Category: Economy

Analysis of the global economy

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Noam Chomsky: “Europe’s policies make sense only on one assumption: that the goal is to try and undermine and unravel the welfare state.” | EUROPP

Noam Chomsky in an interview with EUROPP editors Stuart A Brown and Chris Gilson:

Europe’s policies [austerity during a recession] make sense only on one assumption: that the goal is to try and undermine and unravel the welfare state. And that’s almost been said. Mario Draghi, the President of the European Central Bank, had an interview with the Wall Street Journal where he said that the social contract in Europe is dead. He wasn’t advocating it, he was describing it, but that’s essentially what the policies lead to…….

Chomsky has the cart before the horse. Collapse of welfare states in Europe led to austerity — not the other way round. Joe Hockey had a slightly different take on events in Europe in his April address to the Institute of Economic Affairs:

The Age of Entitlement is over. We should not take this as cause for despair. It is our market based economies which have forced this change on unwilling participants. What we have seen is that the market is mandating policy changes that common sense and years of lectures from small government advocates have failed to achieve.

Reduction of trade barriers and shrinking of the technological advantage enjoyed by developed nations will lead to the inevitable demise of the social contract. Free competition demands efficiency. Countries cannot remain competitive while carrying burdens imposed by a welfare state.

via Five minutes with Noam Chomsky – “Europe’s policies make sense only on one assumption: that the goal is to try and undermine and unravel the welfare state.” | EUROPP.

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‘Doomsday’ For The Fiscal Cliff? | ABC News

Republicans are considering a “Doomsday Plan” if fiscal cliff talks fail. The ABC’s Jon Karl reports:

It’s quite simple: House Republicans would allow a vote on extending the Bush middle class tax cuts (the bill passed in August by the Senate) and offer the president nothing more – no extension of the debt ceiling, nothing on unemployment, nothing on closing loopholes. Congress would recess for the holidays and the president would face a big battle early in the year over the debt ceiling.

Two senior Republican elected officials say this Doomsday Plan is becoming the most likely scenario. A top GOP House leadership aide confirms the plan is under consideration, but says Speaker Boehner has made no decision on whether to pursue it.

Under one variation of the plan, House Republicans would allow a vote on extending only the middle class tax cuts and Republicans, to express disapproval at the failure to extend all tax cuts, would vote “present” on the bill, allowing it to pass entirely on Democratic votes.

By doing this, Republicans avoid taking blame for tax increases on 98 percent of income tax payers. As one senior Republican in Congress told me, “You don’t take a hostage you aren’t willing to shoot.”

This is a time for mending bridges damaged during the election. The ability of the President to unify rather than polarize the two sides of the house will be tested in the next few weeks. Let us hope that he measures up.

via ‘Doomsday’ For The Fiscal Cliff? (The Note) – ABC News.

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Obama Theatrics, Obama Reality – Business Insider

Wendy McElroy writes that we should ignore the distraction of President Obama’s flowery speeches and focus on the under-the-radar actions of regulatory agencies and regulatory czars appointed — FDR-style — directly by the president.

A Nov. 19 article in the National Review opened, “On Friday, the Environmental Protection Agency rejected petitions from the governors of Georgia, Texas, Arkansas, Delaware, Maryland, New Mexico, and North Carolina to suspend the biofuel-blending requirements established by the federal Renewable Fuel Standard (RFS) program.”

The petition asked for relief from the program’s requirement to convert corn crops into ethanol. National Review explained, “The 2012 target is to blend 13.2 billion gallons of biofuel into our gasoline, a quantity that ratchets up to 13.8 billion gallons in 2013. This year, about 4.7 billion bushels, or 40% of the nation’s corn crop, will be consumed by ethanol manufacturing.” The petitioning states are economically reeling from “the worst drought in 50 years,” and the EPA czar has the power to waive the program’s requirement. She chose not to.

via Obama Theatrics, Obama Reality – Business Insider.

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Fiscal Cliff Is Just a Speed Bump on the Road to a Real Crisis | International Liberty

Dan Mitchell writes in the New York Post:

A lot of people get upset about the national debt, which is somewhere between $11 trillion and $16 trillion, depending on whether you include money the government owes itself. Those are big numbers — but if you add up the amount of money that the government is promising to spend for entitlement programs in the future and compare that figure to the amount of revenue that the government projects it will collect for those programs, the cumulative shortfall is more than $100 trillion. And that’s after adjusting for inflation. Some politicians claim this huge, baked-into-the-cake expansion of government isn’t a problem, because we can raise taxes. But that’s exactly what Europe’s welfare states tried — and it didn’t work. Simply stated, even huge tax hikes won’t stem the flow of red ink in the long run if government keeps growing faster than the private economy. This is the fiscal problem that demands attention. Absent real entitlement reform, such as block-granting Medicaid to the states, the burden of government spending will consume ever-larger shares of our economic output with each passing year.

via Explaining in the New York Post that the Fiscal Cliff Is Just a Speed Bump on the Road to a Real Crisis « International Liberty.

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China: Uncertain foundations – FT.com

Simon Rabinovitch at FT writes:

Shadow banking is flourishing in China, helping to make non-bank institutions as big a source of credit as banks themselves since July – something that has never happened before. Chinese bankers, leading rating agencies and the International Monetary Fund have all warned about risks from the surge in loosely regulated lending, with some even pointing to parallels with developed economies before the global financial crisis. But the Chinese government itself has taken a permissive stance.

Highly regulated banks restricted lending to property developers following concerns over a real estate bubble. But regulators turned a blind eye to unregulated shadow lenders who borrow short — normally no more than 3 months — and lend long. They may believe this will sustain economic growth while protecting banks from risky lending. The thinly capitalized sector, however, is at risk from defaults and a consequent liquidity crisis which could spread to the banking sector.

via Uncertain foundations – FT.com.

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IMF: Australia's banks need more capital

The IMF identifies risks to Australia’s banking system:

  • Residential mortgages are banks’ single largest asset, and a combination of high household debt and elevated house prices increases the risk in this portfolio.
  • Banks rely on funding from outside the country, and with the crisis in Europe and the global economy suffering, these funding sources are volatile.
  • Four major banks dominate the banking system, and they share many similarities that can be a cause of risk spreading from one to another in the event of a crisis.

……The four major banks are systemically important which means difficulties in any one of them would have severe repercussions for the financial system and the economy. A higher minimum capital requirement would provide a bigger cushion against potential losses.

Capital ratios may under-state capital requirements through risk-weighting assets. Past performance is not always a good predictor of the future. I prefer FDIC director Thomas Hoenig’s unweighted comparison of tangible assets to tangible equity.

via IMF Survey: Australia’s Banks Sturdy, Closely Connected.

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Mark Carney Named New BOE Governor | WSJ.com

Mark Carney, who currently runs Canada’s central bank, will be the next governor of the Bank of England, the British government announced Monday, in a surprise pick that underscores U.K. officials’ thirst for fresh blood at the powerful institution……

via Mark Carney Named New BOE Governor – WSJ.com.

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The “Export Price Norm” saved Australia from the Great Recession « The Market Monetarist

The Market Monetarist writes how a combination of luck and good policy saved Australia from recession.

Milton Friedman once said never to underestimate the importance of luck of nations. I believe that is very true and I think the same goes for central banks. Some nations came through the shock in 2008-9 much better than other nations and obviously better policy and particularly better monetary policy played a key role. However, luck certainly also played a role…..

via The “Export Price Norm” saved Australia from the Great Recession « The Market Monetarist.

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Australia: Housing affordability still poor

Interesting article by Leith van Onselen on Australian housing affordability.

Today it takes “380 weeks on the average wage (just over seven year’s income) to buy a typical house. This is down from around 430 weeks average wages (just over eight year’s income) required to buy a home in 2008 and 2010.”

Good news. But compare that to less than 250 weeks in 1995 — and less than 200 weeks in 1987.

In 1960, it took homebuyers just 7500 hours [188 weeks on the average wage] to pay off the average mortgage.

via Housing affordability improves but still poor | | MacroBusiness.

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