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The IMF Chief Economist Sees a Threat to World Economies From a Liquidity Trap

In the Financial Times from November 2 2020, the IMF chief economist Gita Gopinath suggested that world economies at present are likely to be in a global liquidity trap. Gopinath has reached this conclusion because the yearly growth rate of the price indexes has been trending down despite very low interest rates policies. According to the IMF chief economist, central banks have lowered interest rates to below 1 percent and in some countries interest rates are at present negative. In the framework of a liquidity trap, it is held that the ability of central banks to stage an effective defense against various economic shocks weakens significantly. So how then can one resolve the problem of the central banks inability to produce the necessary defense of the economy?

A possible way out of the liquidity trap suggests Gopinath, is to employ aggressive loose fiscal policy. This means an aggressive government spending in order to boost the aggregate demand.

According to Gopinath,

Fiscal authorities can actively support demand through cash transfers to support consumption and large-scale investment in medical facilities, digital infrastructure and environment protection. These expenditures create jobs, stimulate private investment and lay the foundation for a stronger and greener recovery. Governments should look for high-quality projects, while strengthening public investment management to ensure that projects are competitively selected and resources are not lost to inefficiencies.

Furthermore, according to Gopinath,

The importance of fiscal stimulus has probably never been greater because the spending multiplier — the pay-off in economic growth from an increase in public investment — is much larger in a prolonged liquidity trap. For the many countries that find themselves at the effective lower bound of interest rates, fiscal stimulus is not just economically sound policy but also the fiscally responsible thing to do.

…click on the above link to read the rest of the article…

2000 vs. 2020: The Role Of Monetary And Fiscal Policies In Stock Market Cycles

2000 vs. 2020: The Role Of Monetary And Fiscal Policies In Stock Market Cycles

The equity market of 2020 has some of the lofty valuation features that showed up at the peak of 2000 cycle. Yet, a key difference is the accommodative stance of monetary and fiscal policies nowadays versus the restrictive stance of 2000. So, the key question for investors is how does the monetary and fiscal policy backdrop influence the investment outlook? Do friendly policies create the potential for even more elevated valuations, to last longer, or is it merely a mirage shifting the focus of investors attentions to the upfront benefits and away from the longer term fundamentals of earnings and portfolio risks?

Equity Markets 2020 vs. 2000

There are a number of macro measures that are often used to assess how expensive or cheap the equity markets are at any point in time. None of these are hard barriers that can’t be exceeded – as all records in finance (like in sports) tend to get broken eventually – but they do offer a perspective on the market valuation relative to past cycles.

For example, the S&P 500 price to sales ratio hit a record high of 2.16 at the beginning of 2000 and has now been exceeded for the first time by the current reading of 2.25X.

Similarly, the market valuation of domestic companies to Nominal GDP – a metric that compares equity prices to overall economic growth – stood at a record 1.85X in 2000 and at the start of 2020 it is estimated that this metric has matched or slightly exceeded the highs of 2000.

Both of these measures suggest that the equity market is expensive. But, critics would argue that favorable monetary and fiscal backdrop makes these measures less excessive than they appear at first glance.

…click on the above link to read the rest of the article…

My Main Worry is Europe

My Main Worry is Europe

Can it get any better than this? That’s the question investors are asking themselves after an exceptional year. Despite a slowdown in the global economy and increasing trade tensions, almost every asset class is up for the past twelve months.

Mohamed El-Erian

Mohamed El-Erian is convinced that the world is nearing a tipping point. According to the internationally renowned economist who coined the term «New Normal», the faith of the global economy depends on a successful hand-off from monetary to fiscal policy and structural reforms. Otherwise, the world will sink into a mire of financial volatility and political collapse, he fears.

«As good as the ‹New Normal› was for the last ten years, I don’t think it will continue during the next ten years», says Mr. El-Erian in an extended interview with The Market.

In his view, Europe is getting much closer to a fateful junction. If the European economy hits stall speed, chances of a recession are increasing, Mr. El-Erian argues. Furthermore, he cautions that the U.S.-China deal will be a short-term truce since trade is no longer just about economics but also about national security.

Mr. El-Erian, investors are looking back at an amazing year with many turns and twists. What’s ahead for the financial markets in 2020?
There’s a tendency to what I call a «one issue market», meaning the market embraces a single issue and is influenced by that issue most of the time. For a long time, this issue used to be Central Banks, then it has evolved into trade. Trade will continue to be an important issue, even with the recent short-term truce. We have pressed the pause button on globalization. Now, the big question is if we press the play button again and continue to globalize as the market is assuming or if we step towards pressing the rewind button on globalization and deglobalize. That uncertainty is not going to go away. It’s going to be with us for the whole of 2020 because trade is no longer just about economics. It’s also about national security.

…click on the above link to read the rest of the article…

IMF Warns World “Dangerously Unprepared” For Upcoming Global Recession

In the starkest warning yet about the upcoming global recession, which some believe will hit in late 2019 or 2020 at the latest, the IMF warned that the leaders of the world’s largest countries are “dangerously unprepared” for the consequences of a serious global slowdown. The IMF’s chief concern: much of the ammunition to fight a slowdown has been exhausted and governments will find it hard to use fiscal or monetary measures to offset the next recession, while the system of cross-border support mechanisms — such as central bank swap lines — has been undermined, warned David Lipton, first deputy managing director of the IMF.

IMF Deputy Managing Director David Lipton

“The next recession is somewhere over the horizon, and we are less prepared to deal with that than we should be . . . [and] less prepared than in the last [crisis in 2008],” Lipton told the Financial Times during the annual meeting of the American Economic Association. “Given this, countries should be paying attention to keeping their economy on a level trajectory, building buffers and not fighting with each other.”

“China is clearly slowing down — we think China’s growth has to slow, but keeping it from slowing in a dangerous way is an important objective,” he said, noting that a downshift would be “material very broadly, not just in Asia.”

…click on the above link to read the rest of the article…


The Fed’s Not Backing Off: Powell’s Standouts & Zingers at the Press Conference

The Fed’s Not Backing Off: Powell’s Standouts & Zingers at the Press Conference

US is “on an unsustainable fiscal path, there’s no hiding from it.”

I have to say, Fed Chairman Jerome Powell is a breath of fresh air when he talks, after the near-physical pain I experienced listening to his last three predecessors. I actually get what he is saying, even if it’s a little twisted. I can make out his veiled disdain for fancy but dubious economic theories and iffy forecasts. And I get to look forward to some zingers when I least expect them – such as at today’s press conference, when he valiantly defended the Fed’s preferred inflation measure, core PCE, by saying that it “tends to run a little lower, but that’s not why we pick it.”

About that wildly ballooning federal deficit:

Even though the question came at the end of the press conference, I’m pulling it to the top because it’s so important. Asked if fiscal policy – the ballooning deficit, after tax cuts and spending increases – comes up a lot at FOMC meetings, he said:

“It doesn’t really come up. It’s not really our job…. We don’t have responsibility for fiscal policy. But in the longer run, fiscal policy will have a significant impact on the economy, so for that reason, I think, my predecessors have commented on fiscal policy, but they have commented on it at a high level rather than trying to get involved in particular measures.

“My plan is to stick to the same approach, and stay in our lane. So I would just say, it’s no secret, it’s been true for a long time, that with our uniquely expensive healthcare delivery system and the aging of our population, we’ve been on an unsustainable fiscal path for a long time. And there is no hiding from it, and we will have to face that, and I think the sooner the better.

…click on the above link to read the rest of the article…

Things Have Changed…


Today’s post is sure to anger a bunch of you. My libertarian friends (you know who you are) will probably be the most outraged, but I suspect many will misinterpret my observations about society’s most likely path as my belief regarding the proper course. So let me try to be clear. I have no interest in asserting I know what should be done, but rather I am focused on what will be done. If you want to debate the theoretical, then there are a myriad of websites for you to choose from. Whether you are conservative or liberal, hard-money or gasp Keynesian, there is a place for you to feel safe and share your views about society’s optimal direction. But let me tell you right now – this isn’t it.

So put aside your political views and try to deal with only probabilities as opposed to your desires regarding economic policy.

Although the Republicans are supposedly the party of fiscal conservatism, we all know that sort of talk is only for when they are not in power.

Again – please do not email me with your political rant. I have no dog in this hunt. When it comes to the markets, I am politically agnostic and the only religion I worship is that of the Market Gods.

There should be little surprise that under Republican stewardship, the greatest fiscal stimulus in the past decade has been instituted. Not saying if it is good or bad because my opinion is completely irrelevant.

But I would like you to step back and think about the recent bout of U.S. economic outperformance. It’s probably fair to say that relative to the rest of the developed world, American fiscal policy has been easier while monetary policy tighter.

…click on the above link to read the rest of the article…

The Makings of a 2020 Recession and Financial Crisis

stockbrokerCarl Court/Getty Images

The Makings of a 2020 Recession and Financial Crisis

Although the global economy has been undergoing a sustained period of synchronized growth, it will inevitably lose steam as unsustainable fiscal policies in the US start to phase out. Come 2020, the stage will be set for another downturn – and, unlike in 2008, governments will lack the policy tools to manage it.

NEW YORK – As we mark the decennial of the collapse of Lehman Brothers, there are still ongoing debates about the causes and consequences of the financial crisis, and whether the lessons needed to prepare for the next one have been absorbed. But looking ahead, the more relevant question is what actually will trigger the next global recession and crisis, and when.

The current global expansion will likely continue into next year, given that the US is running large fiscal deficits, China is pursuing loose fiscal and credit policies, and Europe remains on a recovery path. But by 2020, the conditions will be ripe for a financial crisis, followed by a global recession.

There are 10 reasons for this. First, the fiscal-stimulus policies that are currently pushing the annual US growth rate above its 2% potential are unsustainable. By 2020, the stimulus will run out, and a modest fiscal drag will pull growth from 3% to slightly below 2%.

Second, because the stimulus was poorly timed, the US economy is now overheating, and inflation is rising above target. The US Federal Reserve will thus continue to raise the federal funds rate from its current 2% to at least 3.5% by 2020, and that will likely push up short- and long-term interest rates as well as the US dollar.

Meanwhile, inflation is also increasing in other key economies, and rising oil prices are contributing additional inflationary pressures. That means the other major central banks will follow the Fed toward monetary-policy normalization, which will reduce global liquidity and put upward pressure on interest rates.

…click on the above link to read the rest of the article…

Italy’s Countdown to Fiscal Crisis

Italy’s Countdown to Fiscal Crisis

Italy’s current scheme of piling unfunded government spending on top of an already-huge debt is a recipe for disaster.

As a general rule, we worry too much about deficits and debt. Yes, red ink matters, but we should pay more attention to variables such as the overall burden of government spending and the structure of the tax system.

That being said, Greece shows that a nation can experience a crisis if investors no longer trust that a government is capable of “servicing” its debt (i.e., paying interest and principal to people and institutions that hold government bonds).

This doesn’t change the fact that Greece’s main fiscal problem is too much spending. It simply shows that it’s also important to recognize the side-effects of too much spending (if you have a brain tumor, that’s your main problem, even if crippling headaches are a side-effect of the tumor).

Anyhow, it’s quite likely that Italy will be the next nation to travel down this path.

This is in part because the Italian economy is moribund, as noted by the Wall Street Journal.

Italy’s national elections…featured populist promises of largess but neglected what economists have long said is the real Italian disease: The country has forgotten how to grow. …The Italian economy contracted deeply in Europe’s debt crisis earlier this decade. A belated recovery now under way yielded 1.5% growth in 2017—a full percentage point less than the eurozone as a whole and not enough to dispel Italians’ pervasive sense of national decline. Many European policy makers view Italy’s stasis as the likeliest cause of a future eurozone crisis.”

Why would Italy be the cause of a future crisis?

For the simple reason that it is only the 4th-largest economy in Europe, but this chart from the Financial Times shows it has the most nominal debt.

So what’s the solution?

…click on the above link to read the rest of the article…

Illinois Politicians Are Doubling Down on Failure

Illinois Politicians Are Doubling Down on Failure

In the face of a fleeing population, politicians in Illinois are doubling down on the policies that are driving people away in the first place.

When I did a poll earlier this year, asking which state would be the first to suffer a fiscal crisis, I wasn’t terribly surprised that Illinois wound up in first place.

But I was surprised by the margin. Even though there’s a good case to be made for basket-case jurisdictions such as New JerseyCalifornia, and Connecticut, Illinois not only got a plurality of votes, it received an absolute majority.

Based on what’s happening in the Land of Lincoln, it appears that state politicians want to receive a supermajority of votes. There’s pressure for ever-higher taxes to finance an ever-more-bloated bureaucracy.

And taxpayers are voting with their feet.

The Wall Street Journal editorialized about the consequences of the state’s self-destructive fiscal policy.

Democrats in Illinois ought to be especially chastened by new IRS data showing an acceleration of out-migration. The Prairie State lost a record $4.75 billion in adjusted gross income to other states in the 2015 tax year, according to recently IRS data released. That’s up from $3.4 billion in the prior year. …Florida with zero income tax was the top destination for Illinois expatriates… What’s the matter with Illinois? Too much for us to distill in one editorial, but suffice to say that exorbitant property and business taxes have retarded economic growth. …Taxes may increase as Democrats scrounge for cash to pay for pensions. …Illinois’s unfunded pension liabilities equalled 22.8% of residents’ personal income last year, compared to a median of 3.1% across all states and 1% in Florida. …Illinois’s economy has been stagnant, growing a meager 0.9% on an inflation-adjusted annual basis since 2012—the slowest in the Great Lakes and half as fast as the U.S. overall. This year nearly 100,000 individuals have left the Illinois labor force.

…click on the above link to read the rest of the article…

Whatever Happened to Saving for a Rainy Day?

The National Debt Clock is a very very large digital display of the current gross national debt of the United StatesMichael Brochstein/SOPA Images/LightRocket via Getty Images

Whatever Happened to Saving for a Rainy Day?

The US will be paying for its current fiscal excesses with the promise of future payments. But inefficient economic stimulus now will not give future generations the productive resources needed to make good on it.

CAMBRIDGE – More than a decade ago, I undertook a study, together with Graciela Kaminsky of George Washington University and Carlos Végh, now the World Bank’s chief economist for Latin America and the Caribbean, examining more than 100 countries’ fiscal policies for much of the postwar era. We concluded that advanced economies’ fiscal policies tended to be either independent of the business cycle (acyclical) or to lean in the opposite direction (countercyclical). Built-in stabilizers, like unemployment insurance, are part of the story, but government outlays also worked to smooth the economic cycle.

The benefit of countercyclical policies is that government debt as a share of GDP falls during good times. That provides fiscal space when recessions materialize, without jeopardizing long-run debt sustainability.

By contrast, in most emerging-market economies, fiscal policy was procyclical: government spending increased when the economy was approaching full employment. This tendency leaves countries poorly positioned to inject stimulus when bad times come again. In fact, it sets the stage for dreaded austerity measures that make bad times worse.

Following its admission to the eurozone, Greece convincingly demonstrated that an advanced economy can be just as procyclical as any emerging market. During a decade of prosperity, with output close to potential most of the time, government spending outpaced growth, and government debt ballooned. Perhaps policymakers presumed that saving for a rainy day is unnecessary if this time is different and perpetual sunshine is the new normal.

…click on the above link to read the rest of the article…

When America’s Fiscal Crisis Hits, Be Forewarned that Tax Increases Will Make a Bad Situation Worse

When America’s Fiscal Crisis Hits, Be Forewarned that Tax Increases Will Make a Bad Situation Worse

When America’s fiscal crisis hits, remember that raising taxes will only exacerbate the problem.

At some point in the next 10 years, there will be a huge fight in the United States over fiscal policy. This battle is inevitable because politicians are violating the Golden Rule of fiscal policy by allowing government spending to grow faster than the private sector (exacerbated by the recent budget deal), leading to ever-larger budget deficits.

I’m more sanguine about red ink than most people. After all, deficits and debt are merely symptoms. The real problem is excessive government spending.

But when peacetime, non-recessionary deficits climb above $1 trillion, the political pressure to adopt some sort of “austerity” package will become enormous. What’s critical to understand, however, is that not all forms of austerity are created equal.

The crowd in Washington reflexively will assert that higher taxes are necessary and desirable. People like me will respond by explaining that the real problem is entitlements and that we need structural reform of programs such as Medicaid and Medicare. Moreover, I will point out that higher taxes most likely will simply trigger and enable additional spending. And I will warn that tax increases will undermine economic performance.

Regarding that last point, three professors, led by Alberto Alesina at Harvard, have unveiled some new research looking at the economic impact of expenditure-based austerity compared to tax-based austerity.

…we started from detailed information on the consolidations implemented by 16 OECD countries between 1978 and 2014. …we group measures in just two broad categories: spending, g, and taxes, t. …We distinguish fiscal plans between those that are expenditure based (EB) and those that are tax based (TB)… Measuring the macroeconomic impact of a plan requires modelling the relationship between plans and macroeconomic variables.

Here are their econometric results.

…click on the above link to read the rest of the article…

Conflict between Fiscal & Monetary Policy

We are moving into a crisis of monumental proportions. There has been a serious fundamental problem infecting economic policy on a global scale. This conflict has been between monetary and fiscal policy. While central banks engaged in Quantitative Easing, governments have done nothing but reap the benefits of low-interest rates. This is the problem we have with career politicians who people vote for because they are a woman, black, or smile nicely. There is never any emphasis upon qualification. Every other job in life you must be qualified to get it. Would you put someone in charge of a hospital with life and death decisions because they smile nicely?

Economic growth has been declining year-over-year and we are in the middle of a situation involving low-productivity expansion with high and rapidly rising budget deficits that benefit nobody but government employees.  Once upon a time, 8% growth was average, then 6%, and 4% before 2015.75. Now 3% is considered to be fantastic. Private debt at least must be backed by something whereas escalating public debt is completely unsecured. The ECB wanted to increase the criteria for bad loans, yet if those same criteria were applied to government, nobody would lend them a dime.

Monetary policy, after too long a phase of low-interest rates and quantitative easing, has created governments addicted to low-interest rates. They have expanded their spending and deficits for the central banks were simply keeping the government on life-support – not actually stimulating the private sector. Governments have pursued higher taxes and more efficient tax collection. They have attacked the global economy assuming anyone doing business offshore was just an excuse to hide taxes.

…click on the above link to read the rest of the article…

The Great Deficit Ruse

The Great Deficit Ruse

Your intuition is right: tax cuts are good and tax increases are bad.

If your profligate friend blew his budget on liquor, you might feel bad for him. But it’s unlikely that you would be willing to fork over money to cover his mistake. He needs to figure it out. And maybe, then, he will learn a lesson for the future.

This is exactly how I feel about all this whining about the federal deficit. I didn’t cause it. It’s not my problem. I should not be forced to pay for it. I don’t work every day in order to earn money to pay for other people’s problems.

It’s bad citizenship always to be willing to pay the government’s debts.

Admit that you agree. You don’t really care about the deficit. Not really. It’s an abstraction to you. More crucially, the deficit is not your fault. You are not responsible for paying for one dime of the federal debt. No portion of your justly made income should be taken to cover the fiscal irresponsibility of anyone except perhaps your children.Actually, it’s very bad parenting always to be ready to pay the kids’ debts. It’s similarly bad citizenship always to be willing to pay the government’s debts.

All this media talk–and it is incessant and ubiquitous–about how the deficit is way more important than your property rights completely disregards the realities of politics. Namely: politicians and bureaucrats desperately need an excuse to take your money. Making you pay for their past mistakes is as good an excuse as any.

Your intuition is right: tax cuts are good and tax increases are bad.

But hold on: doesn’t that just shove the burden of debt onto the next generation? My answer: not if the next generation is similarly unwilling to cough up taxes to pay for the dumb things government does.

…click on the above link to read the rest of the article…

Oh Canada: An Economic Experiment


It seems like the only time Canada makes the news is when America elects some right wing President the Hollywood elite don’t like, and they all threaten to move to Canada. We are usually too polite to say something, as it is often clear the Americans are in the midst of quite the family squabble, but what makes these Hollywood shmoes think we want them? Leah Dunham? Alec Baldwin? Whoopi Goldberg? It’s not like we have an open door policy for Hollywood complainers. But while we are on the subject, we would like Seth Rogen back (tell him our pot laws are about to loosen up, that should get him), and my daughters have asked to put in word for the two Canadian Ryan’s to return home (Gosling and Reynolds). America, you can keep Justin Bieber, Howie Mandel and William Shatner.


But that’s often the most news coverage that Canada receives. And in terms of economic news, Canada has trouble making the B segment on even the most boring day of financial network TV. That’s a real shame because there are some interesting economic experiments happening in Canada.

There are two major differences occurring with Canadian economic policy, and many experts are watching with great interest how they play out. The first is on the fiscal side. Canada was at the forefront of electing a leader who promised more infrastructure spending. Before Justin Trudeau, most politicians were running on platforms of promising to balance the budget and cut spending. But Trudeau’s win ushered in a new worldwide wave of politicians advocating the opposite. The second interesting development is Canada’s monetary policy. Bank of Canada Governor Poloz has taken a much different approach than most Central Bankers.

…click on the above link to read the rest of the article…

88% Probability We Just Entered Recession & The Broken Monetary Mechanism That Got Us Here

88% Probability We Just Entered Recession & The Broken Monetary Mechanism That Got Us Here

But so allow me an attempt to mend some bridges.  Let’s start by looking at the various existing frameworks that drive economic policy.  We have Monetary policy (the banks), Fiscal policy (Congress), Microeconomic policy (Corporations).  So let’s look at each.

Let’s begin with Fiscal policy.  The very first issue that should jump out to everyone is that Congress has been utterly ineffective for almost 2 decades now.  That is because the partisanship has become so intense that there simply seems no room for compromise in an effort to get any reasonable piece of legislation done.  What we are left with is a slew of outdated fiscal policies.  Perhaps most detrimental is a corporate tax rate nearly twice that of many other developed nations.

The problem with relatively (to other nations) high corporate tax rates is it means that any domestic investment, everything else equal, has a significantly longer breakeven point.  Said another way, the return on domestic investment is much lower than the return on foreign capital investment (ceteris paribus).  This is a very intuitive concept, easily digestible by all.  The implication is that the relative level of corporate tax rates here in the US incentivize corporations to invest elsewhere.

…click on the above link to read the rest of the article…

Olduvai IV: Courage
In progress...

Olduvai II: Exodus
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