Money mirage exposes emerging markets

If a shock was to hit Brazil, India, Indonesia – or any other emerging market country – tomorrow, how would investors react? Would asset values adjust smoothly, amid an explosion of trading flows? Or would markets instead freeze up, as liquidity evaporated?
It is not an academic question. Earlier this year, when investors started to speculate about an American “taper” – or wind-down from quantitative easing – this mere conjecture was enough to spark a dramatic gyration in the value of some emerging market assets, such as Indian or Brazilian equities.
Since then, those markets have more than recovered. And with most economists still believing the taper remains many months away, investors expect this rally to continue. But behind the scenes, as the private debates in October’s meeting of the International Monetary Fund indicated, some policy makers and asset managers are getting uneasy.
For the real problem with emerging markets today, policy makers admit, is not simply that reform has slowed in places such as Brazil, or that growth rates have disappointed since the 2008 crisis. Nor is it simply that some emerging market countries have experienced spectacular capital inflows – and could thus suffer economic pain if these reverse.
Instead the third, often ignored, issue is the market ecosystem around those capital inflows. Most notably, as money has rushed into emerging markets in recent years, this has created an image of abundant liquidity. But this image may be dangerously illusory, some policy makers fear, as one of the little-noticed ironies of the 2013 financial system is that there may now be fewer – not more – shock absorbers in the markets than there were before 2008. This factor may explain why this summer’s gyrations in emerging market assets were so dramatic.
The key issue at stake, as Mark Carney, Bank of England governor, indicated in a speech last week, is the question of who makes markets in a crisis. Before 2007, when the investment banking world was expanding at a breathless pace, dealers held large stocks of emerging market assets on their books. But since 2008 these inventories have shrunk more than 70 per cent, according to central bank estimates, due to the introduction of the Volcker rule in America (which restricts proprietary trading) and increases capital charges for banks to hold risky assets.
This has undermined the ability of dealers to supply trading liquidity in some asset classes. Take emerging market debt. JPMorgan estimates that since 2008 investors have gobbled up more than $315bn worth of securities. But it also estimates that dealers now hold a mere 0.5 per cent of outstanding stock, or less than one day’s worth of trading volumes. This means they cannot provide much trading “lubricant” if a crisis hits. And just to add to the problem, liquidity levels in emerging markets are already extremely uneven, with the vast majority of trading currently concentrated in a few markets such as Mexico and Korea.
So is there any solution? One option, some bankers mutter, would be to roll back some of the post-2008 financial reforms in relation to, say, banks’ trading books. However, this seems most unlikely to happen given that regulators want to reduce the riskiness of banks. So policy makers are now hunting for alternative ideas. At October’s IMF meeting, for example, Christine Lagarde, IMF head, called on emerging market countries to accelerate reforms to make their capital markets more mature. And last week Mr Carney floated a more radical idea: he suggested that central banks should adopt new measures to ensure liquidity is maintained in a crisis, by overhauling the way that collateral is used by banks.
But though Mr Carney’s intervention reveals the level of unease about this issue – not just in relation to emerging market assets but many other securities too – his policy ideas are still at an embryonic stage. Neither they, nor the IMF appeals, will offer any solution soon. Thus for the moment the only practical answer is a fourth “solution”: asset managers themselves need to start paying more attention to the underlying liquidity issues, and pricing assets accordingly for a world without any market maker of last resort.
There are hints that this is now happening. This autumn, some asset managers are no longer blindly enthusing about the “BRICs” as a single asset class; instead, they are shunning the “BIITS” (Brazil, India, Indonesia, Turkey and South Africa) to focus on markets where there are fewer structural challenges and where the market liquidity looks much deeper. But history shows that memories about liquidity risk tend to be short; particularly when so much easy money is flooding around. Or to put it another way, even if the Fed now delays that “taper”, investors should not forget this summer’s gyrations. It was a potent warning shot, on many different levels.

Gillian Tett

Fonte: FT

Expect more of the same active inertia from the Fed

It will be instructive to compare this Wednesday’s policy announcements from the Federal Reserve with the gradual tapering and forward policy guidance many analysts and commentators forecast just a few weeks ago. I suspect the US central bank will appear to be stuck with the same mix of policy tools even though growth outcomes have consistently fallen short of their expectations. And while recent congressional dysfunction has reduced its room for manoeuvre in the short term, there are deeper forces at play that blunt America’s job recovery, with implications that extend well beyond the Fed.
At the conclusion of their two-day policy meeting, Fed officials are likely to announce few if any changes to the big three components of their current policy stance: floored policy rates will not be touched; forward guidance language will not evolve much; and balance sheet purchases will remain as is, at $85bn a month (also with no change in composition).
Just a few months ago, most analysts expected that, by now, the Fed would be engaged in an important policy pivot involving a gradual taper in purchases and greater reliance on forward policy guidance. Such a pivot was deemed important to strike a more sustainable balance between, to use Fed chairman Ben Bernanke’s phrase, “the benefits, costs and risks” of prolonged reliance on unconventional monetary policy.
A less upbeat assessment of the US economy by the Fed will shed some light on why officials are not altering their policy stance. Partly due to the most recent Congressional debacle – namely, shutting down the government for 16 days, waiting until late in the day to raise the federal debt ceiling and, rather than resolve these issues decisively, postponing them to the first quarter of next year – the Fed is likely to again revise down its projections for economic growth.
Blaming Congress would be the easy way for officials to explain why the Fed retains a policy stance that delivers less than expected. It would also be comforting as it would place the blame elsewhere, thus suggesting a lower degree of internal policy difficulties.
Yet growth downgrades have become depressingly frequent. They occurred in each of the past five years; and it is highly probable that the Fed will do so again for what remains of this year. In the process, officials will be signalling recurrent frustration with two factors.
They have repeatedly discovered that the institution’s ability to promote economic growth and create jobs is weaker than what was anticipated and is needed. This was true for quantitative easing 2 and Operation Twist; it is now also the case for QE3.
They also know that signals to alter the course of policy can easily end up by, excessively and pre-emptively, tightening financial conditions and undermining growth and jobs. Just witness what happened between May and June when the mere mention of a taper disrupted the functioning of financial markets and pulled the rug under housing.
The result of all this goes beyond the shackles of a low-level growth equilibrium, persistent unemployment that risks getting more deeply embedded in the structure of the economy, and high and rising inequality. It also speaks to an increasingly unhealthy co-dependency between the Fed and financial markets.
Markets are now consequentially reliant on continued Fed accommodation, and this regardless of its impact on the real economy and top-line corporate revenue growth. And since unfortunately the Fed is essentially the only policy making entity working hard to promote employment, it ends up seemingly hostage to these markets given that they are such a critical component in the policy transmission mechanism.
The Fed is unable (some would – less charitably – say unwilling) to move either decisively forward or resolutely back. Instead, it appears mired in a classic state of active inertia. This is unlikely to change any time soon.
Despite its considerable operational autonomy and relative political independence, the Fed will remain constrained to a highly gradualist approach that is increasingly ineffective. Moreover, the solution to its policy dilemma will continue to migrate out of its hands and to other policy making entities that already find themselves sidelined by congressional polarisation.
The key issue facing the Fed – indeed, this is true for the US as a whole, Europe, Japan and, by implications, the global economy – boils down to the urgent need to invigorate a much broader set of growth and job engines. Absent a more holistic response that involves a lot more than the central bank, policy will languish in the muddled middle. And as the Fed repeatedly struggles virtually on its own to deliver durable growth and medium-term financial stability, other central banks will find that their own policy flexibility is also negatively affected.

Mohamed El-Erian writer is the chief executive and co-chief investment officer of Pimco

Fonte: FT

How a digital currency could transform Africa

Here is a proposition: provide a secure and authentic digital identity for every person in Africa who wants one.
India has shown it is possible to achieve something similar at scale. Its Aadhar national identity scheme, launched in 2009, has registered 500m people using a number code and matching biometrics. It will improve service delivery – although it also strengthens the state in a way that tempts over-reach. Improving technology makes it possible to think more audaciously in Africa. Instead of just tagging a person – gathering their personal data – why not give them digital sovereignty?
Connectivity is already in place across the continent – with more than half of young Africans on smartphones – which means the era of big data is on its way. The question is who benefits and how.
Open source software now being developed, such as ID3’s Open Mustard Seed , is likely to be available within three years – and can be built as standard into every smartphone, tablet and wearable digital device. It will allow many of the poorest Africans to own their data through a highly secure “core identity”. That will make it harder for the state and companies such as Google and Facebook to scrape private data for their own ends.
One of the first results, we believe, will be to replace coins with a digital equivalent. At present, 99 per cent of low-value transactions in Africa are in cash. Within a decade, digital transactions will be standard, using devices such as electronic bangles, at almost no cost, in a virtual currency. Such currencies will be indexed to commodities and highly localised: not just one for Nairobi but, say, one for poor women’s savings clubs in Nairobi. All will work off a base currency reflecting the pan-African swagger of a rising continent. Its logo should be hefty; a pronking impala, perhaps.
An “impala revolution” will strengthen Africa as its population doubles by 2045 in a period of scarce jobs, expensive food and widespread destruction of nature. Optimistic scenarios have the average African living on $6 a day in 2030 compared with $1.20 today. Although a new middle class will benefit banks (or their disrupters), the continent’s economy will continue to be characterised by payments for a cabbage, a cigarette or use of a latrine. Coins are a blunt instrument for this: many are lost, many lose their value, they are expensive to mint. Mobile money schemes have rightly been praised but are already archaic, and better suited for paying school fees or church tithes than a banana. The average transaction in Kenya’s M-Pesa is more than $20.
By contrast, impala technology will raise standards of performance and transparency. It will help users build credit histories to secure micro loans for school, health and housing. Governments and aid agencies using their own versions of it will have verifiable means of disbursing their resources accurately and cheaply.
Indeed, just as some governments are promising their citizens laptops and tablets, so they might consider subsidising next-generation wearable devices for those without bank accounts. Since virtual transactions will happen mostly in the informal sector, these governments will lose little by setting a tax-free ceiling of a few dollars’ spending a day for each user.
We would like to see an agreement announced at Davos in January for the first impala to come into use in Somaliland. The formerly British part of Somalia is a good place to start. The regulatory environment is liberal, its money transfer and telecoms companies are capable and supportive, and aid agencies urgently need to distribute large amounts of cash efficiently.
Best of all, it already has a peculiar currency. The Somaliland shilling has continued despite a lack of recognition for the self-declared republic as a sovereign state. It was willed into existence 20 years ago as a currency for low-value transactions. A digital equivalent, the first impala, will be more secure, more stable and more transparent.

Jonathan Ledgard and John Clippinger are, respectively, a director of Future Africa at the Swiss Federal Institute of Technology in Lausanne; and a senior scientist at MIT’s Human Dynamics Group and chief executive of ID3

Fonte: FT

Wolfgang Münchau: Optimism about an end to the euro crisis is wrong

Adjustment is the key to ending the eurozone crisis. The optimists are saying that this process of regaining competitiveness is now taking place. Look at the success of the Spanish export sector or the fall in Greek wages. And, in any case, the eurozone economy is rebounding, which helps further.
This judgment is profoundly wrong. It is true that the crisis countries have brought down their current account deficits. Italy and Spain are now running surpluses. Since Germany and the Netherlands have not brought down their current account surpluses, the eurozone as a whole has moved from an almost balanced current account in 2009 to a surplus this year of 2.3 per cent of gross domestic product, according to the International Monetary Fund’s most recent estimates. The IMF puts the 2014 current account surplus at 2.5 per cent. In other words, the eurozone is adjusting at the expense of the rest of the world.
But while the eurozone is a fixed-currency regime internally, it is nothing of the sort externally. The currency does exactly what textbooks say it should: it keeps on rising, thus offsetting the improvements in the current account. Last week the euro rose to more than $1.38 against the dollar.
You could put this rise down to the US budget crisis, or the Federal Reserve’s postponement of the tapering of its quantitative easing programme. And, sure enough, if the eurozone’s acute financial crisis were to return, the euro would no doubt fall again as investors pull out. But if things continue as they are, I would expect the currency to remain strong, possibly even to overshoot. An overshooting euro would take care of the eurozone’s current account surplus by raising the prices of its goods on global markets.
The rise in the exchange rate may persuade the European Central Bank to respond by cutting interest rates to negative levels and providing more liquidity to banks. This is generally a good thing. The main problem with the rise in the euro’s external value is that it makes the internal adjustment harder. The crisis countries need to lower their export prices but the higher value of the euro raises the prices of exports to outside the eurozone. (The exchange rate does not, of course, affects intra-eurozone trade.)
Judging the progress the eurozone has made on internal adjustments is hard as you must disentangle effects happening concurrently. You cannot arrive at a firm conclusion by just looking at the improvement in Spanish export performance, for example. The latest IMF World Economic Outlook included such an analysis, suggesting the internal adjustment was mostly cyclical, not structural. This is an important observation, buried in a subsection, itself hidden deep in the report. It essentially says internal adjustment is not really happening. The rise in the exchange rate ends the scenario whereby the eurozone pulls itself out of trouble by running large and persistent current account surpluses against the rest of the world.
The IMF notes that eurozone internal adjustment requires two types of price change in crisis countries. First, the prices of non-tradeable goods – a haircut in Madrid – will have to fall relative to those of tradeable goods such as a Seat car. Second, the prices of Spanish tradeable goods would have to fall against those of non-Spanish tradeable goods elsewhere in the eurozone.
Different countries had different adjustment paths and most managed a relative improvement in their competitiveness. But the IMF asks whether this will continue. Probably not. Adjustment was driven by the end of capital inflows. When cyclical conditions improve, which they will, current account deficits will return.
Not only that. The IMF reckons that reducing net external liabilities to levels that would be considered healthy elsewhere would need “much larger relative price adjustments than implied by the need to reverse past unit labour cost appreciation or to achieve current account surpluses”. Put bluntly: the scale of necessary adjustment is absolutely enormous. The IMF does not believe that this is going to happen. Its baseline 2018 forecast for Greece, Ireland, Portugal and Spain has the net foreign asset position – the gap between the assets they own abroad, and the assets foreigners own in their country – at less than minus 80 per cent of GDP. This is a level generally not considered sustainable.
Adjustment remains possible in theory, but a scenario in which the eurozone adjusts is inconsistent with stated policy. Germany’s new grand coalition will be fiscally less austere, but I see no see no scenario under which Berlin reduces its current account surpluses over the next four years. Reform fatigue has befallen the crisis states. Adjustment on the scale the IMF is talking about is just not going to happen, not even with stronger than expected growth.
In a monetary union adjustment is hard without any transfers and without a fiscal union. I know of no plausible plan how the eurozone can manage the dual feat of economic adjustment and debt sustainability within the straitjacket of official policy. And as long as such a plan does not exist, the crisis is not over.

Wolfgang Münchau

Fonte: FT

An interview with Alan Greenspan

A couple of years ago I bumped into Alan Greenspan, the former chairman of the US Federal Reserve, in the lofty surroundings of the Aspen Institute Ideas Festival. As we chatted, the sprightly octogenarian declared that he was becoming interested in social anthropology – and wanted to know what books to read.
“Anthropology?” I retorted, in utter amazement. It appeared to overturn everything I knew (and criticised) about the man. Greenspan, after all, was somebody who had trained as an ultraorthodox, free-market economist and was close to Ayn Rand, the radical libertarian novelist. He was (in) famous for his belief that the best way to run an economy was to rely on rational actors competing in open markets. As Fed chair, he seemed to worship mathematical models and disdain “soft” issues such as human culture.
But Greenspan was serious; he wanted to venture into new intellectual territory, he explained. And that reflected a far bigger personal quest. Between 1987 and 2006, when he led the Fed, Greenspan was highly respected. Such was his apparent mastery over markets – and success in delivering stable growth and low inflation – that Bob Woodward, the Washington pundit, famously described him as a “maestro”. Then the credit crisis erupted in 2007 and his reputation crumbled, with critics blaming him for the bubble. Greenspan denied any culpability. But in late 2008, he admitted to Congress that the crisis had exposed a “flaw” in his world view. He had always assumed that bankers would act in ways that would protect shareholders – in accordance with free-market capitalist theory – but this resumption turned out to be wrong.
In the months that followed, Greenspan started to question and explore many things – including the unfamiliar world of anthropology and psychology. Hence our encounter in Aspen.
Was this just a brief intellectual wobble, I wondered? A bid for sympathy from a man who had gone from hero to zero in investors’ eyes? Or was it possible that a former “maestro” of free markets could change his mind about how the world worked? And if so, what does that imply for the discipline of economics, let alone Greenspan’s successors in the policy making world – such as Janet Yellen, nominated as the new head of the Fed?
Earlier this month I finally got a chance to seek some answers when I stepped into a set of bland, wood-panelled offices in the heart of Washington. Ever since Greenspan left the imposing, marble-pillared Fed, this suite has been his nerve centre. He works out of a room dubbed the “Oval Office” due to its shape. It is surprisingly soulless: piles of paper sit on the windowsill next to a bust of Abraham Lincoln. One flash of colour comes from a lurid tropical beach scene that he has – somewhat surprisingly – installed as a screen saver.
“If you are not going to have numbers on your screen, you might as well have something nice to look at,” he laughs, spreading his large hands expansively in the air. Then, just in case I might think that he is tempted to slack off at the age of 87, he stresses that “I do play tennis twice a week – but my golf game is in the soup. I haven’t had time to get out.” Or, it seems, daydream on a beach. “I get so engaged when I have a problem you cannot solve, that I just cannot break away from what I am doing – I keep thinking and thinking and cannot stop.”
The task that has kept him so busy is his new book, The Map and the Territory, published this month and a successor to an earlier memoir, The Age of Turbulence. To the untrained eye, this title might seem baffling. But to Greenspan, the phrase is highly significant. For what his new manuscript essentially does is explain his intellectual journey since 2007. Most notably it shows why he now thinks that the “map” that he (and many others) once used to analyse finance is incomplete – and what this means for anyone wanting to navigate today’s economic “territory”.
This is not quite the mea culpa that some people who are angry about the credit bubble would like to see. Greenspan is a man who built his career by convincing people that he was correct. Born in New York to a family of east European Jewish ancestry, he trained as an economist and, before he was appointed by Ronald Reagan to run the Fed, was an economic consultant on Wall Street (interspersed with a brief spell working for the Nixon administration). This background once made him lauded; today it seems more of a liability, at least in the eyes of the political left. “Before [2007] I was embarrassed by the adulation – they made me a rock star,” he says. “But I knew then that I was being praised for something I didn’t really do. So after, when I got hammered, it kind of balanced out, since I don’t think I deserved the criticism either … I am a human so I feel it but not as much as some.”
Yet in one respect, at least, Greenspan has had a change of heart: he no longer thinks that classic orthodox economics and mathematical models can explain everything. During the first six decades of his career, he thought – or hoped – that Homo economicus was a rational being and that algorithms could forecast behaviour. When he worked on Wall Street he loved creating models and when he subsequently joined the Fed he believed the US central bank was brilliantly good at this. “The Fed model was as advanced as you could possibly get it,” he recalls. “All the new concepts with every theoretical advance was embodied in that model – rational expectations, monetarism, all sorts of sophisticated means of thinking about how the economy worked. The Fed has 250 [economic] PhDs in that division and they are all very smart.”
And yet in September 2008, this pride was shattered when those venerated models suddenly stopped working. “The whole period upset my view of how the world worked – the models failed at a time when we needed them most … and the failure was uniform,” he recalls, shaking his head. “JPMorgan had the American economy accelerating three days before [the collapse of Lehman Brothers] – their model failed. The Fed model failed. The IMF model failed. I am sure the Goldman model also missed it too.
“So that left me asking myself what has happened? Are we living in an unreal world which has a model which is supposed to replicate the economy but gets caught out by one of the most extraordinary events in history?”
Shocked, Greenspan spent the subsequent months trying to answer his own question. He crunched and re-crunched his beloved algorithms, scoured the data and tested his ideas. It was not the first time he had engaged in intellectual soul-searching: in his youth he had once ascribed to intellectual positivism, until Rand, the libertarian, persuaded him those ideas were wrong. However, this was more radical. Greenspan was losing faith in “the presumption of neoclassical economics that people act in rational self-interest”. “To me it suddenly seemed that the whole idea of taking the maths as the basis of pricing that system failed. The whole structure of risk evaluation – what they call the ‘Harry Markowitz approach’ – failed,” he observes, referring to the influential US economist who is the father of modern portfolio management. “The rating agency failed completely and financial services regulation failed too.”
But if classic models were no longer infallible, were there alternative ways to forecast an economy? Greenspan delved into behavioural economics, anthropology and psychology, and the work of academics such as Daniel Kahneman. But those fields did not offer a magic wand. “Behavioural economics by itself gets you nowhere and the reason is that you cannot create a macro model based on just [that]. To their credit, behavioural economists don’t [even] claim they can,” he points out.
But as the months turned into years, Greenspan slowly developed a new intellectual framework. This essentially has two parts. The first half asserts that economic models still work in terms of predicting behaviour in the “real” economy: his reading of past data leaves him convinced that algorithms can capture trends in tangible items like inventories. “In the non-financial part of the system [rational economic theory] works very well,” he says. But money is another matter: “Finance is wholly different from the rest the economy.” More specifically, while markets sometimes behave in ways that models might predict, they can also become “irrational”, driven by animal spirits that defy maths.
Greenspan partly blames that on the human propensity to panic. “Fear is a far more dominant force in human behaviour than euphoria – I would never have expected that or given it a moment’s thought before but it shows up in the data in so many ways,” he says. “Once you get that skewing in [statistics from panic] it creates the fat tail.” The other crucial issue is what economists call “leverage” (more commonly dubbed “debt”). When debt in an economy is low, then finance is “neutral” in economic terms and can be explained by models, Greenspan believes. But when debt explodes, this creates fragility – and that panic. “The very nature of finance is that it cannot be profitable unless it is significantly leveraged … and as long as there is debt there can be failure and contagion.”
A cynic might complain that it is a pity Greenspan did not spot that “flaw” when he was running the Fed and leverage was exploding. He admits that he first saw how irrational finance could become as long ago as the 1950s and 1960s when he briefly tried, as a young New York economist, to trade commodity markets. Back then he thought he could predict cotton values “from the outside, looking at supply-demand forces”. But when he actually “bought a seat in the market and did a lot of trading” he discovered that rational logic did not always rule. “There were a couple of guys in that exchange who couldn’t tell a hide from copper sheeting but they made a lot of money. Why? They weren’t trading a commodity but human nature … and there is something about human nature which is not rational.”
Half-a-century later, when Greenspan was running the Fed, he had seemingly come to assume that markets would always “self-correct”, in a logical manner. Thus he did not see any reason to prick bubbles or control excessive exuberance by government fiat. “If bubbles are not leveraged, they can be highly disruptive to the wealth of people who own assets but there are not really any secondary consequences,” he explains, pointing out that the stock market bubble of the late 1980s and tech bubble of the late 1990s both deflated – without real economic damage. “It is only when you have leverage that a collapse in values becomes so contagious.”
Of course, the tragedy of the noughties credit bubble was that this bout of exuberance – unlike 1987 or 2001 – did involve leverage on a massive scale. Greenspan, for his part, denies any direct culpability for this. Though critics have carped that he cut rates in 2001, and thus created easy money, he points out that from 2003 onwards the Fed, and other central banks, were diligently raising interest rates. But even “when we raised [official] rates, long-term rates went down – bond prices were very high”, he argues, blaming this “conundrum” on the fact that countries such as China were experiencing “a huge increase in savings, all of which spilled into the developed world and the global bond market at that time”. But whatever the source of this leverage, one thing is clear: Greenspan, like his critics, now agrees that this tidal wave of debt meant that classic economic theory became impotent to forecast how finance would behave. “We have a system of finance which is far too leveraged – [the models] cannot work in this context.”
So what does that mean for institutions such as the Fed? When I arrived to interview Greenspan, the television screens were filled with the face of Yellen. What advice would he give her? Should she rip up all the Fed’s sophisticated models? Hire psychologists or anthropologists instead?
For the first time during our two-hour conversation, Greenspan looks nonplussed. “It never entered my mind – it’s almost too presumptuous of me to say. I haven’t thought about it.” Really? I press him. He shakes his head vigorously. And then he slides into diplomatic niceties. One unspoken, albeit binding, rule of central banking is that the current and former incumbents of the top jobs never criticise each other in public. “Yellen is a great economist, a wonderful person,” he insists.
But tact cannot entirely mask Greenspan’s deep concern that six years after the leverage-fuelled crisis, there is even more debt in the global financial system and even easier money due to quantitative easing. And later he admits that the Fed faces a “brutal” challenge in finding a smooth exit path. “I have preferences for rates which are significantly above where they are,” he observes, admitting that he would “hardly” be tempted to buy long-term bonds at their current rates. “I run my own portfolio and I am not long [ie holding] 30-year bonds.”
But even if Greenspan is wary of criticising quantitative easing, he is more articulate about banking. Most notably, he is increasingly alarmed about the monstrous size of the debt-fuelled western money machine. “There is a very tricky problem we don’t know how to solve or even talk about, which is an inexorable rise in the ratio of finance and financial insurance as a ratio of gross domestic income,” he says. “In the 1940s it was 2 per cent of GDP – now it is up to 8 per cent. But it is a phenomenon not indigenous to the US – it is everywhere.
“You would expect that with the 2008 crisis, the share of finance in the economy would go down – and it did go down for a while. But then it bounced back despite the fact that finance was held in such terrible repute! So you have to ask: why are the non-financial parts of the economy buying these services? Honestly, I don’t know the answer.”
What also worries Greenspan is that this swelling size has gone hand in hand with rising complexity – and opacity. He now admits that even (or especially) when he was Fed chairman, he struggled to track the development of complex instruments during the credit bubble. “I am not a neophyte – I have been trading derivatives and things and I am a fairly good mathematician,” he observes. “But when I was sitting there at the Fed, I would say, ‘Does anyone know what is going on?’ And the answer was, ‘Only in part’. I would ask someone about synthetic derivatives, say, and I would get detailed analysis. But I couldn’t tell what was really happening.”
This last admission will undoubtedly infuriate critics. Back in 2005 and 2006, Greenspan never acknowledged this uncertainty. On the contrary, he kept insisting that financial innovation was beneficial and fought efforts by other regulators to rein in the more creative credit products emerging from Wall Street. Even today he remains wary of government control; he does not want to impose excessive controls on derivatives, for example.
But what has changed is that he now believes banks should be forced to hold much thicker capital cushions. More surprising, he has come to the conclusion that banks need to be smaller. “I am not in favour of breaking up the banks but if we now have such trouble liquidating them I would very reluctantly say we would be better off breaking up the banks.” He also thinks that finance as a whole needs to be cut down in size. “Is it essential that the division of labour [in our economy] requires an ever increasing amount of financial insight? We need to make sure that the services that non-financial services buy are not just ersatz or waste,” he observes with a wry chuckle.
There is a profound irony here. In some senses, Greenspan remains an orthodox pillar of ultraconservative American thought: The Map and the Territory rails against fiscal irresponsibility, the swelling social security budget and the entitlement culture. And yet he, like his leftwing critics, now seems utterly disenchanted with Wall Street and the extremities of free-market finance – never mind that he championed them for so many years.
Perhaps this just reflects an 87-year-old man who is trying to make sense of the extreme swings in his reputation. I prefer to think, though, that it reflects a mind that – to his credit – remains profoundly curious, even after suffering this rollercoaster ride. When I say to him that I greatly admire his spirit of inquiry – even though I disagree with some conclusions – he immediately peppers me with questions. “Tell me what you disagree with – please. I really want to hear,” he insists, with a smile that creases his craggy face. As someone who never had children, his books now appear to be his real babies; the only other subject which inspires as much passion is when I mention his adored second wife, Andrea Mitchell, the television journalist.
But later, after I have left, it occurs to me that the real key to explaining the ironies and contradictions that hang over Greenspan is that he has – once again – unwittingly become a potent symbol of an age. Back in the days of the “Great Moderation” – the period of reduced economic volatility starting in the 1980s – most policy makers shared his sunny confidence in 20th-century progress. There was a widespread assumption that a mixture of free market capitalism, innovation and globalisation had made the world a better place. Indeed, it was this very confidence that laid the seeds of disaster. Today, however, that certainty has crumbled; the modern political and economic ecosystem is marked by a culture of doubt and cynicism. Nobody would dare call Yellen “maestro” today; not when the Fed (and others) are tipping into such uncharted territory. This delivers some benefits: Greenspan himself now admits this pre-2007 confidence was an Achilles heel. “Beware of success in policy,” he observes, laughing. “A stable, moderately growing, non-inflationary environment will create a bubble 100 per cent of the time.”
But a world marked by profound uncertainty is also a deeply disconcerting and humbling place. Today there are no easy answers or straightforward heroes or villains, be that among economists, anthropologists or anyone else. Perhaps the biggest moral of The Map and the Territory is that in a shifting landscape, we all need to keep challenging our assumptions and prejudices. And not just at the age of 87.

Gillian Tett

Fonte: FT

Philip Stephens: When Britain leaves Europe, Scotland will leave Britain

The other day Alex Salmond set out his stall for an independent Scotland. It was a bravura performance. Had the Scottish people been asked straight afterwards they would surely have voted to break with the UK. Europe teems with politicians hiding from the storms. Scotland’s first minister is that rare thing – a leader intent on changing the political weather.
Britain’s Conservative-led coalition government is in trouble. Popular anger with ever-rising household energy prices has marked a shift in the political mood. Capitalism survived the great crash of 2008, but years of falling living standards have left voters attuned to the flaws of liberal economics. They have spotted that, as in banking so in energy, the market can be rigged to favour the few. They have noticed that senior executives have been unscathed by austerity. They are fed up with politicians who wring their hands. Scotland has long stood to the left of England. Mr Salmond hopes to catch a rising social democratic tide.
Scotland will vote on independence in September next year. If David Cameron’s Conservatives win the UK-wide election in 2015, Britons will then be offered a referendum on whether to stay in the EU. The polls would be separated by time, but the two sets of relationships are intimately connected. Were Britain to fall out of Europe – and it might – Scotland sooner or later would wave goodbye to Britain.
Received wisdom has it that Mr Salmond’s Scottish National party will fail in its first bid for separation. A pro-union alliance of Labour, Conservatives and Liberal Democrats has notched up successes in challenging the SNP’s prospectus. Alistair Darling, the former chancellor leading the unionist side, has proved a formidable interrogator of the nationalists’ claims.
Mr Salmond has been put on the defensive about how an independent Scotland would manage the economy. He wants to keep sterling, but is embarrassed by the implication that interest rates would continue to be set by the Bank of England in London. The SNP case that control of North Sea oil and gas would more than compensate for the loss of hefty tax transfers from Westminster is less than watertight. The SNP is hazy about how it would run foreign and defence policy.
The calculation in the unionist camp is that such arguments will carry the day. When the moment arrives, the canny Scots will vote with their pocketbooks. Sticking with the union is safe. Better to press for a new transfer of power from Westminster to the Holyrood parliament. Devolution has already given Scotland a fair measure of control over its own affairs.
Mr Salmond might argue that this week’s threat of closure by Ineos of its large petrochemical plant at Grangemouth underscores why Scotland must take control of its destiny. Opponents could counter that the union with England provides a cushion against inevitable economic setbacks.
The arithmetic is on the side of the unionists. Opinion polls show that a substantial majority of Scots are unconvinced of the case to scrap the 300-year old Act of Union with England. They suggest barely a third of Scots favour full independence, while about twice that number would favour more devolution. Yet to think the battle is won is to make two grave mistakes.
The first underestimates the force of Mr Salmond’s personality. When the Scottish parliament was set up in 1999, its electoral system was designed to remove all possibility of an outright SNP victory. Mr Salmond smashed the system in 2011 when he swept back to power with an overall majority. Weeks before polling day, unionists had judged such a victory impossible.
There is no mystery to the SNP’s success. Mr Salmond has discarded a separatism once rooted in grievance against the English for a nationalism that promises cordial relations with the rest of the UK. Queen Elizabeth can keep her palace at Balmoral and remain titular head of state. Citizens of an independent Scotland would be at once Scottish and British.
Reassurance is twinned with confidence. In Mr Salmond’s words, independence would be “an act of national self-confidence and national self-belief”. The argument is thus framed as one between hope and despair – between those who are optimistic about Scotland’s future and the pessimists who think it must forever be shackled to England.
The second mistake is to assume that a No to independence in the 2014 referendum would be the last word. It would be followed by an argument about the transfer of more powers and then, possibly, by a plebiscite on the EU. Assuming the SNP had won a decent share of the vote, eventual independence would remain an option.
This is where Britain’s relationship with Europe is critical. A referendum that took the UK out of the EU would transform the argument in Scotland. Pro-union Scots would think again were England to detach itself from its own continent.
The case for Scotland staying in the UK is much the same as that for Britain remaining in the EU. Globalisation has eroded the capacity of nations to exercise sovereignty. Sharing sovereignty is a way to reclaim power. Nationalism is escapism that ends in a cul-de-sac.
Were England to cut itself off from its own continent the intelligent response of Scots would be to swap union with a diminished England for independent membership of the EU. There lies an irony. Eurosceptics say they are marching in defence of a sovereign UK. Nothing could be more calculated to shatter the union of England with Scotland than Britain’s withdrawal from Europe.

Philip Stephens

Fonte: FT

Look to ‘Helicopter’ Ben for clues to Yellen’s Fed

What can we expect from a Federal Reserve helmed by newly nominated chair Janet Yellen? Unlikely as it may sound, we can draw insight from a decade-old misinterpreted remark.
In November 2002, as the US economy was emerging from recession, Federal Reserve Governor Ben Bernanke delivered his now infamous “Helicopter” speech – during which he recalled Milton Friedman’s jocular depiction of dropping money from helicopters as a last-ditch means to fight deflation.
“A money-financed tax cut is essentially equivalent to Milton Friedman’s famous ‘helicopter drop’ of money,” Mr Bernanke said, using the analogy to combat fears of imminent deflation which had driven the yield on the 10-year US Treasury note below 4 per cent, the lowest yield since the early 1960s.
The witty but obscure reference to Friedman’s 1969 paper “The Optimum Quantity of Money” was largely misinterpreted, both on Main Street and Wall Street. Derided as “Helicopter Ben”, Mr Bernanke saw his commitment to price stability drawn into question as he was viewed as championing easy money. Nevertheless, it appeared that his comments serendipitously contributed to ending the deflation scare. Interest rates stabilised and the market’s concerns over price deflation were successfully allayed.
Inflation fighter
The helicopter speech continued to haunt Mr Bernanke, even upon his confirmation as chairman of the Federal Reserve. With his commitment to price stability in doubt, the chairman found it hard to take pre-emptive and decisive action in the subprime crisis he encountered soon after taking office. It was imperative to him that he reaffirm his mantle as an inflation fighter, even though maintaining a restrictive monetary policy before the housing collapse would prove only to further exacerbate the crisis.
Ultimately, the chairman relented. He dramatically reversed course and flooded the financial system with unprecedented levels of monetary liquidity.
Future historians will ultimately judge whether the chairman’s actions in the early days of the crisis – marked by a reluctance to reduce rates – are responsible for the depth of the collapse.
More pressing, however, is the similar series of questions that looms large for Ms Yellen. Like Mr Bernanke, she is haunted by a history of dovish monetary sentiment; her reputation for favouring easy money is virtually ubiquitous. But this characterisation may be unfair.
Her long and established career at the Fed renders her one of the most seasoned and highly informed central bankers in the world. Ms Yellen has an impeccable resume, and is arguably one of the best qualified candidates in recent history for the Fed chairman position.
She has previously served as chair of the president’s Council of Economic Advisors, was an FOMC governor for two years, and president of the San Francisco Fed for five-and-a-half years. Over the past three years, she has served as vice-chairman of the Fed, and is known for her cautious and methodical leadership style. She is well regarded for having excellent communications skills and is a leading advocate of Fed transparency.
Nevertheless, the spectre of easy money advocacy with which she is associated could potentially complicate her life as the chair of the Fed.
Will she face the same challenges as Mr Bernanke? Will her dovish legacy cause her to act in ways inconsistent with promoting economic recovery? Will she exit QE too soon or too quickly – causing rates to rise and potentially damaging the housing market – in an effort to establish inflation-fighting credibility?
Hard course to steer
Or will Ms Yellen embrace earlier comments which suggest the Fed might tolerate higher levels of inflation than the central bank’s stated 2 per cent ceiling – assuming such price pressures were deemed to be transient? Either way, it will be hard for the chairman to steer a middle course in trying to fulfil its dual mandate.
I take Ms Yellen at her word. I believe in the long run she will use monetary policy, including inflation, as a tool to reduce unemployment. She may, in the short run, feel a need to establish her anti-inflation credentials – resulting in an earlier exit of QE than expected. If that path were to result in dramatic increases in interest rates, similar to the aftermath of Mr Bernanke’s June press conference when he raised the notion of tapering, I believe she would quickly reverse course.
The ultimate normalisation of post-crisis monetary policy will be tricky. Policy makers will find it difficult to pace the reduction in monetary accommodation to assure both price stability and full employment. Given the significant possibility for a policy error, the odds favour betting on lower unemployment and higher inflation in a Yellen Fed.

Scott Minerd is global chief investment officer at Guggenheim Partners

Fonte: FT

John Plender: Treasuries have turned anything but risk-free

The US debt ceiling imbroglio may not have resulted in sovereign default, but I suspect that the rise in US Treasury yields from early summer until the temporary resolution of the crisis last week may in due course be seen as reflecting the emergence of a risk premium.
An important message of this episode, in other words, is that the world’s main reserve currency is now a very unsafe haven, while US Treasuries are anything but risk free.
That, in turn, raises the question of whether the US is inescapably in decline as China rises to challenge its hegemony. Even without default it is clear, in purely financial terms, that anyone who can diversify out of US Treasuries will now feel impelled do so as far as possible.
Nothing could demonstrate more clearly how quickly politics can subvert the thrust of economics.
A mere month ago the US looked the only economy in the developed world close to achieving escape velocity from the crisis, as well as having an underlying dynamism conspicuously absent from Europe or Japan.
Yet the government closure seriously undermined its credibility in economic policy making while imposing a needless drag on growth.
The inability of the US to intervene in Syria has also raised questions about its ability to deploy hard power around the world. At the same time it has shown that its claim to act as a responsible custodian for more than 60 per cent of the world’s official reserves is tarnished.
Rating recklessness
The first exhibit on that score is the recklessness displayed by American politicians over the country’s credit rating. They have given the strongest possible hint that the degree of polarisation in Washington guarantees that fiscal punch-ups will be recurring events.
Nor is fiscal policy the only problem. Seen from the perspective of central bank managers of official reserves, quantitative easing constitutes dangerously experimental monetary policy for a country entrusted with $6.8tn of such reserves.
For emerging market countries, printing money via QE looks like a policy of competitive devaluation, even if it was embarked on for domestic reasons. And they have an understandable fear that exit from QE, which is the most experimental part of the experiment, will saddle them with even more seriously overvalued currencies along with higher interest rates on their foreign indebtedness.
It is also worrying for reserve managers that the Federal Reserve is operating in a fog. This is not just a matter of the impact of government closure on economic statistics, which will delay any retreat from QE. Nor is it purely about the lack of a route map for the exit.
The global financial system is hostage to a big rise in borrowing costs when the retreat from QE puts an end to the current era of extraordinarily low interest rates.
The rise in bond yields will thus inflict big capital losses on bond holders. Neither the Fed nor anybody else can know how those losses will be distributed around an increasingly complex system. How far bonds have been hedged or leveraged is likewise unclear.
Don’t believe central banks
Of course, the central bankers’ response is that the prudential regulators are well aware of the risks and will be on the alert. That is the same message they peddled back in 2008 when they were hopelessly wrong footed after the collapse of Lehman Brothers. Believe it at your peril.
So is there a parallel here with the transfer of hegemonic power from the UK to the US between the wars?
Yes, to a degree, but the differences are important. The UK was far weaker economically after the first world war than the US is today. The current crisis in the US is more political than economic. And it has to be said that American politicians are doing their utmost to speed up the transfer of power from the US to China. Yet where reserve currency status is concerned, it will take time for China to offer the world a credible reserve currency, not least because its financial markets remain under-developed.
As I argued here two weeks ago, the obvious message for Beijing is to accelerate the pace of financial market development. It will be interesting to see whether the communist party plenum next month unveils plans to do this.
Yet when contemplating blunders on the scale the US has just inflicted on itself, it is easy to underestimate the problems of strategic rivals. The challenge for China in its proposed liberalisation of interest rates and opening up of the capital account is quite as great as the exit from QE will be for the US.
Even so, declinism is now in fashion. It is safe to predict that this will be the global publishing business’s next growth industry.

John Plender

Fonte: FT

Wolfgang Münchau: Italy misses the chance to reform

Earlier this year I wrote that Mario Monti was the wrong man to lead Italy. Now it has turned out that the former Italian prime minister could not even manage to lead the small centrist political party he founded less than a year ago. He resigned last week as president of Civic Choice after a dispute over his decision to criticise the 2014 Italian budget; he also quit the party’s group in the Senate, the upper house. Mr Monti succumbed in one of those snakepit moments of Italian politics with all its rivalries, conspiracies and grandstanding.
The decline and fall of the former European commissioner is a cautionary tale about an outsider’s sudden rise to power – and more importantly, about the hopelessness of economic reform in Italy. In his substantive criticism of the budget – proposed by the governing coalition of which Civic Choice is a member – Mr Monti was right. The budget reshuffled tiny amounts of spending and taxation, and missed a big opportunity for reforms.
The headline item in Italy’s 2014 budget is a symbolic €2.5bn reduction in the labour “tax wedge” – the difference between the cost of labour to an employer and an employee’s take-home pay. This is a measure of competitiveness – and one where Italy scores particularly poorly. To close the gap with Germany, the Rome government would have to reduce the wedge by 20 times what it is proposing now.
Cutting Italy’s high labour taxes sits right at the top of almost every reform agenda. To do so requires a wider change of spending and taxation priorities. I am not a supply-sider, but if you have locked yourself into a monetary union with a competitive Germany, it is hard to maintain high levels of labour taxes. Unless you find a way for Germany to adjust to you – dream on – you have to adjust to Germany.
Like Mr Monti, Enrico Letta, Italy’s current prime minister, and Fabrizio Saccomanni, the finance minister, are acutely aware of what needs to be done. But they face extreme constraints. Mr Letta’s Democrats are one of Europe’s last unreformed socialist parties. It supports the prime minister in his determination to stay within the EU-mandated deficit target of 3 per cent of gross domestic product. But it also opposes the changes needed to free up resources for tax cuts.
Meanwhile, Silvio Berlusconi’s centre-right People of Liberty party, another member of the coalition, opposes increases in wealth, property and consumption taxes. If one coalition partner vetoes spending cuts, and the other vetoes tax increases, the margin for budgetary manoeuvre is close to zero.
To fund a bigger cut in labour taxes, Mr Letta would have to cut out a layer of regional government. Inefficient state-owned utilities – many of which serve as havens for clapped-out politicians – would also need to be sold. The main benefit of privatisation is not just the cash it brings but efficiency gains. In the short run, one of the most important measures should be to clean up the banks, which are currently unwilling to lend to the private sector.
I am not sure that any of this is politically feasible inside the confines of the European fiscal target. Even the German government was forced to breach the rules when it launched a much more moderate reform programme in 2003.
Do not expect the same from Italy. Instead of accepting a breach in fiscal rules as the price of pursuing reforms, Rome has chosen fiscal compliance – and no reform. With no prospect of growth, the only way the government will hit its fiscal targets will be through a toxic combination of austerity and smoke-and-mirror accounting tricks, such as the use of one-off revenue measures to fund permanent expenditures.
The next few months will see many amendments to the budget, the purpose of which will not be to improve its quality but to cater to special interests. It is possible that PDL hawks might seek an excuse to let the government fail. Would new elections help? Mr Monti’s experience shows that reformers in Italy do not necessarily win elections.
The centre-right, meanwhile, is currently preoccupied contemplating life after Mr Berlusconi’s increasingly certain political exit. The PDL is not reformist either. It is the ultimate special interest party.
The best hope may lie with Matteo Renzi, the 38-year old mayor of Florence who is the only top politician who both stands a chance of being elected and who offers some clarity about what needs to be done, such as bigger cuts in the tax wedge. Mr Renzi may soon take over the leadership of the Democrats. His first job would be to align a reluctant party behind his agenda, a task of a similar scale to the one faced by successive leaders of the British Labour party in the 1980s and 1990s.
We know such transformations take a long time. But Italy does not have that time. The Italian establishment’s preference of not reforming, not defaulting, and staying in the eurozone is inconsistent. It has been the great failure of Italy’s political establishment, including Mr Monti in his role as a politician, to make that clear.

Wolfgang Münchau

Fonte: FT

Restoring F. P. Ramsey

Margaret Paul
FRANK RAMSEY (1903–1930)
A sister’s memoir
304pp. Smith-Gordon. £20.
978 1 85463 248 7


Resenha do livro acima, escrito pela irmã do F.P.Ramsey, um genio que, infelizmente, morreu muito jovem. Vale a leitura da resenha e do livro. Sim, eu já tenho um exemplar do livro. Recomendo, também, um outro, disponível somente para o kindle, de autoria do Karl Sabbagh: Shooting Star.

F . P. Ramsey has some claim to be the greatest philosopher of the twentieth century. In Cambridge in the 1920s, he singlehandedly forged a range of ideas that have since come to define the philosophical landscape. Contemporary debates about truth, meaning, knowledge, logic and the structure of scientific theories all take off from positions first defined by Ramsey. Equally importantly, he figured out the principles governing subjective probability, and so opened the way to decision theory, game theory and much work in the foundations of economics. His fertile mind could not help bubbling over into other subjects. An incidental theorem he proved in a logic paper initiated the branch of mathematics known as Ramsey theory, while two articles in the Economic Journal pioneered the mathematical analysis of taxation and saving.

Ramsey died from hepatitis at the age of twenty-six in 1930. For some geniuses, an early death accelerates the route to canonization. But for Ramsey it had the opposite effect. Ramsey’s death coincided with Ludwig Wittgenstein’s return to Cambridge after his reclusive years in the Austrian Alps. The cult surrounding Wittgenstein quickly caught fire, and for the next fifty years dominated philosophy throughout the English-speaking world. By the time it subsided, Ramsey had somehow been relegated to a minor role in history, a footnote to an archaic Cambridge of Russell, Keynes and the Bloomsbury set.

In some ways, Ramsey and Wittgenstein had much in common. They were both inspired by Russell’s Principia Mathematica and both saw their initial task in philosophy as improving its account of the relation between language and reality. But they had very different philosophical temperaments. Wittgenstein’s first book, the Tractatus Logico-Philosophicus, added a powerful dose of mysticism to his analysis of language, and this gnostic strain became even more pronounced in the neo-idealism of his later philosophy. Ramsey, by contrast, saw the world through the lens of mathematics and fundamental physics. For Wittgenstein, science was an enemy that threatened to coarsen the human spirit. For Ramsey, it was a friend that could help us understand the place of humans in a world governed by natural law.

Over the past few decades interest in Ramsey has revived, and there are now collections of his published and unpublished works. But so far there has been no full account of his life. We can be thankful that his youngest sister, Margaret Paul, who died in 2002, spent much of her last twenty years piecing together her brother’s history. The result, now published with the help of her own family, is a sensitive and philosophically well-informed memoir. (Margaret was herself an Oxford don; another brother, Michael, was the more famous Archbishop of Canterbury.) One thing the book explains is how Ramsey managed to achieve so much so young. A combination of quite exceptional mathematical ability and favoured background – his father was President of Magdalene College, Cambridge – meant that his reputation preceded him into Cambridge circles. By the time he became a mathematics undergraduate it was generally recognized, not least by Ramsey himself, that he was destined to solve fundamental problems. At the beginning of his second year, he was deemed the only person with enough mathematical logic and German to be trusted with the English translation of Wittgenstein’s Tractatus. In the spring term a review of Keynes’s Theory of Probability pointed the way to the concept of subjective probability. The following year he published a long article on the Tractatus for the philosophical journal Mind, and then spent a fortnight that summer in Austria discussing it with Wittgenstein himself. At this point he was still some months short of his twenty-first birthday.
Ramsey was by no means all work. As his celebrity grew, so did his circle of acquaintances. Readers of conventional 1920s memoirs will be pleased to find Virginia Woolf, Liam O’Flaherty, Kingsley Martin, Lewis Namier and other luminaries making appearances. Not everybody is shown in a good light, but it should be said that for bad behaviour Wittgenstein was in a league of his own. When Ramsey first met him in Austria, he had given away his vast inherited fortune, and was refusing all offers of financial assistance. This occasioned many practical difficulties, to which he would react like a spoiled child, falling out with well-meaning friends who tried to help him circumvent his problems. Somehow Ramsey and Keynes managed to remain in his good books and arranged for him to visit Britain in 1925. He turned up shortly after Keynes’s wedding to the ballerina Lydia Lopokova. Small talk was not Wittgenstein’s thing. He quarrelled badly with Ramsey and reduced Lopokova to tears with his furious responses to her friendly remarks.

In 1929, Wittgenstein returned to Cambridge for good. He and Ramsey made up their differences and for the best part of a year resumed philosophical discussion. But it is hard to imagine that they would have continued in intellectual harmony for long. Wittgenstein’s transcendental hankerings made him impatient with what he saw as Ramsey’s materialism and his “ugly”, “bourgeois mind”. Ramsey for his part was irritated by Wittgenstein’s exclusive focus on his own ideas, and felt that “he is no good for my work”.

Over the past century the philosophical landscape has shifted. The central challenge is now to accommodate mind and meaning within the world uncovered by science, and hankerings for some higher perspective have been marginalized. It is good to be reminded how far Ramsey went in meeting this challenge. Perhaps he can now be restored to his proper place in the philosophical pantheon.


David Papineau is Professor of Philosophy at King’s College London. His books include Thinking About Consciousness, 2002, The Roots of Reason: Philosophical essays on rationality, evolution and probability, 2003, and, most recently, Philosophical Devices: Proofs, probabilities, possibilities, and sets, which appeared last year

Fonte: The Times Literary Supplement

Stephen King: No alternative to dollar except financial chaos

Can you hear the sound of cans being kicked down the road? The US disaster scenario has been avoided, for now. But given the deep disagreements between Democrats and Republicans and the even deeper divisions within the Republican party, we may end up going through the process all over again early next year.
If it had been any other country than the US, we’d all have had a good laugh before putting our money elsewhere. The guilty nation would have faced a much higher cost of credit and a much weaker currency.
Because, however, the US dollar and Treasuries provide the anchor for the global financial system, we merely breathe a sigh of relief and keep our fingers crossed that, next time, a deal will be struck without too much blood being spilt.

Russian roulette

That may be a forlorn hope. Many Republicans voted Wednesday night in favour of default. Some, it seems, are prepared to play a financial version of Russian roulette, thinking that a default need not lead to disaster – in the same way that, five times out of six times, pulling the trigger does no harm. Others have regarded the recent federal government shutdown as a way to demonstrate the case for small government. They might be willing to do the same thing all over again in a few weeks’ time.
There are also some more serious undercurrents. One is the persistent absence of decent economic growth. During the 1980s and 1990s, the US economy happily chugged along at 3-3.5 per cent per year. Since 2000, the pace has slowed to an annual rate averaging around 2 per cent. Even though, this year, the budget deficit has ended up lower than expected, the longer term fiscal arithmetic is, to say the least discouraging. Unless Congress grapples with this challenge now, the fiscal debates will become even more protracted in years to come. The US will end up being either a high tax or low spending economy. Reaching agreement on which will be, to say the least, difficult.
The second, related, issue is the incredibly high level of income inequality in the US. John F Kennedy used to claim that “a rising tide lifts all boats” but, in modern-day America, that aphorism no longer seems to work. The gap between ‘haves’ and ‘have-nots’ has become ever larger, and the number of ‘haves’ has got ever smaller: even wages for university graduates have, in many cases, struggled to keep pace with productivity gains. What role should government play in this story?
Some think it should be more than happy to redistribute slices of the economic cake. Others take a more 19th century view, arguing that, because the rich tend to save more, they are better able to provide the funds for long-term investment that might, otherwise, be squandered to buy votes.
The third issue is America’s financial relationship with the rest of the world. The battles witnessed in Washington over the last few weeks suggest that at least some US politicians have lost sight of the fact that the US is heavily indebted to the rest of the world.
Reserve currency status helps keep the creditors at bay – the costs of walking away from a dollar-based global financial system are possibly greater for America’s creditors than they are for the US itself – but reserve currency status also allows Washington to slip into bad habits that no other country could ever contemplate.
Even if the debt ceiling is raised, even if further shutdowns are avoided, there is a danger of a growing mismatch between America’s own fiscal ambitions and the interests of its creditors.
Vietnam War
It’s not quite the same story but the early-1970s break-up of the Bretton Woods system of fixed but adjustable exchange rates provides an intriguing precedent. The mounting costs associated with the Vietnam War led US authorities to crank up the printing of dollars in the late-1960s.
While this helped alleviate domestic fiscal pressures, the extra dollars in circulation threatened the dollar’s supposedly fixed link with gold. Foreign central banks began to fret, swapping their dollar reserves into precious metal, leaving US gold reserves precariously low.
Eventually, the growing inconsistency between US political ambition and global financial need led to the Bretton Woods system collapsing altogether, paving the way for the financial chaos of the 1970s.
Ironically, the current budgetary mess has also encouraged the printing of dollars. The Federal Reserve’s decision in September not to taper seems, in hindsight, to have been remarkably prescient. With the countdown to another potential debt ceiling stand-off already under way, it may even be tricky for the Fed to contemplate tapering in December.
The extra liquidity associated with quantitative easing has already triggered financial upheaval elsewhere in the world – most obviously in some of the more fragile emerging economies – but a further attachment to quantitative easing in a bid to mask Washington’s fiscal dispute may only encourage further problems down the road.
It may often seem that there is no alternative to a dollar-based international financial system. There is. It’s called financial chaos. The deal struck this week is more than welcome. The risk of financial chaos, however, has not yet gone away.


Stephen King is HSBC’s chief economist

Fonte: FT

David Pilling: China may be in much better shape than it looks

The story of China’s investment addiction is well known. China invests more in factories, smelters, roads, airports, shopping malls and vast housing complexes than any modern nation has done in history. At its peak, after the stimulus that followed the 2008 global financial crisis, gross capital investment hit a vertigo-inducing 49 per cent of output. Worse, every time growth sags, as it did at the start of this year, central planners reach for the cement-mixers, pushing investment up again.
Yu Yongding, a well-known academic at the Chinese Academy of Social Sciences, worries about this a lot. China is storing up trouble, he believes, as it adds to its stock of white elephants and unprofitable industries. Take the steel industry, he writes in a recent article. China has more than 1,000 steel mills and produces roughly half the world’s output. There is so much overcapacity that profitability last year was an atom-thin 0.04 per cent.
China’s high investment rate is the flip side of its high savings rate, which in 2007 topped 50 per cent of gross domestic product. This story is also well known. Chinese people save too much. One reason is that they stash away money to cover catastrophic events such as sickness or redundancy. In addition, the system penalises consumers by suppressing deposit rates so that cheap money can be funnelled to favoured sectors – all those steel mills. This propensity to save makes the necessary rebalancing of the Chinese economy harder. If consumers cannot be relied upon to spend and exports can no longer be the engine of growth, all that is left is investment.
Growth this year is likely to be about 7.5 per cent, quite a comedown from the nearly 12 per cent of 2010. But Xi Li, assistant professor at Hong Kong University of Science and Technology, says it will have to fall more. He calculates that if household consumption, now at 34 per cent of GDP, is to rise to 50 per cent in 10 years, annual investment growth would need to fall to minus 3 per cent a year. That would mean GDP growth falling to 4 per cent. Part of the basis for such assessments is empirical. You only need to visit China to see the investment, whether in the world’s longest high-speed rail network or in huge “ghost cities”. Part, though, is statistical. Each year, official data show investment at close to 50 per cent, savings at about the same level and consumption at about 35 per cent.
But what if the official data were wrong? That is the intriguing claim by two academics, Jun Zhang and Tian Zhu, respectively of Fudan University and China Europe International Business School, who argue that consumption has been consistently underreported. In a recent paper they find three important areas of undercounting. One is housing. China, they argue, does not properly account for “imputed rent”, an estimate of how much owner-occupiers would need to pay if they were renting. Second, they say, a lot of private consumption shows up in statistics as corporate expenses. For example, many executives pay for their private car on the company account. Although this appears in official data as investment, it is really consumption.
Third, and most important, they argue, GDP surveys underrepresent high earners, who may not relish the idea of officials with clipboards noting down their every expenditure. If high-income households are missing from the survey, so is their consumption. Taking these three factors together, the two academics calculate that China underestimates consumption by 10-12 percentage points.
That view, though still a minority one, has some support among investors. Jonathan Garner, head of Asian and emerging market equity strategy at Morgan Stanley, has long argued that Chinese consumption is higher than captured in official statistics. In a February report, using a bottom-up method, his team estimated household consumption at 46 per cent of GDP, $1.6tn higher than officially recognised. If he is right – or even half right – then some of the scare stories about China look slightly less scary. For example, investment, though still excessive by anyone’s standards, might not be quite as outrageously wasteful as assumed. Mr Garner puts capital investment at 41 per cent of GDP in 2012, not 49 per cent. “Our data suggest the transition to consumption-driven growth has already been under way for some time.” That, he says, is borne out by concrete data. Car sales, for example, are growing by 13-14 per cent, double the pace of the economy. Consumer-related stocks have long outperformed industrial ones.
Of course, if consumption data are wrong, that would imply investment data are wrong too. More work needs to be done to explain this. Nor do even the most optimistic estimates of consumption make concerns about chronic overinvestment vanish. They would, however, make them smaller. What seems like an obscurantist debate over the methodology for calculating GDP turns out to be of vital importance for China’s economic future.

David Pilling

Fonte: FT

John Kay: The Nobel committee is muddled on the nature of economics

The Royal Swedish Academy of Sciences continues to astonish the public when awarding the Nobel Memorial Prize in Economics. In 2011 it celebrated the success of recent research in promoting macroeconomic stability. This year it pays tribute to the capacity of economists to predict the long-run movement of asset prices.
People with knowledge of financial economics may be further surprised that this year Eugene Fama and Robert Shiller are both recipients . Prof Fama made his name by developing the efficient market hypothesis, long the cornerstone of finance theory. Prof Shiller is the most prominent critic of that hypothesis. It is like awarding the physics prize jointly to Ptolemy for his theory that the Earth is the centre of the universe, and to Copernicus for showing it is not.
Actually, it is not as bad as that analogy suggests. Although the efficient market hypothesis is not true, the basic idea – that there is a tendency for publicly available information to be reflected in market prices – is an essential tool for anyone involved in securities markets. And while the claim that economists are good at predicting long-run asset prices is a stretch, Prof Shiller’s research supports strong evidence of long-run mean reversion, as prices return to the fundamental values established by the earning capacity of the underlying assets.
Still, both these insights were available to market practitioners from common sense and casual observation long before the complex mathematics and extended data sets of academic financial economics. The prize committee gives the misleading impression that there is an agreed, established and advancing body of knowledge in financial economics: but the subject, for half a century a showpiece in economic departments and business schools because of its mix of intellectual rigour and practical relevance, is today struggling to maintain credibility in the face of the financial instability of the past two decades.
The problem is not the efficient market hypothesis itself, which should be understood as a tendency, not a law. The problem is with the superstructure built around it – a world of rational agents holding rational expectations achieving a state of “equilibrium” – a term economists have borrowed from physics – through trade with other rational agents holding similar rational expectations. In a masterpiece of persuasive language, the word “rational” is used to describe agents and expectations with a meaning very different from its ordinary usage.
This theory is easier to defend for its logical consistency than for the supporting empirical evidence. The capital asset pricing model to which it gives rise offers a striking, and counterintuitive, proposition: that the idiosyncratic risk associated with individual speculative projects, such as pharmaceutical research or weapons programmes, needs no reward above that accruing to riskless investments; but the risk associated with macroeconomic uncertainty experienced by all companies will require a substantial premium. The most striking empirical demonstration that this prediction is not true is found in the work Prof Fama undertook himself; while the most important contribution of his co-laureate, Prof Shiller, was to show the volatility of stock market prices far exceeds that justified by new information relevant to fundamental values.
But we do not have to believe, like Prof Fama, that we all correspond
to his concept of rationality or, like Prof Shiller, that we are slaves to our psychological weaknesses. There is a middle course, which understands that the economists’ use of the term “rationality” lacks relevance in a world characterised by imperfect information; that rational expectations are impossible in the face of radical uncertainty; and that it is implausible that constantly changing securities prices represent an equilibrium.
There was no scope for compromise on the nature of the physical world: Copernicus was right and Ptolemy was wrong. There are not, and will not be, equivalent certainties in economics, and if such certainty is the hallmark of science – I do not think it is – then economics is not a science. The resulting insecurity seems to lead the Nobel committee to claim more for the subject of economics than it has achieved.

John Kay

Fonte: FT

Matt Steinglass : Dutch budget deal offers lessons to the US

As the clock ticked down, talks over a budget deal were deadlocked. A government lacking a majority in one house of the legislature faced unprecedented resistance, with the opposition employing obstructionary measures that had previously been considered off-limits. Approval ratings for all the parties suffered, the government risked lame-duck status, political uncertainty threatened to kill off the green shoots in the economy and fears grew of the rise of a populist rightwing faction.
Yes, it has been a difficult month in the Netherlands.
As with the Obama administration in the US, the cabinet of Mark Rutte, the Liberal prime minister, has spent the past few weeks battling an emboldened opposition and facing an unyielding deadline: the demand by the European Commission for a new Dutch budget for 2014 with an extra €6bn in austerity measures. This demand exacerbated an increasingly vicious ideological polarisation in the Netherlands which in many ways mirrors that in the US, with centrist parties under pressure from the far left and right.
But on Friday, the government and three moderate opposition parties cut a budget deal that will provide a bare one-vote majority in the Dutch Senate. The fragile accord shows that despite a rising tide of populism, the country’s traditional governing culture of coalition and compromise is still working – just.
The background for the Dutch deadlock was the country’s severe year-long recession and growing opposition to austerity measures demanded by Brussels in order to bring the deficit down towards the EU’s limit of 3 per cent of GDP. The centrist cabinet, a coalition of Mr Rutte’s centre-right Liberals and the centre-left Labour party that took office just a year ago, has seen its popularity drop below 20 per cent. The far-right Party for Freedom of Geert Wilders, which opposes austerity (and indeed wants the Netherlands to exit the EU), has risen to the top of the polls while the far-left Socialist party is running well ahead of Labour.
The Liberal-Labour coalition has a majority in the Dutch lower house but not in the Senate. Normally that would not matter; the Senate is a traditionally weak body, rejecting legislation only if it is unconstitutional or impossible to carry out. But just as Republicans in the US have recently used filibusters and the debt ceiling in unprecedented ways, Dutch opposition parties under pressure of popular anger have this year begun voting down legislation in the Senate. That forced Mr Rutte and his Labour finance minister, Jeroen Dijsselbloem, into negotiations with centrist opposition parties.
As talks dragged on, one by one the potential partners dropped out. The Christian Democrats, once the classic centrist party of power, blasted the budget deal’s proposed tax increases. Next to go was GreenLeft, who insisted on substantially less than €6bn in austerity. Both parties have seen their supporters defect to the far right and left and clearly felt that taking responsibility for an unpopular austerity budget could be fatal.
In the end, the government struck a deal with the left-liberal D66 party, the centre-left Christian Union and the tiny rightwing Christian SGP party. The combination is bizarre enough that Dutch journalists, accustomed to dubbing every coalition with a handy moniker, are struggling to find a name for it. (Since the right-left Liberal-Labour-D66 coalition is traditionally known as “purple”, some are calling the new arrangement “purple with the Bible”.)
The deal rests on old-fashioned horse-trading: D66 will get extra education spending while Christian parties will get fewer cuts in childcare subsidies. The concessions will be made up with some tax rises (on car ownership, among others). That will let the government meet its €6bn austerity target but will probably anger some Liberal voters. Labour market flexibility will also be hastened, which could further weaken Labour, as the country’s largest worker federation said on Friday it opposed the deal.
But if the three opposition parties that backed the deal must now share popular anger at austerity, they will benefit from a glow of public approval for having reached a compromise that allows government to proceed. To judge by the reaction so far, Dutch voters are still prepared to reward parties for taking responsibility for difficult but necessary compromises, even if they dislike the content of those compromises.
If there is a lesson here for the US, that would be it.

Matt Steinglass

Fonte: FT

Cristina Fernandez, Argentina’s fading populist

When Pope Francis held an audience with Cristina Fernández in March, his first with any head of state, the meeting of the two Argentines was a study in contrasts. While the former was serene and dressed in white, Ms Fernández wore widow’s weeds and appeared coquettish, her eyes circled in kohl.
“Oops, can I do that?” she said, touching his sleeve and giggling like a schoolgirl. “I never imagined I would meet the Pope,” she mumbled, crossing her hands across her chest.
It was an unusual show of humility from a politician known for her imperious style and sharp tongue. As she once said: “The only thing to fear is God – and me a little, too.” But this week Ms Fernández was cast in another unfamiliar role: that of invalid.
Following a bump to her head two months ago, Ms Fernández, 60, was diagnosed with blood on the brain and rushed to hospital. Although this is a routine procedure, her forced exit has provoked a near constitutional crisis and brought Argentina’s problems to a climax worthy of an Almodóvar movie.
Ms Fernández’s populist model, part of the region’s “pink tide”, is receding. The Asian-driven boom in commodity prices, which has powered Latin America’s third-biggest economy for a decade, is ending. Ignored by world leaders – delegates at last month’s Group of 20 leading nations meeting in St Petersburg unplugged their headphones as she spoke – her popularity has also slumped at home. Ms Fernandez’s frequent migraines and delicate health have led some to wonder if she is a “woman on the verge of a nervous breakdown”.
The debut of this bus driver’s daughter on the world stage, when her husband, Néstor Kirchner, unexpectedly won the 2003 election, was almost as dramatic. They met as law students, and before entering politics shared a legal practice recovering foreclosed properties – the perfect background in a country that had defaulted on $100bn of bonds.
As president, with Ms Fernández at his side, Mr Kirchner imposed a debt restructuring on creditors and pumped subsidies into energy, health and education. The pair took on the country’s biggest interest groups, from media companies to judges to the farming lobby; railed against imperialism; and redoubled Argentina’s claim to the Falkland Islands, the British territory in the South Atlantic. Tankers laden with soya destined for Asia, meanwhile, raised economic growth to Chinese rates. Poverty fell rapidly. Wrapping themselves in the memory of Juan and Evita Perón, the populist founders of Argentina’s idiosyncratic nationalist movement, they hatched a plan to rule indefinitely by alternating the presidency.
So was born what the Kirchners named the “model”, and the start of what Ms Fernández calls “the glorious decade”. It might be better described as a run of good luck now apparently ebbing.
One constant in Argentina’s history is its inability to manage a boom. Today, inflation is estimated at 25 per cent, and currency controls and general maladministration have sapped the economy. Indeed, not even ministers believe the official inflation numbers. Last year’s expropriation of Spanish oil company Repsol’s majority stake in national energy company YPF has drained business confidence. A battle with holdout creditors has shut the country out of financial markets.
As with so many populist regimes that extol the “people” but favour secrecy and personal power, graft and sweetheart deals have flourished. “I’ve never seen this degree of corruption,” says Argentine journalist Jorge Lanata, who fronts a muckraking television show. “What most angers me is them talking as if they were Mother Teresa.”
Any plans Ms Fernández had for dynastic rule collapsed with her husband’s death from heart failure three years ago, before her second term. The public displays of emotional volatility, which prompted Hillary Clinton, then US secretary of state, to inquire in cables revealed by WikiLeaks about Ms Fernández’s “mental health”, have subsided. But not her isolation. Insecure and bereft of her husband’s counsel, she finds her inner circle has shrunk to just a handful, in particular, Máximo, 36, the elder of her children and her only son. “In our government what is important aren’t the cabinet meetings, but the things we have done,” she said in a recent interview.
That lack of institutionality now haunts Argentina as the president recovers from an operation expected to require a month’s rest. Constitutionally, Amado Boudou, the vice-president and Harley-Davidson enthusiast, is in charge but tainted by a corruption scandal. “The only person in power is the president,” said cabinet chief Juan Manuel Abal Medina this week, even with Ms Fernández in intensive care.
With midterm elections on October 27, in which Ms Fernández’s party (a breakaway Peronist faction) is expected to lose its congressional majority – followed by 2015 presidential elections for which she cannot run – her party is deserting her. “We love a sweet flower, but not one headed to the political graveyard,” says one member. The prospect of a more business-friendly administration is enticing investors, particularly to Argentina’s vast, recently discovered shale gas reserves. “Do you think Chevron would have embarked on its $1.2bn investment in July if it didn’t see the writing on the wall?” says one.
If Ms Fernández is true to form, she will emerge from hospital vengeful and valiant. Yet some note a new softness since she met the Pope – he sent her a get-well telegram this week – and her excitement at the possibility he might baptise her first grandchild. That, plus her fading political fortunes and health, could prompt a change of heart, or even retirement.
“I’d love to be a judge after 2015,” she said recently. The comment was made ironically but, judging by the local stock market – up 75 per cent this year – it is a hope many share.

John Paul Rathbone and Benedict Mander

Fonte: FT

Philip Stephens: America’s economic retreat threatens China’s rise

China’s rise was made in America. The ingenuity and industriousness of its people aside, China’s extraordinarily rapid emergence as the world’s second-largest economy was made possible by an open international economic system designed and built by the US. Now Beijing has serious cause for concern. What America makes, it may also be able to break.
The fiscal stand-off in Washington has drawn sharp words from the People’s Republic. US President Barack Obama and Republicans in Congress have been told in no uncertain terms that China expects Washington to live up to its global responsibilities. Behind such words lie deep concerns. China’s growth rate has already slowed. Another shock and it could sink beyond the 6 or 7 per cent deemed necessary by the Communist party to underwrite political and social order.

These are not the best of times for American power and prestige. Mr Obama’s contortions over Syria and his willingness to talk to Iran have left traditional Arab allies seething, Turkey has chosen a Chinese over an American air defence system, while Israeli prime minister Benjamin Netanyahu rails that Mr Obama is too soft on Palestinians as well as Iranians. These countries have all made plenty of their own mistakes, but it is hard to think of a time when mistrust of the US in the Middle East was quite so high.
The government shutdown forced Mr Obama to cancel appearances at the Asia-Pacific Economic Cooperation forum in Bali and the East Asia Summit in Brunei. His absence and the fiscal farce playing out in Washington scarcely inspire confidence as to the administration’s much-vaunted “pivot to Asia”. Presence matters in this part of the world, and Mr Obama left the stage to Chinese President Xi Jinping.
For his part Mr Xi is left with a trinity of concerns about the direction of US policy. The first two are serious but cyclical. The third is the dangerous one – a structural shift that threatens China’s medium to long-term economic prospects.
The most immediate worry for Beijing is that a protracted stalemate in Washington would send the US economy back into recession and throw markets into a tailspin. If the holder of the world’s reserve currency cannot (or will not) pay its bills on time, what future for the global financial system? China would not escape lightly from a US default.
The second thing disturbing Beijing is that the continued weakness of the dollar is devaluing China’s huge stock of US debt. China held nearly $1.3tn of US Treasury securities in July 2013, putting it at the top of the international table – ahead of Japan. Chinese officials have long complained that the US is inflating away its debts, shifting the burden of economic adjustment on to those with large dollar holdings. There is little they can do. The US response to such complaints is a shrug of the shoulders that says no one is asking Beijing to buy US debt. It could always go elsewhere.
The big threat, though, comes in the third dimension of US policy: a shift that is seeing the US move from acting as the guarantor of broadly based multilateral rules to a preference for small coalitions with its friends. Washington is edging back from the liberal order it created after the second world war.
This order allowed western Europe to rise from the rubble, assured US hegemony and solidified the western alliance in response to the Soviet threat. America’s national interest was perfectly aligned with its international responsibilities as the world’s leading economic power. What was good for the Germany, for France, Britain and others, was also good for America, which needed strong and prosperous allies.
As Ashley Tellis of the Carnegie Endowment told a conference hosted by the International Institute for Strategic Studies in Bahrain this week, the postwar economic settlement is now fracturing. What the US had not reckoned on was that the emerging powers in general and China in particular would also be beneficiaries of this US-led system.
The rise of the rest has muddied the relationship between US interests and its provision of global public goods. China now looks set fair to become the world’s largest economy. Empowering a country that would then challenge US hegemony was not part of the postwar game plan.
So the US is swapping postwar multilateralism for preferential trade and investment deals with like-minded nations. As I heard Mr Tellis tell it, this means sidelining comprehensive trade arrangements in favour of bilateral and regional deals where Washington can more readily identify its interests.
In an ideal world, the proposed Trans-Pacific Partnership and the Transatlantic Trade and Investment Pact would serve as frameworks for subsequent, inclusive trading and investment rules – a bridge back to multilateralism. But in US eyes, they are looking more like a useful strategy to lock out China. Of course, these negotiations could fail – on questions of trade there are formidable differences even among friends. But the trajectory has been set: just as the US is scaling back its provision of global security, so it is taking a more hard-edged view of its role as guarantor of the open economic system.
Beijing should be worried. However destabilising the present shenanigans in Washington are in the short term, sustained prosperity in China rests above all on access to a level international playing field. Without strong US backing, the multilateral order will fall into further disrepair and globalisation will give way to fragmentation. China, the biggest gainer from the liberal order, would be the biggest loser from its demise.

Philip Stephens

Fonte: FT

Ashoka Mody: Trade is the true test of the world’s green shoots

Following its sixth consecutive downgrade of global economic performance, the International Monetary Fund’s World Economic Outlook again projects a recovery around the corner. The government shutdown aside, news from the US has been encouraging; despair on the eurozone is abating; and the Chinese slowdown has been orderly. Green shoots have appeared before, only to disappoint. Might this time be different?
World trade is a helpful lens through which to monitor global economic health. The collapse of 2008-09 was triggered by a financial earthquake but transmitted across the world by a precipitous fall in trade. Early in the crisis, industrial production fell at the same pace as at the start of the Great Depression in 1929-30 – but the trade collapse was unprecedented. Looking into the abyss, world leaders mustered a co-ordinated stimulus to limit the fall. Yet the rebound was powered by the Chinese appetite for imports that accelerated global trade in 2010.
That was misread as the end of the crisis. In early 2010, the recovery was expected to propel world gross domestic product to more than 4 per cent annual growth over the next five years, higher than in the boom years of 2003-07. But GDP growth in 2013 will be less than 3 per cent. Private deleveraging, the shift from fiscal stimulus to austerity, and structural deficiencies – now more manifest – are to blame.
A crucial element of global forecasts was the view on world trade, which was projected to grow between 2011 and 2013 at an annual rate of 6 per cent, 1 percentage point above its average over the past few decades. It has fallen short. For 18 months it has grown at a paltry annual rate of about 2 per cent.
Today the world economy is in an unusual phase: world trade growth is below world production growth rates. So a necessary amplifying force for a global recovery is missing. In fact, economic distress is being spread through global trade.
The eurozone is central to this dynamic. Though the global ripples are not as manifest as they were amid financial turmoil, they are real. European economies are among the most trade-intensive. As they have fallen into a stupor, their imports from each other have imploded.
But Europe’s economic size ensures its sharply reduced imports generate substantial global spillovers too. The effects have been felt directly in Asia, with which Europe has strong trade links. As Asia has slowed, so has the demand for commodities, sucking a larger group of emerging economies into this downward ambit.
In turn, weak world demand is exacerbating the domestic dysfunctions of emerging markets. Their resilience was applauded during the critical phase of the crisis. The IMF’s WEO just six months ago still viewed emerging economies as the new engine of world growth. But without the buffer of global demand, their longstanding structural problems have resurfaced. The sharp currency depreciations faced by Brazil, India, Indonesia and Turkey were a wake-up call.
Now the bets are again on developed economies. Yet today there is no global locomotive. Continued US recovery requires the same consumer-driven boom that led to the crisis. China must curb its excesses. Economic revival elsewhere awaits a boost from robust trade; but deep-rooted country stresses, magnified by global interconnections, hamper trade growth. There is little scope for further monetary activism and no appetite for fiscal stimulus. Politics everywhere is stymieing the pace of policy action, as the US government shutdown reminds us.
The global economy is barely moving forwards. The hope is that good news will jolt it into a self-reinforcing lift-off. But equally, bad news and policy errors could rapidly aggravate vulnerabilities.
History requires us to heed this warning. During the climb back from the Depression, world trade also grew at or below world production rates. Barry Eichengreen of the University of California, Berkeley, wrote that, without a co-ordinated global policy, each country needed time to heal its wounds before re-emerging as a productive contributor to world trade and growth. The healing happened in time – but, if the Depression started in 1929, we may still be in 1933, with a few years before global growth is robust. A quick change in that dynamic may prove elusive.

Ashoka Mody is a visiting professor at Princeton University and a fellow at the Bruegel think-tank

Fonte: FT