US and UK inflation
Latest data on inflation suggests price rises are dampening in the US - opening the door for further rate cuts.
But in the UK there are fears that sustained inflationary pressures will prevent the Monetary Policy Committee of the Bank of England reducing the base rate until at least the summer. Geoff looked at this in detail earlier in the week.
read more...»Credit Crunch in 3:07
I teach a General Studies course on Friday mornings and will be looking at the credit crunch and the link between financial and economic crises tomorrow.
read more...»Feeling the pinch
This BBC news audio-video clip is excellent for students wanting to gauge where the US economy is at this critical stage of the cycle. I used it to explain the difference between leading, co-incident and lagging indicators. Officially we wont know if the economy is in recession for some time because the official data on output, income and spending arrives several months after the event! But the experience of the Brooklyn brewery shown in the video is a good mini case study - they are being buffeted by the falling dollar (which increases the price of grain imported from the UK), rising world prices for yeast and hops. And by the slowdown in consumer demand. The one bright spot is that a weaker dollar is increasing their export volumes.
Recession Watch: American Idle
Economists in the United States pay a lot of attention to the monthly payroll numbers and the latest set of figures are being taken as a sign that recession is more or less a done deal in the USA.
read more...»Signs of a negative “wealth effect” for the USA?
One of the big recession risks facing the US economy is that a sharp decline in the net wealth of millions of US households will cut deep into consumer confidence and a willingness and ability to spend on big ticket items. The so called “wealth effect” can be very powerful either when asset prices are surging ahead as they have for most of the last ten years. Or when the wealth effect goes into reverse and people find that the value of the property, shares and other financial assets are in freefall. The negative wealth effect was a noticeable feature of the last economic recession in the UK in the main due to the steep fall in nominal and real house prices.
Today the Federal Reserve Bank published their regular ‘flow of funds’ figures - and inside them was the news that US families are getting poorer for the first time in more than five years. Asset prices are falling and levels of debt are rising - the result a cut in household net worth and a rise in the stress barometer.
read more...»McCain on Cap and Trade
Senator John McCain will be battling it out for the Presidency in the November elections and his economic policies come under scrutiny in this article in the Wall Street Journal. I wonder how many A level economics students know that McCain (together with Joe Lieberman) has long been a supporter of cap and trade emissions schemes - favouring the market mechanism as a way of putting a price on carbon to incentivise producers to cut CO2 emissions in the least cost way.
McCain is quoted in the WSJ as saying that
“I am absolutely convinced that innovation, technology, and using the entrepreneurship of America will come up with technologies which will save money, be a boon to our economy, and clean up our environment.” He’s unlikely to get much argument on this from his Democratic opponents; Sens. Obama and Clinton co-sponsored Sen. McCain’s legislation.
The rest of the article can be read here
Housing Bubbles and Irrationality
Robert Schiller, the economist who has penned two books on the existence “irrational exuberance” writes about the US housing bubble and bust in today’s New York Times. In doing so he introduces us to another aspect of behavioural economics - the impact of information cascades which shape the decision making of people who are seeking to act entirely rationally when making a call about the investment value of putting money into property. The cascade effect kicks in when people have incomplete information and tend to rely on the experiences and judgements of others.
Schiller writes that
“The failure to recognize the housing bubble is the core reason for the collapsing house of cards we are seeing in financial markets in the United States and around the world. If people do not see any risk, and see only the prospect of outsized investment returns, they will pursue those returns with disregard for the risks…... The efficient-markets view holds that the market is wiser than any individual: in aggregate, the market will come to the correct decision. But the theory is flawed because it does not recognize that people must rely on the judgments of others.”
‘How a Bubble Stayed Under the Radar’ can be read here (free registration and login to the NYT site is required)
US Economy - who do you trust?
The Target 2.0 team from my school were in action yesterday in the Regional Final. They were placed second which means they miss out on the final but the department is still £650 better off - and I am sure the boys found the experience highly valuable. It certainly got them talking and thinking about monetary policy and the multitude of influences and indicators relating to inflation.
One of the questions they were asked as part of the competition was to compare the single target of the MPC (CPI 1% between 3%) against the dual target of the Fed (who are responsible for controlling inflation and growth).
It makes sense then, for Ben Bernanke to prefer a more aggressive interest rate policy if he is responsible for ensuring the US economy does not experience too slow growth. On the other hand…
Mr Bush rejected calls for a second package of measures, telling reporters at the White House press conference: “why don’t we let the stimulus package we have a chance to kick in”.
Which makes a nice case study in time lags.
Of course, the difference between the two is that Mr Bernanke may still be in office in 2009 - and picking up the pieces of the economic problems emerging now.
read more...»12 steps to meltdown
If you like laying on the economic pessimism extra thick then this article by Martin Wolf in the Financial Times today is worth a look. He draws on the work of Nouriel Roubini of New York University’s Stern School of Business, founder of RGE monitor who has been a constant prophet of doom on the US economy for longer than most. Roubini has developed a list of 12 steps towards the mother of all economic meltdowns
Step one is the worst housing recession in US history
Step two would be further losses, beyond the $250bn-$300bn now estimated, for subprime mortgages
Step three would be big losses on unsecured consumer debt
Step four would be the downgrading of the monoline insurers
Step five would be the meltdown of the commercial property market
Step six would be bankruptcy of a large regional or national bank.
Step seven would be big losses on reckless leveraged buy-outs
Step eight would be a wave of corporate defaults
Step nine would be a meltdown in the “shadow financial system”.
Step 10 would be a further collapse in stock prices
Step 11 would be a drying-up of liquidity in a range of financial markets, including interbank and money markets.
Step 12 would be “a vicious circle of losses, capital reduction, credit contraction, forced liquidation and fire sales of assets at below fundamental prices
Today oil prices finished above $100 a barrel for the first time. And Credit Suisse revealed that it had suspended a “handful” of traders for overvaluing assets and would take a $1 billion hit to its first-quarter results.
Castro bows out
After a staggering forty nine years in power, we wish a fond goodbye to Fidel Castro the 81 year old President of Cuba. I must admit to knowing precious little about the Cuban economy and whilst EcoWin usually has a veritable goldmine of economic data on virtually every economy in the world, there were just forty seven entries for Cuba, mostly from the IMF on Cuba’s foreign exchange reserves and borrowing! But Cuba is one of the relatively few countries with which the USA runs a trade surplus! And this surplus has been growing in recent years.
Several of my colleagues at school are frequent visitors to Cuba and I must quiz them for more background information on the economy. A common perception is the living standards for the average Cuban are massively below that in the USA - I have put together a short data profile of the two countries using data drawn from the World Bank Development Report from April 2007.
read more...»Credit crunch redux: pointing the finger
Never one to fear accusations of flogging a dead horse, Jon Moulton was on Channel 4’s Dispatches programme last night to explain to us, once again, the credit crunch. But it wasn’t even the fact that we’ve had this debacle crammed down our throats for the last five months that irked me, it was the smug, gloating tone he reserved for the bankers. I’m sure a fine drinking game could’ve been invented out of that one episode, given the number of times the word “greed” was tossed about with a holier-than-thou smirk on his face. Is he himself not one of those “fat cats” he so readily blames for the downfall of Northern Rock?
read more...»Business decisions drive the economic cycle
Bruce Kasman, chief economist at JPMorgan Chase was quoted in an article in the Financial Times last week saying that “recessions are all about shifts in business behaviour.’ The analysis piece was looking at the apparent gap between the dire warnings of recession emanating from the US financial community and the more benign view of the economic landscape coming from the leaders of bricks and mortar businesses.
What are the key business decisions that may decide the extent and duration of the downswing in the US economy in the coming months? Here are five that I can think of, there are bound to be more.
read more...»A Tale of Two Trade Deficits
‘Most of our imports these days come from overseas”. (George W Bush)
The publication of the overseas trade figures rarely makes headline news these days, the balance of payments isn’t as high in the national consciousness as it once was in days of yore - there are still economics teachers out there who remember the sterling crises of the late 1960s and early 1970s! But today we had confirmation (in so far as the trade data can ever be relied upon) that the United States has seen the first reduction in its trade deficit in goods and services for six years whilst the UK has just notched up its biggest ever gap between the value of exports and imports!
read more...»Larceny in the Human Heart
Ben Stein, in the NY Times, writes an impassioned article entitled The Unending Allure of the Free Lunch. He blames deregulation (as well as the usual factors of greed and/or stupidity) on the subprime crisis.
One of my favourite books is Devil Take The Hindmost by Edward Chancellor (great name for an economics writer!) in which the history of speculative bubbles provides (one would think) a crash course in short-term gain versus long-term pain. The pain part of the cycle has begun (with stock market problems and repossessions a significant feature for the UK housing market again) yet is anyone surprised that here we are again?
As Ben Stein puts it so passionately at the end of his article:
“Is anyone ever going to wake up to the fact that there is a lot of larceny in the human heart and that there are a lot of sheep waiting to be shorn and that regulation is not a bad thing? Or will we just lurch from massive meltdown to massive theft and on and on? Is anyone ever going to get it? Anyone? Anyone?”
Three great macro articles today!
The Monday morning papers brought three contrasting but equally stimulating comment pieces on the future for the UK and international economy from Stephen King, Anatole Kaletsky and Larry Elliott.
read more...»Our pick of the Sunday papers!
There are some excellent articles on the economics front in today’s Sunday papers.The Observer has some thought provoking articles to get your teeth stuck into.
read more...»An Evening with an Inspirational Economist
Halfway through Jim O’Neill’s talk to the Keynes Society last night I realised properly for the first time in several years why I teach economics. There are few subjects that happen in real time, in internet time – and few where there are so many constantly changing issues to confront and events and trends to make sense of. We live in utterly fascinating times, and lying just beneath the surface of so many of the critical economic and geo-political debates is a seismic shift in the global economy’s Teutonic plates. The rise of the BRIC economies and the Next eleven (N-11) was the subject of an inspiring talk by the Managing Director & Head of Global Economic Research at Goldman Sachs.
read more...»Engine rooms for the world economy
David Smith writing in the Sunday Times provides a timely reminder that the engines in the boiler room of the global economy have been renewed and replaced. Over half of the rise in global demand for goods and services came from countries outside the Group of Seven. For the first time ever, consumers in China have added more to world aggregate demand than their counterparts in the USA.
read more...»US Economy Chart Room
I have updated a twenty chart presentation on the US economy which is streamed here. The charts provide an overview of what is happening at the moment to the US showing evidence of turning points in the economic cycle.
Another cut in US interest rates
The United States Federal Reserve has once more moved to lower interest rates in an aggressive move to bolster confidence and demand in their flagging economy. This BBC news audio-visual clip looks at the immediate market reaction. Just about every macroeconomic policy lever is now being pulled in terms of monetary and fiscal policy and it will be fascinating to see what impact the loosening of macroeconomic policy has on the economy.
Ben Bernanke has indicated that he is prepared to cut rates even further if necessary, a stark contrast to the inactivity at the Bank of England. The fact is that the drivers of monetary policy decisions in the United States tend to err on the side of economic growth whereas the sober bankers on the Monetary Policy Committee take a sterner line on inflation risks. Whose side are you on?
read more...»
Every breath you take
With Ben Bernanke hitting the front page headlines of the newspapers more or less every day, I want to share one of my favourite videos on You Tube, created in April 2006.
read more...»Cathartic recession?
Cathartic
1. causing bowel evacuation, usually of liquid feces; an agent that so acts.
2. producing catharsis.
Evan Davis in his excellent blog ‘Evanomics’ was prompted to ask Larry Summers this morning on the BBC radio 4 Today programme whether there was such a thing as a cathartic recession - a downturn that helped to rid an economy of financial excess; raise private sector savings and bring about a correction of macroeconomic imbalances such as an enormous trade deficit.
Evan’s blog post can be read here
David Warsh writes here about the US economy and considers whether there has never been a better time for a recession
Fears of a 30’s style liquidity trap
Fears of a 1930’s style “liquidity trap”
Will big cuts in interest rates avert the threat of recession for the United States? Interest rate reductions ought normally to provide a monetary stimulus to the economy supporting confidence and encouraging consumer spending and business investment. A well-judged relaxation of monetary policy should help to stabilise demand, output and jobs helping to reduce the risk of a painful economic slump.
But the Nobel-prize winning economist Joe Stiglitz has claimed that the United States may be on the verge of a 1930s-style “liquidity trap” which may make monetary policy decisions impotent. His argument is based on the divergent movement in long term and short term interest rates. Last week the US Federal Reserve cut short term interest rates by 0.75% (the largest single reduction in nearly a quarter of a century) - thus bringing down short term official interest rates. Stiglitz believes that longer-term interest rates such as rates on government and corporate bonds and mortgage rates will not come down as easily and it is this that might act as a depressant on the real economy. The credit crunch has driven up long term interest rates and bond yields are also being edged upwards by fears of rising global inflation, for example caused by persistently high fuel and energy prices and the end of a decade or more of cheap food.
If mortgage rates stay high, there will be little respite for a US housing market clearly mired in recession. Falling property prices will depress personal wealth and lead to a reduction in spending on goods and services. Negative equity may haunt many thousands of home-owners - where their property is worth less than their outstanding mortgage debt - and in this situation, lower short term interest rates e.g. on credit cards will do little to boost consumer demand. Stiglitz believes that in a liquidity trap two things can happen. Firstly that large changes in interest rates have little impact (the interest elasticity of demand drops close to zero) and also that the time lag between a relaxation of monetary policy and its eventual impact on aggregate demand lengthens. This makes it very difficult to rely solely on monetary policy as a way of managing demand. This is perhaps a cue for the size and scale of the tax rebates being pushed through by the Bush administration.
Even that may not be sufficient. Professor Stiglitz is reported in the Telegraph as saying:
“As a Keynesian, I’d say the biggest back for the buck in terms of immediate stimulus would be unemployment assistance and tax rebates for the poor. That will feed through quickly, but set against the magnitude of the problem, even a fiscal stimulus package of $150bn is not going to be enough. The (economic) distress is going to be very severe. Around 2m people have lost all their savings.”
Consumer spending accounts for over 70 per cent of aggregate demand in the US economy – a record high – and much greater than for most other advanced economies. The Stiglitz view is that the US recession is as much the result of macroeconomic mismanagement rather than a response to a series of negative external shocks.
“What we have now are the foreseeable consequences of bad economic management.”
Suggestions for further reading
Can the world stop the slide? (Time magazine)
http://www.time.com/time/magazine/article/0,9171,1706763,00.html
George Soros: Britain cannot escape US recession (The Guardian)
http://www.guardian.co.uk/business/2008/jan/24/recession.davos
Reasons to be cheerful on the US economy?
Firstly there is a good example of the derived demand for labour and the impact that a housing industry slowdown can have on unemployment. The BBC reports that ‘Building and plumbing firm Wolseley plans to cut around 1,300 more jobs in North America after being hit by the slowing US housing market.’ Labour shedding is relatively easier in a flexible labour market; the
Writing in the Times today, Anatole Kaletsky neatly summarises the transmissions mechanism between changes in house prices and the
There are, in principle, three ways that a housing collapse can affect the broader economy and financial markets:
1. Directly, through a cutback in construction activity.
2. Indirectly, through a negative wealth effect on consumer confidence and demand for credit.
3. Indirectly, through damage to bank capital and, thus, the supply of credit.
Kaletsky offers some optimism
§ The housing sector is weakening but the export sector is booming on the back of the weak dollar – an important counter balance to upwards of ½ a million jobs that might be lost in a housing recession
§ The scale of income inequality in the
Evan Davis has been reporting from the
The model who won’t get out of bed for any dollars at all
The falling dollar
A great story about people's expectations of future movements in value of the world's most heavily traded currency. According to the BBC article Supermodel 'rejects dollar pay' <?xml:namespace prefix = o ns = "urn:schemas-microsoft-com:office:office" />
The world's richest model has reportedly reacted in her own way to the sliding value of the US dollar - by refusing to be paid in the currency.
Gisele Bündchen is said to be keen to avoid the <?xml:namespace prefix = st1 ns = "urn:schemas-microsoft-com:office:smarttags" />
According to
"Contracts starting now are more attractive in euros because we don't know what will happen to the dollar," the supermodel’s sister told reporters.
There is also a very similar story on this theme at Rapper Jay-Z dissing the dollar
The chart below tracks the value of the US dollar against the Euro (which was introduced in 1999)
Tim Harford has a take on this story in his new blog
