Archive for July 4th, 2010
Roubini: Europe’s Economy Will Stop Growing As Soon As This Year
There’s slow growth and then there’s no growth.
Nouriel Roubini believes European economic growth will hit a brick wall by year’s end:
The currency bloc does not face a double-dip recession, however, despite deteriorating financial-market confidence over economic growth in an age of fiscal austerity, Roubini told a conference in Aix-en-Provence.
“Given the shocks of the last few months… by year-end, euro zone growth could be closer to zero percent,” said Roubini.
Note though he’s not even saying there’s risk of a double dip recession, he’s just saying growth will basically end. For the U.S., he sees sluggish GDP growth of 1.5% in the second half, but at least a better situation than for Europe.
Join the conversation about this story »
Politicians’ Latest Austerity Fad Will Cause The Most Severe Contraction Of Economic Support In Decades
During the crisis, arguments for stimulus spending seemed to have the moral high ground.
Most major economies easily enacted stimulus programs back then and politicians who opposed supporting the economy with spending looked vulnerably irresponsible.
Yet thanks to Greece’s debt and spending crisis, the world has come around 180 degrees, says the Economist.
Now austerity is the latest economic fashion across the world. Promoters of austerity measures appear to have the moral high ground politically, and most major countries around the world are under pressure to remove government spending support from their economies. This could lead to one of the largest contractions of economic support, globally, in decades:
The trend has been most noticeable in Europe, where every big economy has spelled out spending cuts or tax increases in recent weeks. But it is evident everywhere. Japan’s new prime minister, Naoto Kan, has pushed a debate about raising the consumption tax to the top of the campaign for the upper house of parliament. In America, Congress’s fears about the deficit have thwarted the Obama administration’s efforts to pass a new mini-stimulus.
Until recently the deficit-cutting rhetoric exaggerated its likely short-term impact. Germany has long been one of the loudest proponents of the need for austerity. But its near-term plans (tightening worth 0.4% of GDP in 2011) are modest. Spain was the only big European economy forced by financial markets into immediate, tough austerity. Yet now Britain has chosen that route, with a budget that promises tightening worth 2% of GDP in 2011. The expiration of America’s stimulus implies a fiscal tightening of some 1.3% of GDP in 2011, a figure which could rise considerably if Congress prevented the extension of George Bush’s tax cuts. Much could change, but for now the rich world looks set for a collective fiscal adjustment worth around 1% of its combined GDP next year, the biggest synchronized budget contraction in at least four decades.
Join the conversation about this story »
India raises interest rates to combat inflation
The Reserve Bank of India (RBI) has raised its key lending and borrowing rates from 5.25% to 5.5%, in a bid to combat rising inflation.
Inflation rose to 10.16% in May – far exceeding the central bank’s own estimate of 8.5%.
The wholesale price index rate, which represents the highest since 2008, is the central bank’s most [...]
Keynesians And Austrians Are Ignoring Basic Factors, Like The Energy Crisis
Left unaddressed during the past 3 years in most of the debates between economists has been the problem of energy. The reason is simple: post-war economists don’t do energy, except as an ever-expanding resource that the credit system and technology makes available. For the post-war economist, the supply curve of energy–save for brief lags–is always coming back into rough equilibrium with the economy. Accordingly, the ongoing dispute between Keynesians and Austrians (or Austerians if you like) is exceedingly boring in this regard.
As late as 2008, for example, economist Paul Krugman was at least an infrastructure-and-engineering Keynesian. However, Paul quickly converted to becoming just a throw lots of money at the existing system Keynesian. The hollow nature of Krugman’s debate with Niall Ferguson meanwhile comes via their shared belief that the system will self-organize, if you follow their respective prescriptions. They are indeed the inheritors of Adam Smith. However, neither allowing the economy to deflate further from here via austerity, nor throwing more debt-marked stimulus will solve the present day problem. For the United States, along with the rest of the developed world, has reached a boundary in energy.
Only an economist could wonder in their leisure now, whether energy played a significant role in our current crisis. Indeed the public remarks of Ben Bernanke on the matter of energy, during the 2005-2010 period, were at least as clueless as his embarrassing commentary on the historic bubble in housing and credit. As the nation’s chief economist, Bernanke saw no problem with credit, with derivatives, with the fast inflation in housing prices, or with energy prices. And as an American economist, he was not alone.
As state’s see their budgets collapse and start a new round of layoffs, we should consider the fact that house price inflation masked the lack of wage growth in the United States. And now that house prices continue their descent for a 5th year, American workers are more fully exposed to the decade-long march higher in energy costs. They can experience this individually through energy prices, or more generally through the overall energy cost to the economy. Hence, the chart above.
Unlike many who were either shocked or angered at the ridiculous paper released by Richmond Fed Economist Kartik Athreya, Economic is Hard, I was delighted. For, the paper confirms that at the Federal Reserve, just as in the post-war economics profession, competency has been replaced with authority. Indeed, this was in fact Athreya’s central point: that only a PhD in economics conferred the proper access to discuss economic issues. The most beautiful rebuttal came from Ambrose Evans-Pritchard, who made a point dear to me and one that I have made for years: economics is a social science, not a science. In other words, economists are working down here, alongside the rest of us humanists. History, literature, psychology, and anthropology to mention a few disciplines are all equally competitive fields of knowledge to understand the system of behavior known as an economy. Accordingly, it behooves post-war economists to dislodge themselves of the view that their discipline neatly explains energy and energy supply. Lose the attitude. The problem of energy limits awaits you.
-Gregor
Chart: United States Energy Expenditure as a Percent of GDP 1999-2008. Data used is the latest available. GDP series comes from the US Department of Commerce, Bureau of Economic Analysis. Energy Expenditure data comes via EIA Washington’s SEDS series, for all states and also the country as a whole. I put these two data series together on my own, but, checked it against EIA Washington’s own calculation of Total Energy Expenditures vs GDP. 2009 is not omitted from the chart by choice, but rather, because expenditure data is not easily available yet for that year. Background photo is of a rooftop sculpture by Antony Gormley from his project Event Horizon, which was displayed in both London and New York.
Join the conversation about this story »
US unemployment rate dips further to 9.5%
The Labor Department has revealed the world’s largest economy lost 125,000 jobs last month – primarily due to the loss of temporary Government jobs, which were recruited to help conduct the 2010 census.
However, a fall would traditionally mean a higher unemployment rate, but this dipped from 9.7% in May to 9.5% in June.
Meanwhile, the [...]