In his new book on the Obama economic team, Ron Suskind quotes former administration official Larry Summers complaining: “We’re home alone. There’s no adult in charge. Clinton would never have made these mistakes.”
via Barack Obama, Home Alone – Rich Lowry – National Review Online.
Larry Summers “We’re home alone” comment could damage Barack Obama’s already slim chances of re-election. Already slim because there is little he can do that will create jobs before November next year.
The risks ahead are not just of a mild double-dip recession, but of a severe contraction that could turn into Great Depression II, especially if the eurozone crisis becomes disorderly and leads to a global financial meltdown. Wrong-headed policies during the first Great Depression led to trade and currency wars, disorderly debt defaults, deflation, rising income and wealth inequality, poverty, desperation, and social and political instability that eventually led to the rise of authoritarian regimes and World War II. The best way to avoid the risk of repeating such a sequence is bold and aggressive global policy action now.
via How to Prevent a Depression – Nouriel Roubini – Project Syndicate.
China’s refusal to open its economy to foreign investment could backfire by encouraging European politicians to curb Chinese investments on the continent, the European Union’s trade chief has warned.
U.S. builders broke ground on fewer homes in August, more evidence that the housing market remains depressed.
The Commerce Department said Tuesday that builders began work on a seasonally adjusted annual rate of 571,000 homes last month, a 5% decline from July and a three-month low. That’s less than half the 1.2 million homes that economists say is consistent with healthy housing markets.
via Home building down 5% in August as slide continues – latimes.com.
The government aims to “soften the pain” from the strong yen and keep it from leading to more “hollowing out” of Japanese industry, the plan says. It calls for expanding and extending funds for key industries that create jobs, as well as expanding training for workers and the unemployed.
It also urges expansion of financial support for small- and medium-sized businesses, many of which have been hit hard by the currency’s surge.
The government also revealed measures intended to exploit the strong yen’s merits, implicitly acknowledging the limits on Tokyo’s ability to weaken the currency.
The plan proposes support for Japanese companies conducting mergers and acquisitions overseas, as well as for development of overseas natural resources and energy supplies, which the strong yen could help make cheaper.
Tokyo also wants to make the benefits of the strong yen apparent to consumers in areas such as electricity and gas utility prices, and calls for the implementation of a survey of consumers on the merits of the currency’s rise.
In short, the West must stimulate with a credible longer term deficit reduction plan, the East must dump its mercantilism and banks must be reigned in everywhere. All eminently sane — and the opposite of what’s happening.
The risks to the global economy are many, but three in particular demand strong action by policymakers:
• In the euro area, banks must be made stronger, not only to avoid deleveraging and maintain growth, but also, and more importantly, to reduce risks of vicious feedback loops between low growth, weak sovereigns, and weak banks. This requires additional capital buffers, from either private or public sources.
• The top priorities in the United States include devising a medium-term fiscal consolidation plan to put public debt on a sustainable path and to implement policies to sustain the recovery, including by easing the adjustment in the housing and labor markets. The new American Jobs Act would provide needed short-term support to the economy, but it must be flanked with a strong medium-term fiscal plan that raises revenues and contains the growth of entitlement spending.
• In Japan, the government should pursue more ambitious measures to deal with the very high level of public debt while attending to the immediate need for reconstruction and development in the areas hit by the earthquake and tsunami.
The president’s announced jobs plan centers on the need for additional short-term stimulus designed to boost aggregate demand and jump-start economic growth. In some recession scenarios, such action, if timely, can indeed raise output and employment.
In our current state, however, calling for additional spending and temporary tax relief without addressing longer-term economic challenges may exacerbate the likelihood of another recession in the coming year.
This is because the U.S. economy suffers from structural problems predating the financial crisis, particularly an excessive reliance on household consumption and government spending, and insufficient attention paid to business investment and exports. The financial system and the economy need to adjust in the face of this structural shift.
This observation points out two problems with the case for stimulus being made by Obama. The first is that near-term and temporary support for household incomes does little to counterbalance the chilling effect of announced future policies. Uncertainty becomes the enemy.
via Short-Term Stimulus Won’t Help U.S. in Long Run: Glenn Hubbard – Bloomberg.
The beleaguered housing sector is looking like the Greece of the U.S. economy. Just as the euro zone won’t prosper until Greece gets its act together, the U.S. recovery won’t gain traction until the housing sector deals with the excesses of its past……..
Housing and related mortgage problems remain a large drag on economic growth. In August, housing starts stood at a annual rate of 571,000–just one-third of its pace during the boom. And the weak September reading on home builders sentiment suggest builders see more declines ahead.
via Housing Is to the U.S. What Greece Is to the Euro Zone – Real Time Economics – WSJ.
A key rate setter-for China’s central bank let slip – or was it a slip? – that Beijing aims to run down its portfolio of US debt as soon as safely possible.
“The incremental parts of our of our foreign reserve holdings should be invested in physical assets,” said Li Daokui at the World Economic Forum in the very rainy city of Dalian….”We would like to buy stakes in Boeing, Intel, and Apple, and maybe we should invest in these types of companies in a proactive way.”
via China to ‘liquidate’ US Treasuries, not dollars – Telegraph Blogs.
Why would a poor country with GDP per capita of $4000 and an emerging economy be investing in US Treasurys or blue chip stocks? Perhaps because repatriating funds would cause the yuan to rise to a more realistic level against the dollar and end China’s trade advantage.
