I was real fortunate to receive got had the chance to attend the World Economic Forum inwards Davos final week, co-leading a session entitled "Making Better Decisions" on behavioral economics. My focus is mainly on microeconomics, too and thus I was grateful to larn well-nigh the electrical flow macroeconomic climate from leading policymakers, executives, too commentators. I wanted to create this posting to part what I learned. I volition subdivide the ship service into dissimilar categories, but at that spot volition naturally endure some overlap.
European Economy
European Economy
- General upbeat mood, every bit tail risks (e.g. likelihood of collapse of Euro) receive got been significantly reduced
- But, to a greater extent than a feeling of relief (absence of negative word that people feared this fourth dimension final year) than optimism (presence of definitively positive news)
- Europe looks solid alone compared to recent pitiable performance
- The U.S. has done much meliorate than Europe. Unemployment is below the pre-crisis level, the stock marketplace is higher, too gross domestic product is higher. In Europe, Federal Republic of Federal Republic of Germany is the alone province that satisfies all 3 criteria
- Euro-area gross domestic product growth at 1% is yet anemic, too uneven across the Euro-zone: concentrated inwards the poorest countries
- Short-term growth has resulted from monetary too financial stimulus. Long-term growth volition depend on structural issues: technology, innovation, trade, supply-side factors, which are weak
- Structural reforms needed to address these supply-side issues, but governments are notoriously sluggish
- Youth unemployment is a major supply-side concern inwards many countries: > 50% inwards Kingdom of Spain too Italy, 25% inwards France. Failure to acquire a project a twelvemonth or 2 after leaving schoolhouse / academy substantially reduces the take away chances of getting 1 later
- Some technological changes (e.g. 3D printing) volition Pb to a substantial loss of jobs inwards some sectors, but the creation of jobs inwards others. Governments should endure prepared
- Short-term risks
- European Parliament elections could run into some Euro-skeptics beingness elected, which may receive got similar effects every bit the Tea Party inwards the US
- Imminent Asset Quality Review of European Banks; some may non pass
- Is to a greater extent than rule is the optimal solution to a financial crisis?
- Axel Weber (UBS): Some regulations (on leverage too the banking system) were indeed necessary. Taxpayers were uncomfortable amongst the sum of jeopardy that was beingness taken. But, demand to retrieve that the destination of the banking arrangement is to foster growth (by lending money), too thus nosotros mustn't over-regulate
- Same applies to non-finance regulations. Freeing upward access to information (e.g. medical records) tin endure helpful for growth
- Sir Martin Sorrell (WPP): best regulatory alter would endure to increment labor marketplace flexibility. Firms are unable to lay off workers without excessive severance pay, too thus they don't hire to laid about with
Deflation Concerns
- All OECD countries (except Turkey too Hungary) are below their inflation targets
- Why is deflation bad?
- Households volition postpone purchases if they think prices are going to fall
- Real (i.e. inflation-adjusted) debt rises when prices fall. This makes borrowers fifty-fifty to a greater extent than inwards debt, too makes them less probable to spend. The regime is a major borrower, too deflation increases the existent sum of world debt
- For the higher upward reasons, depression inflation may cause weak economical growth, rather than only beingness a symptom of weak economical growth
- OK, I empathize that negative inflation is bad, but shouldn't nosotros target 0% inflation, non 2% inflation?
- Quality of goods rises over time, too thus 2% inflation is actually 0% inflation, too this is non fully captured inwards updates to inflation calculations
- Positive inflation allows existent payoff to autumn fifty-fifty if nominal payoff don't fall
- Some may fence that depression "headline" inflation is because shale revolution has driven downwards liberate energy prices, but "core" inflation figures (which exclude liberate energy prices) are also low
- Policymakers feared that Quantitative Easing would Pb to inflation, but QE has had a much bigger lawsuit on the prices of financial assets (e.g. stocks) than existent goods too services
- Major crusade of deflation is debt overhang: firms receive got too thus much debt that they receive got few incentives to invest
- We don't know how to cure debt overhang, nosotros alone know how to motion debt from Earth sector to the soul sector
- View that debt overhang is of import suggests that the demand side, rather than the render side, is fundamental to avoiding deflation
- Monetarists (who advocate focusing on the render side) predicted that quantitative easing would Pb to inflation. But it didn't, it alone reduced downside risks. This shows that demand-side considerations are important
- Economies alone grew inwards the final decade due to debt. Private credit grew much faster than GDP. U.K. identify debt/GDP was 15% inwards 1964 too 95% inwards 2008. Policymakers don't know how to growth without taking on debt
- Germany was the alone province nosotros could think of that has grown without debt, but they receive got grown due to a electrical flow concern human relationship surplus: Red People's Republic of China has taken on debt to purchase German linguistic communication goods. Thus, they've also required debt to accomplish growth
- Earnings haven't yet risen, which is 1 of the fundamental drivers of inflation
- Good deflation is where prices autumn relative to wages, but hither nosotros receive got depression wage growth
- Even though U.K. too U.S. unemployment information are good, wage growth is surprisingly weak
- Yen barbarous inwards 2012 inwards anticipation of QE; Pound barbarous inwards 2008 for the same reason. Led to inflation the next twelvemonth since input prices rose. Similarly, it led to other countries having falling inflation. Thus, QE inwards 1 province "exports" deflation elsewhere - it passes on the problem
- But, if all countries engage inwards QE together, this tin receive the global economy.
European Bank Regulation
- European Central Bank volition endure a mutual regulator across all European banks
- Uncertainty over whether at that spot volition endure a mutual deposit guarantee
- Further political reform, too financial union, volition farther solidify Europe, but at that spot are many opponents
- Is the financial arrangement safer now?
- Anthony Jenkins (Barclays): yes, nosotros empathize jeopardy meliorate now, too there's closer supervision. However, whether the arrangement is safer is non the alone of import question; nosotros must also inquire if it supports growth.
- Anat Admati (Stanford): no. The changes that receive got happened receive got been similar reducing the speed confine from xc to 85. Financial crises aren't exogenous natural disasters (like hurricanes) that nosotros tin practise footling about; they are man-made disasters created past times faulty laws
- Paul Singer (Elliott Management): no. Banks yet engage inwards substantial proprietary trading; they are 10 times to a greater extent than leveraged than his ain hedge fund, too don't empathize their risks (e.g. complex derivatives).
- Douglas Flint (HSBC): Move jeopardy into places that it's transparent too understood (e.g. banks) than leaving it amongst people who don't empathize it (e.g. acquire out a pocket-size concern vulnerable to telephone commutation charge per unit of measurement jeopardy every bit it's unable to hedge itself using derivatives.)
- Anthony Jenkins (Barclays): Northern Rock (building society), HBOS, RBS (commercial banking) failed, too these were non active inwards derivatives. Derivatives are socially useful for jeopardy management.
- It's unrealistic to think that banks should exactly acquire rid of risk, every bit this is impossible. However clever people are amongst algorithms, y'all can't spin straw into gilded - y'all can't plow risky materials into a AAA bond. They can't eliminate risk, but they perform a useful portion past times taking jeopardy off others' hands (even though this agency that they cease upward risky themselves)
- Thus, the destination should non endure for banks to endure safe, but exactly to empathize the risks they are taking.
French Economy
- GDP growth of 0.0% inwards 2012, barbarous 0.1% inwards Q3 2013
- Weak regime financial position
- Government spending at 53% of gross domestic product is highest inwards G7
- Debt/GDP was 91% inwards mid-2012, versus the 60% target inwards the Stability Pact
- Huge unfunded pensions. As U.S. states are finding, pay-as-you-go is some other discussion for a pyramid scheme
- S&P downgraded French Republic to AA, Moody's to Aa1. Fitch downgraded French Republic too upgraded Kingdom of Spain at the same time
- Since creation of Euro, French Republic has grown 0.8%/year versus Germany's 1.3%
- Unemployment charge per unit of measurement of 10.9% (versus 5% inwards Germany), highest inwards sixteen years. Youth unemployment of 25%
- Rigid production too service markets according to OECD surveys
- Rigid labor markets
- Strong work laws brand dismissals hard. Dismissals oft challenged inwards court; workers receive got long fourth dimension window to competitor dismissals
- High minimum wage (€9.53/hour), beyond the productive mightiness of many workers
- 35 sixty minutes travel week, sixty twelvemonth erstwhile retirement age
- High welfare too unemployment benefits discourage work
- Unexpected worsening inwards electrical flow concern human relationship deficit inwards Nov 2013. Exports weak due to
- Rigidities inwards product, service, too labor markets
- Weakness inwards fundamental trading partners (Italy, Spain). French Republic is heavily exposed to Europe due to merchandise linkages too banking system; Germany, inwards contrast, exports exterior Europe
- Due to the Euro, French Republic can't devalue to keep competitiveness. An increment inwards prices combined amongst a constant nominal telephone commutation charge per unit of measurement leads to a higher existent telephone commutation rate
- Since Hollande's election inwards mid-2012, footling action
- Responded indignantly to IMF, OECD calls for French Republic to reform its budget deficits, claiming that outsiders should non enjoin French Republic how to run its economy
- Muddled policies. Increased concern taxation relief, but also reversed some taxation reliefs of previous regime too increased income taxation to 75% higher upward €1m
- No efforts to improve investment, innovation, eliminate 35 sixty minutes travel week
- January 2014 announced €30b of payroll taxation cuts. "Responsibility Pact" that, if businesses invest inwards French Republic too hire immature too erstwhile workers, they volition acquire to a greater extent than taxation cuts too fewer constraints on concern activity
- Goal is to create 1.8m jobs to cutting unemployment to 7% past times 2018
- Tax cuts are welcome, too demonstrate pragmatism (as Socialist governments are non typically associated amongst supply-side reforms). Big interrogation is how to finance it. Government can't borrow, every bit French Republic is already indebted. Announced €53b of spending cuts over the adjacent 3 years, but few details. Hollande has shown he tin enhance income tax, but cutting expenditure is much harder
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