth, while aging populations in developed countries - and now in an increasing number of emerging markets (for example, China, Russia, and Korea) - reduce the labor input in production.

The rise in income and wealth inequality exacerbates the global saving glut (which is the counterpart of the global investment slump). As income is redistributed from labor to capital, it flows from those who have a higher marginal propensity to spend (low- and middle-income households) to those who have a higher marginal propensity to save (high-income households and corporations).

Moreover, a protracted cyclical slump can lead to lower trend growth. Economists call this "hysteresis": Long-term unemployment erodes workers' skills and human capital; and, because innovation is embedded in new capital goods, low investment leads to permanently lower productivity growth.

Finally, with so many factors dragging down potential growth, structural reforms are needed to boost potential growth. But such reforms are occurring at suboptimal rates in both advanced and emerging economies, because all of the costs and dislocations are frontloaded, while the benefits occur over the medium and long term. This gives opponents of reform a political advantage.

Meanwhile, actual growth remains below the diminished potential. A painful deleveraging process implies that private and public spending need to fall, and that savings must rise, to reduce high deficits and debts. This process started in the US after the housing bust, then spread to Europe, and is now ongoing in emerging markets that spent the last decade on a borrowing binge.

At the same time, the policy mix has not been ideal. With most advanced economies pivoting too quickly to fiscal retrenchment, the burden of reviving growth was placed almost entirely on unconventional monetary policies, which have diminishing returns (if not counter-productive effects).

Asymmetric adjustment between debtor and creditor economies has also undermined growth. The former, having overspent and under-saved, had to spend less and save more when markets forced them to do so, whereas the latter were not forced to spend more and save less. This exacerbated the global savings glut and global investment slump.

Finally, hysteresis further weakened actual growth. A cyclical slump reduced potential growth, and the reduction in potential growth prospects led to further cyclical weakness, as spending declines when expectations are revised downward.

There are no politically easy solutions to the global economy's current quandary. Unsustainably high debt should be reduced in a rapid and orderly fashion, to avoid a long and protracted (often a decade or longer) deleveraging process. But orderly debt-reduction mechanisms are not available for sovereign countries and are politically difficult to implement within countries for households, firms, and financial institutions.

Likewise, structural and market-oriented reforms are necessary to boost potential growth. But, given the timing of costs and benefits, such measures are especially unpopular if an economy is already in a slump.

It will be no less difficult to leave behind unconventional monetary policies, as the US Federal Reserve recently suggested by signaling that it will normalize policy interest rates more slowly than expected. Meanwhile, fiscal policy - especially productive public investment that boosts both the demand and supply sides - remains hostage to high debts and misguided austerity, even in countries with the financial capacity to undertake a slower consolidation.

Thus, for the time being, we are likely to remain in what the IMF calls the "new mediocre," Larry Summers calls "secular stagnation," and the Chinese call the "new normal." But make no mistake: There is nothing normal or healthy about economic performance that is increasing inequality and, in many countries, leading to a populist backlash - both on the right and the left - against trade, globalization, migration, technological innovation, and market-oriented policies.

Wednesday, April 20, 2016

How Brexit could start the end of the EU



It would create a huge amount of uncertainty, about not just Britain but the future of the European Union............

Wednesday, April 13, 2016

Must watch Nouriel Roubini interview with FCCJ on global economy and risls


Dr Nouriel Roubini talks about the following - 

-US recession possibilities and its effects.
-Fed rate hike last December, Trend towards Negative interest rates.
-Banking system concerns. 
-EuroZone has some political concerns including Refugees. 
-Possibility of UK exiting EU could have other implications.
-Kicking the can down the road will create a bigger problem down the line and risk of a harder landing.

and MORE...........

Monday, April 4, 2016

Newer forms of QE could be introduced in the future

With most advanced economies experiencing anemic recoveries from the 2008 financial crisis, their central banks have been forced to move from conventional monetary policy – reducing policy rates via open-market purchases of short-term government bonds – to a range of unconventional policies. Although the zero nominal bound on interest rates – previously only a theoretical possibility – had been reached and zero-interest-rate policy (ZIRP) had been implemented, growth remained anemic. So central banks embraced measures that didn’t even exist in their policy toolkit a decade ago. And now they are poised to do so again.

The list of unconventional measures has been extensive. There was quantitative easing (QE), or purchases of long-term government bonds, once short-term rates were already zero. This was accompanied by credit easing (CE), which took the form of central-bank purchases of private or semi-private assets – such as mortgage- and other asset-backed securities, covered bonds, corporate bonds, real-estate trust funds, and even equities via exchange-traded funds. The aim was to reduce private credit spreads (the difference between yields on private assets and those on government bonds of similar maturity) and to boost, directly and indirectly, the price of other risky assets such as equities and real estate.

Then there was “forward guidance” (FG), the commitment to keep policy rates at zero for longer than economic fundamentals justified, thereby further reducing shorter-term interest rates. For example, committing to maintain zero policy rates for, say, three years implies that interest rates on securities with up to a three-year maturity should also fall to zero, given that medium-term interest rates are based on expectations concerning short-term rates over the next three years. Capping things off, there was unsterilized currency-market intervention to boost exports via a weaker currency.

These policies did indeed reduce long- and medium-term interest rates on government securities and mortgage bonds. They also narrowed credit spreads on private assets, boosted the stock market, weakened the currency, and reduced real interest rates by increasing inflation expectations. So they were partly effective.

Still, in most advanced economies, growth (and inflation) remained stubbornly low. There was no shortage of reasons for this. Given deleveraging from high private and public debts, unconventional monetary policies could prevent severe recessions and outright deflation; but they could not bring about robust growth and 2% inflation.

Moreover, the policy mix was suboptimal. While monetary policy can play an important role in boosting growth and inflation, structural policies are needed to increase potential growth and keep firms, households, banks, and government from turning into zombies, chronically unable to spend because of too much debt. And fiscal policies were also necessary to support aggregate demand.

Unfortunately, the political economy of most structural reforms – with their front-loaded costs and back-loaded benefits – implies that they occur only slowly. At the same time, fiscal policy has been constrained in some countries by high deficits and debts (which jeopardize market access), and in others (the eurozone, the United Kingdom, and the United States, for example) by a political backlash against further fiscal stimulus, leading to austerity measures that undermine short-term growth. So, like it or not, central banks became and still are the only game in town when it comes to supporting aggregate demand, lifting employment, and preventing deflation.

As a result, unconventional monetary policies – entrenched now for almost a decade – have themselves become conventional. And, in view of persistent lackluster growth and deflation risk in most advanced economies, monetary policymakers will have to continue their lonely fight with a new set of “unconventional unconventional” monetary policies.

Some have already been implemented. For example, negative interest policy rates (NIRPs) are now standard in Switzerland, Sweden, Denmark, the eurozone, and Japan, where the excess reserves that banks hold with central banks as a result of QE are taxed with a negative rate. Policymakers have shifted from working on the quantity of money (QE, CE, and foreign-exchange intervention) to working on the price of money (first ZIRP, then FG, and now NIRP). Nominal interest rates are now negative not only for overnight debt, but also for ten-year government bonds. Indeed, about $6 trillion worth of government bonds around the world today have negative nominal yields.

The next stage of unconventional unconventional monetary policy – if the risks of recession, deflation and financial crisis sharply increase – could have three components. First, central banks could tax cash to prevent banks from attempting to avoid the negative-rate tax on excess reserves. With banks unable to switch into cash (thereby earning zero rates), central banks could go even more negative with policy rates.

Second, QE could evolve into a “helicopter drop” of money or direct monetary financing by central banks of larger fiscal deficits. Indeed, the recent market buzz has been about the benefits of permanent monetization of public deficits and debt. Moreover, while QE has benefited holders of financial assets by boosting the prices of stocks, bonds, and real estate, it has also fueled rising inequality. A helicopter drop (through tax cuts or transfers financed by newly printed money) would put money directly into the hands of households, boosting consumption.

Third, credit easing by central banks, or purchases of private assets, could broaden significantly. Think of direct purchases of stocks, high-risk corporate bonds, and banks’ bad loans.

If unconventional unconventional monetary policies sound a little crazy, it’s worth remembering that the same was said about “conventional unconventional” policies just a few years ago. And if current conditions in the advanced economies remain entrenched a decade from now, helicopter drops, debt monetization, and taxation of cash may turn out to be the new QE, CE, FG, ZIRP, and NIRP. Desperate times call for desperate measures.

Monday, March 7, 2016

Britain could exit the EU

Are we back to 2008 and another global financial crisis and recession

The question I am asked most often nowadays is this: Are we back to 2008 and another global financial crisis and recession?

My answer is a straightforward no, but that the recent episode of global financial market turmoil is likely to be more serious than any period of volatility and risk-off behavior since 2009.

This is because there are now at least seven sources of global tail risk, as opposed to the single factors – the euro-zone crisis, the Federal Reserve “taper tantrum,” a possible Greek exit from the eurozone, and a hard economic landing in China – that have fueled volatility in recent years.

First, worries about a hard landing in China and its likely impact on the stock market and the value of the renminbi have returned with a vengeance.

While China is more likely to have a bumpy landing than a hard one, investors’ concerns have yet to be laid to rest, owing to the ongoing growth slowdown and continued capital flight.

Second, emerging markets are in serious trouble. They face global headwinds (China’s slowdown, the end of the commodity super cycle, the Fed’s exit from zero policy rates). Many are running macro imbalances, such as twin current account and fiscal deficits, and confront rising inflation and slowing growth.

Most have not implemented structural reforms to boost sagging potential growth. And currency weakness increases the real value of trillions of dollars of debt built up in the last decade.

Third, the Fed probably erred in exiting its zero-interest-rate policy in December. Weaker growth, lower inflation (owing to a further decline in oil prices), and tighter financial conditions (via a stronger dollar, a corrected stock market, and wider credit spreads) now threaten US growth and inflation expectations.

Fourth, many simmering geopolitical risks are coming to a boil. Perhaps the most immediate source of uncertainty is the prospect of a long-term cold war – punctuated by proxy conflicts – between the Middle East’s regional powers.

Fifth, the decline in oil prices is triggering falls in US and global equities and spikes in credit spreads. This may now signal weak global demand – rather than rising supply – as growth in China, emerging markets, and the US slows.

Weak oil prices also damage US energy producers, which comprise a large share of the US stock market, and impose credit losses and potential defaults on net energy exporting economies, their sovereigns, state-owned enterprises, and energy firms. As regulations restrict market makers from providing liquidity and absorbing market volatility, every fundamental shock becomes more severe in terms of risk-asset price corrections.

Sixth, global banks are challenged by lower returns, owing to the new regulations put in place since 2008, the rise of financial technology that threatens to disrupt their already-challenged business models, the growing use of negative policy rates, rising credit losses on bad assets (energy, commodities, emerging markets, fragile European corporate borrowers), and the movement in Europe to “bail in” banks’ creditors, rather than bail them out with now-restricted state aid.

Finally, the European Union and the eurozone could be ground zero of global financial turmoil this year. European banks are challenged. The migration crisis could lead to the end of the Schengen Agreement, and (together with other domestic troubles) to the end of German Chancellor Angela Merkel’s government.

Moreover, Britain’s exit from the EU is becoming more likely. With the Greek government and its creditors once again on a collision course, the risk of Greece’s exit may return. Populist parties of the right and the left are gaining strength throughout Europe.

Thus, Europe increasingly risks disintegration. To top it all off, its neighborhood is unsafe, with wars raging not only in the Middle East, but also – despite repeated attempts by the EU to broker peace – in Ukraine, while Russia is becoming more aggressive on Europe’s borders, from the Baltics to the Balkans.

In the past, tail risks were more occasional, growth scares turned out to be just that, and the policy response was strong and effective, thereby keeping risk-off episodes brief and restoring asset prices to their previous highs (if not taking them even higher).

Today, there are seven sources of potential global tail risk, and the global economy is moving from an anemic expansion (positive growth that accelerates) to a slowdown (positive growth that decelerates), which will lead to further reduction in the price of risky assets (equities, commodities, credit) worldwide.

At the same time, the policies that stopped and reversed the doom loop between the real economy and risk assets are running out of steam. The policy mix is sub-optimal, owing to excessive reliance on monetary rather than fiscal policy.

Indeed, monetary policies are becoming increasingly unconventional, reflected in the move by several central banks to negative real policy rates; and such unconventional policies risk doing more harm than good as they hurt the profitability of banks and other financial firms.

Two dismal months for financial markets may give way in March to a relief rally for assets such as global equities, as some key central banks (the People’s Bank of China, the European Central Bank, and the Bank of Japan) ease more, while others (the Fed and the Bank of England) will remain on hold for longer. But repeated eruptions from some of the seven sources of global tail risk will make the rest of this year – unlike the previous seven – a bad one for risky assets and anemic for global growth. 

Wednesday, February 10, 2016

How long can markets be disconnected from the real world

Since the beginning of the year, the world economy has faced a new bout of severe financial market volatility, marked by sharply falling prices for equities and other risky assets. A variety of factors are at work: concerns about a hard landing for the Chinese economy; worries that growth in the US is faltering at a time when the Fed has begun raising interest rates; fears of escalating Saudi-Iranian conflict; and signs—most notably plummeting oil and commodity prices—of severe weakness in global demand.

These risks are being magnified by some grim medium-term trends implying pervasive mediocre growth. Indeed, the world economy in 2016 will continue to be characterized by a New Abnormal in terms of output, economic policies, inflation, and the behavior of key asset prices and financial markets.

So, what exactly is it that makes today’s global economy abnormal?

First, potential growth in developed and emerging countries has fallen because of the burden of high debt, rapid ageing and a variety of uncertainties holding back capital spending. Moreover, many technological innovations have not translated into higher productivity growth, the pace of structural reforms remains slow, and protracted cyclical stagnation has eroded the skills base and that of physical capital.

Second, actual growth has been anaemic and below its potential trend, owing to the painful process of deleveraging underway, first in the US, then in Europe, and now in highly leveraged emerging markets.

Third, economic policies—especially monetary policies—have become increasingly unconventional. Indeed, the distinction between monetary and fiscal policy has become increasingly blurred. Ten years ago, who had heard of terms such as ZIRP (zero-interest-rate policy), QE (quantitative easing), CE (credit easing), FG (forward guidance), NDR (negative deposit rates), or UFXInt (unsterilized FX intervention)? No one, because they didn’t exist.

But now, these unconventional monetary-policy tools are the norm in most advanced economies—and even in some emerging-market ones. And recent actions and signals from the European Central Bank and the Bank of Japan reinforce the view that more unconventional policies are to come.

Some alleged that these unconventional monetary policies—and the accompanying ballooning of central banks’ balance sheets—were a form of debasement of fiat currencies. The result, they argued, would be runaway inflation, a sharp rise in long-term interest rates, a collapse in the value of the US dollar, a spike in the price of gold and other commodities, and the replacement of debased fiat currencies with crypto-currencies such as bitcoin.

Instead—and this is the fourth aberration—inflation is still too low and falling in advanced economies, despite central banks’ unconventional policies and surging balance sheets. The challenge for central banks is to try to boost inflation, if not avoid outright deflation. At the same time, long-term interest rates have continued to come down in recent years; the value of the dollar has surged; gold and commodity prices have fallen sharply; and bitcoin was the worst performing currency of 2014-15.

The reason ultra-low inflation remains a problem is that the traditional causal link between the money supply and prices has been broken. One reason for this is that banks are hoarding the additional money supply in the form of excess reserves, rather than lending it. Moreover, unemployment rates remain high, giving workers little bargaining power. And a large amount of slack remains in many countries’ product markets, with large output gaps and low pricing power for firms (an excess-capacity problem exacerbated by Chinese over-investment).

And now, following a massive decline in housing prices in countries that experienced a boom and bust, oil, energy and other commodity prices have collapsed. Call this the fifth anomaly—the result of China’s slowdown, the surge in supplies of energy and industrial metals (following successful exploration and over-investment in new capacity), and the strong dollar, which weakens commodity prices.

The recent market turmoil has started the deflation of the global asset bubble wrought by QE, though the expansion of unconventional monetary policies may feed it for a while longer. The real economy in most advanced and emerging economies is seriously ill, and yet, until recently, financial markets soared to greater highs, supported by central banks’ additional easing. The question is, how long Wall Street and Main Street can diverge.

In fact, this divergence is one aspect of the final abnormality. The other is that financial markets haven’t reacted very much, at least so far, to growing geopolitical risks either, including those stemming from the Middle East, Europe’s identity crisis, rising tensions in Asia, and the lingering risks of a more aggressive Russia. Again, how long can this state of affairs—in which markets not only ignore the real economy, but also discount political risk—be sustained?

Welcome to the New Abnormal for growth, inflation, monetary policies and asset prices, and make yourself at home. It looks like we will be here for a while. 

Monday, February 1, 2016

India could grow faster

Despite number of global economic headwinds, Indian economy remains strong though pace of growth should be stronger.

Potential growth for India is much higher than seven per cent. It can be eight to nine per cent. The key thing for India is to continue what they are doing but the country needs to accelerate their pace of reform.

Thursday, January 28, 2016

This financial crisis is not going to be as bad as 2008 - 2009 crisis

It is not going to be like 2008-09. There is not the excessive leverage in the financial system that there was last time.



Roubini on China

My view for the last few years on China is that we will have neither a hard nor a soft landing. I would say China is going to have a bumpy landing

The big thing that should happen is China should stop kicking the can down the road and get on with some serious structural reforms.

Monday, January 25, 2016

Oil prices to be over $40 by end of 2016

Oil prices can go lower even from current levels but if they’re going lower toward $20 a barrel, I don’t think they can stay there. At that point there’ll be producers that cannot produce profitably and they’re going to cut back on production. By year end, it has to be above $40 because the fundamentals do not justify oil at $30.


Tuesday, January 19, 2016

Asset prices still too high compared to their fundamental value

The world economy has had a rough start in 2016, and it will continue to be characterized by a new abnormal: in the behavior of growth, of economic policies, of inflation and of key asset prices and financial markets.

First, potential growth in developed markets and emerging markets has fallen, and actual growth will remain below this weak potential. That potential has fallen because of the burden of high private and public debt, population aging—older people tend to save more and invest less—and a variety of uncertainties that keep capital spending low. Meanwhile, technological innovations haven’t translated yet into higher productivity growth at the aggregate level, while structural reforms aren’t moving fast enough to increase potential growth. There’s also “hysteresis”—the way that protracted cyclical stagnation can weigh down potential growth, since human and physical capital become more obsolete if they aren’t used at full capacity.

What actual growth we’ve seen has been anemic, below its potential as a painful process of deleveraging has been under way, first in the U.S., then in Europe and now in emerging markets, to stabilize and reduce high levels of private and public debts and deficits.

At the same time, economic policies—especially ­monetary—have become increasingly unconventional, and the distinction between monetary and fiscal policy has become more blurred. Ten years ago, who had heard of terms such as ZIRP (zero-interest-rate policy), QE (quantitative easing), CE (credit easing), or UFXInt (unsterilized FX intervention)? These esoteric and unconventional monetary-policy tools are now the norm in most advanced economies, and even some emerging market ones as well.

Some critics incorrectly argued that these unconventional monetary policies—and the accompanying mushrooming of the balance sheet of central banks, which they saw as an alleged form of debasement of fiat currencies—would lead to hyperinflation, a collapse in the value of the U.S. dollar, a sharp rise in long-term interest rates and the price of gold and other commodities, even the replacement of standard currencies with crypto-currencies like Bitcoin. Yet none of that happened—inflation is still too low and falling in advanced economies, while long-term interest rates have kept on falling in the past few years. The value of the dollar has surged at historic rates even as commodity prices have fallen sharply—with gold dropping by some 25% in 2015—even as Bitcoin has been the worst-performing currency in 2014–15, if one could even call it a currency.

In spite of the ballooning balance sheets of central banks and the unconventional policies that were supposed to debase fiat currencies, inflation is too low and falling in advanced economies, and even in many emerging markets. Central banks now need to try to avoid low-flation, if not outright deflation. The traditional connection between the money supply and prices—as more money is pushed into the system, prices should go up—has collapsed for two reasons. One, banks are hoarding the additional supply of money in the form of excess reserves rather than lending it. Two, there is still a lot of slack in many countries. Goods markets have large output gaps, with the excess capacity now exacerbated by the over-investment by China. In labor markets, unemployment rates are still too high and workers have too little wage bargaining power. That slack is clear in real estate markets in countries that had a housing boom and bust, and now in commodity markets where the prices of oil, energy and other raw materials have collapsed thanks to various factors, including the slowdown of China, the surge of supply in energy and industrial metals thanks to new discoveries and overinvestment in new capacity, as well as a strong dollar that weakens the price of commodities.

Real interest rates are very low and many asset prices too high relative to their underlying fundamental value in equities, real estate, credit and government bonds. We have negative nominal interest rates at the policy level in most of Europe—including the euro zone, Switzerland, Denmark and Sweden. There are now over $2 trillion equivalent of government bonds at maturities all the way to 10 or 20 years that provide a negative nominal yield in the euro zone, the rest of Europe and Japan. Why would investors lend to governments at a negative nominal yield for 10 years when they could instead hold cash and at least earn a zero yield?

It is indeed a new abnormal for growth, inflation, monetary policies and asset prices—and it is likely to stay with us in 2016 and well beyond.



via www.time.com/4180698/nouriel-roubini-global-economy/