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Canada's Place in the Global Economy

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More on how we are tied to the US economy and how US politics intrudes upon our decision making. Frankly, attempts to legislate what we drive will simply result in more and more old cars staying on the road as people realize the trade off between paying $10,000 more for a car is hardly worth a $900 reduction in your fuel bill (not to mention that such cars will probably not meet the needs of the vast majority of people).

http://opinion.financialpost.com/2012/11/29/peter-foster-mandating-cars-people-dont-want/

Peter Foster: Mandating cars people don’t want

Peter Foster | Nov 29, 2012 8:34 PM ET | Last Updated: Nov 29, 2012 8:45 PM ET
More from Peter Foster
 
Peter Kent’s U.S.-based fuel standards will not have any impact on climate

“I’m from the government, and I’m here to save you money.” That was the implausible line peddled this week by Environment Minister Peter Kent as he announced new fuel-economy standards for Canadian auto manu­facturers.

On Tuesday, just before jetting off to yet another pointless climate conference, in Doha, Mr. Kent announced what he called “good news.” The government would be forcing the auto industry to make cars consumers might not want, but this could save motorists $900 in gasoline a year. He quoted a marvellously precise and yet random-seeming average fuel consumption of “54.5 miles per U.S. gallon” by 2025. The units make it clear that the figure was dictated by Washington, not Ottawa.

A recent U.S. congressional investigation expressed outrage that President Barack Obama had pulled the target figure from his, er, back pocket, with manipulation to accommodate his moonshot/Soviet-style commitment (same thing really) to have a million electric cars on the road by 2015.

By 2025, according to Mr. Kent’s mirror plan, cars will be using “up to” 50% less fuel and producing “almost” 50% fewer greenhouse gas emissions. This begs a number of questions on both sides of the border: Will consumers buy these vehicles? If they don’t, what happens to auto manufacturers? And what impact will the reduction of greenhouse gas emissions have on the global climate, even assuming that the “official” hypothesis of catastrophic man-made global warming is accurate?

The last-mentioned issue is in no doubt: these restrictions will have not the slightest impact on the climate and thus can be justified only on the rather bizarre basis, as Mr. Kent put it, of being “the right thing to do.” You know, like wearing a hair shirt, or going on a long pilgrimage on your knees, or adopting a diet of locally-grown kale.

Mr. Kent claimed that these actions “prove that we can both tackle climate change and save at the pump both at the same time.”

Well, sort of, as long as you realize that “tackling” is in no way synonymous with producing tangible results, and “saving at the pump” comes at potentially considerable cost elsewhere, primarily in the price of new vehicles, which some have estimated will have to rise by $10,000 by 2025. Mandating cars people don’t want doesn’t come cheap. Just look at the sticker shock of the Chevy Volt.

Mr. Kent went on to claim that “Since these proposed regulations align with the stringent standards of the United States, they will not only deliver important environmental benefits, but they will also keep our manufacturers competitive. And that will protect Canadian jobs.”

Again, that statement requires a little interpretation, lest it be taken to mean that government specification of automobile features might promote jobs or growth. What it actually means is that unless Canada aligns its standards with those of the U.S. — whether those standards make sense or not — then it will be subject to possible green trade sanctions. Mr. Kent was not talking about creating jobs but preventing them from being destroyed by stupid policy. In fact, these fuel standards are quite possibly forcing GM to reprise its role as Thelma and/or Louise, heading once more for the financial precipice.

Certainly, if you are determined to have market- and job-destroying restrictions on automobile manufacture, it makes sense to have common North American standards, since a Balkanized system would cost even more jobs, but this is hardly a cause for celebration.

These new fuel-economy restrictions are part of a broader commitment by Canada — again paralleling the U.S. — to reduce greenhouse gas emissions by 17% from 2005 levels by 2020. Again, this target has no logical or scientific basis.

The Harper government has been producing an inevitable smoke-and-mirrors, sector-by-sector approach to “tackling” its U.S.-mandated targets. Mr. Kent repeated the claim on Tuesday that Canada is already “halfway” towards meeting those 2020 emissions objectives. What he meant is that projections are halfway there. As previously noted here, this equates to a dieter committing to lose 20 pounds and suggesting he is “halfway there” because he projects losing 10 pounds by a certain date.

Canada’s real pterodactyl in the ointment is the oil and gas sector, for which the Harper government claims it will issue regulations next year. The problem — which would only be a problem in a world of carbon-constrained insanity — is that oil sands output is projected to soar over the coming two decades. The current “solution” is for emissions to be buried, literally, via carbon capture and storage (CCS) plants. So far, Canada has one such plant on the drawing board, the Shell-led Quest project. Unfortunately, the project’s $1.35-billion cost had to be subsidized to the tune of $745-million by Alberta and $120-million by Ottawa. CCS is a solution Canada can’t afford, even if it did have any impact on the climate.

The Harper government has done a creditable job in dealing with the mess the Liberals left on the climate file, but the climate policy game is still the economic equivalent of Russian Roulette. Unfortunately, an enthusiastic player is back in the White House and, due to the size of its trading relationship, Canada can’t leave the table.
 
Part 1 of 2

Good news for Canada according to this report which is reproduced under the Fair Dealing provisions of the Copyright Act from the Financial Post:

http://business.financialpost.com/2012/12/11/goldmans-top-economist-explains-his-big-call-for-the-u-s-economy/
Goldman’s top economist explains his big call for the U.S. economy

Joe Weisenthal, Business Insider

Dec 12, 2012

In a recent report, Goldman’s top economist Jan Hatzius predicted that finally, the U.S. would see a real growth acceleration in the second half of 2013.

There are three great reasons to listen to Hatzius:

1. He’s the top economist at Goldman Sachs. That alone is a reason to take him seriously.

2. He called the economic downturn. Remember, he got pilloried in 2007 by Ben Stein for saying that housing was going down, and that the economic ramifications would be significant.

3. He has a framework for analyzing the economy that’s rare among Wall Street economists.

At the core of his call — which was made in a note titled The US Economy in 2013-2016: Moving Over the Hump — was this simple chart:

screen%20shot%202012-12-07%20at%205.48.29%20pm.jpg


The chart demonstrates a critical economic concept: Government deficits (the grey line) are essentially the mirror image of private sector savings (the dark black line). When the private sector tries to save money aggressively (as happened during the crisis) the government deficit will inevitably explode (as happened). Periods associated with small government deficits (such as the late ’90s) are associated with extreme private sector leveraging.

The key to understanding the economy, and forecasting growth, is to think about which sectors are increasing and decreasing their savings.

In a 30-minute conversation with Business Insider conducted last Friday, Hatzius explained:

“…every dollar of government deficits has to be offset with private sector surpluses purely from an accounting standpoint, because one sector’s income is another sector’s spending, so it all has to add up to zero. That’s the starting point. It’s a truism, basically. Where it goes from being a truism and an accounting identity to an economic relationship is once you recognize that cyclical impulses to the economy depend on desired changes in these sector’s financial balances.”

Hatzius is bullish on the U.S. economy starting in the second half of 2013, because finally he expects private releveraging to occur at a nice clip, and to not be counteracted by a fiscal drag. Says Hatzius:

“If the business sector is basically trying to reduce its financial surplus at a more rapid pace than the government is trying to reduce its deficit then you’re getting a net positive impulse to spending which then translates into stronger, higher, more income, and ultimately feeds back into spending.”

He has a specific explanation and numbers in mind, to explain the private sector’s inclination to reduce its savings, and spend more.

“Since mid-2009, that surplus has gradually come down as businesses and households have gotten closer to where they need to be from a long-term balance sheet perspective. They’ve paid down debt, they’ve eliminated the excess supply of housing, and that’s basically allowed them to reduce the financial surpluses that they run. They’re still running large surpluses – still 5.5 to 7 percent of GDP, but they’re no longer as large. We expect those figures to come down as the balance sheet adjustment process makes further strides and that’s an underlying source of boost to the economy that’s happening on the one side.”

Of course, Hatzius’s bullishness on the private sector’s impulse to spend more is tempered by the fact that we’re going to see some form of austerity early in 2013, even if there’s a deal on the fiscal cliff.

And if there’s no deal on the fiscal cliff, then there is major cause for worry. While things might be okay if a deal is agreed to early in January, the ongoing confidence shock as the fight wore longer into the year, would be a problem. If we go into February without a deal?

“…I think the economy will be contracting, and potentially contracting pretty rapidly. It’d be a very unpleasant environment.”

Suffice it to say, Hatzius is not to keen on the push to rename the “Fiscal Cliff” the “Fiscal Slope” in order to take the urgency out of getting a deal by the end of the year.

Among other topics in our discussion: The future of Fed policy (he thinks there’s a high probability, but no guarantee, that the Fed will adopt an “Evan’s Rule” early in 2013), why business investment has slowed down dramatically, when interest rates will finally rise (probably the end of 2013), when the Fed will tighten policy (no sooner than 2016!), and whether monetary policy regime change will work in Japan.

The full transcript of our discussion is below the dotted line. Thanks to Lucas Kawa for the transcription.

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BI: In your recent note you said that starting last year, you introduced your clients to the notion of “financial balances model,” that private sector surpluses were offset by government sector deficits, and that they mirrored one another. Explain this chart and how you came to recognize the importance of it.

HATZIUS:
There is an accounting identity which is issued, if you start with the global economy, to simplify it, that every dollar of government deficits has to be offset with private sector surpluses purely from an accounting standpoint, because one sector’s income is another sector’s spending, so it all has to add up to zero.That’s the starting point. It’s a truism, basically.

Where it goes from being a truism and an accounting identity to an economic relationship is once you recognize that cyclical impulses to the economy depend on desired changes in these sector financial balances.

If the business sector is basically trying to reduce its financial surplus at a more rapid pace than the government is trying to reduce its deficit then you’re getting a net positive impulse to spending which then translates into stronger, higher, more income, and ultimately feeds back into spending.

Conversely, if the business sector reduces its desired surplus by less than the government sector tries to reduce the budget deficit, then you end up with cyclical weakness. It’s a little heavy-going, to put this into words, and can be challenging.

There’s a reasonable amount of jargon involved (ex post, ex ante type of stuff), and I generally try to avoid having too much jargon and too much heavy going in the sort of things that we write, but in this particular case it is useful and worthwhile to wade through this a little bit. It’s an exception, but I think it is useful in this case.

screen%20shot%202012-12-08%20at%205.26.32%20pm.png


BI: In your recent note, “Moving Over The Hump” you say that in the second half of 2013, we’re going to switch over to a level of above-trend growth that we haven’t seen since the financial crisis hit. What’s the switch, and how does it relate to this chart?

HATZIUS:
The main thing is that there’s a sort of continued improvement in the private sector, in the sense that the private sector went to running extremely large financial surpluses during the crisis. In the middle of 2009, households and businesses spent 9 percent of GDP less than they earned, meaning they were running a 9 percent of GDP financial surplus.

Since mid-2009, that surplus has gradually come down as businesses and households have gotten closer to where they need to be from a long-term balance sheet perspective. They’ve paid down debt, they’ve eliminated the excess supply of housing, and that’s basically allowed them to reduce the financial surpluses that they run. They’re still running large surpluses – still 5.5 to 7 percent of GDP, but they’re no longer as large. We expect those figures to come down as the balance sheet adjustment process makes further strides and that’s an underlying source of boost to the economy that’s happening on the one side.

On the other hand though, the government has moved to increasing the fiscal drag. The pace of fiscal consolidation has picked up. Most of the fiscal consolidation that we’ve seen so far has been in the state and local sector.

As we move into 2013, we’ll see a big pickup in fiscal consolidation, probably, in the federal sector, and early 2013 we’re going to be at 1.5 percent of GDP of fiscal drag and I think that is going to make the economy quite weak.

Our baseline is not recessionary weak but nevertheless, it is going to look quite weak. Beyond that though, to get to answering the question, beyond the first half of 2013, we would expect the pace of fiscal drag to diminish, and as it diminishes that should lead to some acceleration in models over the next couple of quarters here.

BI: Speaking about the private sector specifically – I understand the argument that households are repairing their balance sheets for various reasons (ex. the housing bust is over) – but what’s your take on the corporate side of the private sector? What will prompt the corporate sector to spend more money and reduce its surpluses?

HATZIUS:
There’s been some of that already. Over the last couple of years, the corporate sector – outside the financial sector – didn’t go into the crisis with big, heavy, over-leveraged balance sheets, but there’s been sort of improvement in the quality of balance sheets, earnings have been strong, and so the corporate sector has reduced its surpluses a bit as well. There has been, more recently, greater weakness in corporate spending over the past 6 months.

We would attribute some of that to fears about the fiscal cliff and fears of policy uncertainty shock in late 2012 – early 2013. I think if that’s the right diagnosis and you do get some kind of a deal and some resolution to the uncertainty, then that might also mean that you get some pent-up demand being released in the for profit sector. My expectation would be that you get a recovery, provided you do get the deal.

fredgraph-27.png


BI: Do you think there are any other factors contributing to the hesitancy in corporate spending, or do you think it’s mostly related to policy uncertainty and the fiscal cliff?

HATZIUS:
I think the short-run weakness that we’ve seen over the past few months is related to policy developments. Other than that, if you exclude the last 3-6 months, business investment actually hasn’t performed all that badly in the recovery so far.

I think the growth rates haven’t been spectacular, but you really wouldn’t expect spectacular growth rates given how muted things have been elsewhere, but you’ve seen decent growth rates in business investment. So I think the weakness we’ve seen recently does suggest there’s been a policy impact here.

BI: Back to the balance sheet, multi-sectoral framework of looking at the economy. How did you come to this view? On Wall Street this is still very rare. I don’t see many economists talk about the economy this way, recognizing this identity and making projections based on it. How did you come to see this as the framework by which we should be looking at the economy right now?

HATZIUS:
I’ve long been fascinated with looking at private sector financial balances in particular. There was an economics professor at Cambridge University called Wynne Godley who passed away a couple of years ago, who basically used this type of framework to look at business cycles in the U.K. and also in the U.S. for many, many years, so we just started reading some of his material in the late 1990s, and I found it to be a pretty useful way of thinking about the world.

It’s usually not something that gives you the secret sauce at getting it all right, because there are a lot of uncertain inputs that go into this analytical framework, but I do think it’s a reasonable organizing framework for thinking about the short to medium term ups and downs of the business cycle.

Basically, in order to have above-trend growth – a cyclically strong economy – you need to have some sector that wants to reduce its financial surplus or run a larger deficit in order to provide that sort of cyclical boost, most of the time.

There are other factors at play in the business cycle – I’m certainly not claiming that ‘this is it!’ – but I have found it to be pretty useful.

BI: Do you have any explanation or thoughts about why this framework hasn’t broken through more on Wall Street? It still seems pretty rare.

HATZIUS:
I’m not sure. I think there are actually a lot of people who think about the world in terms of this chart a little more implicitly. I think if you talk about the need to have stronger demand growth somewhere in order to get acceleration, in those charts it becomes kind of a truism. But if you put it in financial balances terms, you’re not really saying anything dramatically different. It’s just perhaps a little more semantics even. I just find it a reasonable discipline to think about.

BI: Let’s go back to the current state of the economy. One of your colleagues put out a note, sort of keying off your research, saying that real interest rates are finally going to rise and that this could break the back of the gold bull market. What will cause real interest rates to rise? Despite the stronger economy, we still haven’t seen that happen. Long-term and short-term real interest rates have been stuck at incredibly low levels.

HATZIUS:
I mean, we don’t have any increase in real rates at the short-end of the yield curve in our forecasts until 2016, those are policy instruments, purely policy instruments, and we would expect the Fed to keep the funds rate at zero even beyond the current 2015 guidance, so we’ve got them hiking sometime after that, in 2016.

At the longer end, nominal rates or real rates are partially policy instruments these days, but they’re partially also responses to changes in the economy and changes in expectations of future short rates, so as you approach the period when you have more lift-off, you would expect some upward pressure on long-term yields relative to the extremely low levels that we‘re at, at the moment.

In 2013, our expectation is that on average, growth is still going to be pretty slow – 2 percent annual average, roughly – but in the second half of the year and in 2014 things get a bit better. And if it’s true that the degree of fiscal drag diminishes and the private sector boost stays with us, I think you can ultimately expect a little bit of upward pressure on long-term yields.

But we still have long-term yields in nominal terms – pretty close to 2 percent by the end of 2013. In subsequent years, I would expect a little more upward pressure if the lift-off date for the funds rate stays in 2015 and doesn’t get pushed through due to additional bad news about the economy.

screen%20shot%202012-12-08%20at%205.28.37%20pm.png


End of Part 1
 
Part 2 of 2

BI: Why is it that you don’t think we’ve seen that yet on the long end. It appears there’s been a turn (based on the stock market and some labor market indicators). More people are talking about the economy getting closer to liftoff. And yet, if you were just looking at long-term rates you wouldn’t see that at all.

HATZIUS:
It’s been a little surprising to us that we’re quite as low as we are. Having said that, we’ve not seen a sustained return to above trend growth, maybe in some of the labor market indicators you could sort of infer above-trend growth, but in other GDP-type indicators, broad indicators, like our current activity indicator, which measures a wide variety of different signals for the economy, certainly is not sending a message of above-trend growth.

You’ve seen an additional move from the Fed in the direction of more aggressive unconventional easing. Unconventional easing is partly more aggressive guidance about the short term rates and partly more aggressive asset purchases than what the market was building in a year ago, and so that’s offset whatever improvement in the economy and the stock market you might have gotten.

BI: You bring up the Fed and the direction it’s going in. There’s been a growing buzz that the ultimate endgame for the Fed is some sort of Nominal GDP targeting regime. What do you think about that concept, and what do you think the prospects are that the Fed will end up going in that direction?

HATZIUS:
I think it has quite a lot of attraction in the sense that it’s forward guidance about the economic conditions that the Fed is trying to achieve and it’s a very clear forward guidance about the Fed’s desire to bring spending in the economy back to something closer to pre-crisis trends.

I think at least in economic models, very simplified economic models admittedly, but economic models in which firms and consumers are forward looking and build even relatively long-term expectations about monetary policy into their current decisions, policy like Nominal GDP targeting can be pretty expansionary, can shift expectations about the economy in a way that already delivers a boost at this point in time. So there are some significant attractions about it.

Of course, there are also some risks. I don’t think it’s a likely switch for the Federal Reserve in the near term. I think the risks and the drawbacks are that the Fed is somewhat uncomfortable with the message that catch-up growth could be achieved regardless whether it comes through higher inflation or higher real growth.

That is, of course, part of the logic of the framework – we’re going to focus on nominal growth and aren’t going to respond the same way to changes in inflation. That stands in the way of them adopting a framework like this any time soon despite the fact that it’s become talked about more, it’s gained quite a bit of respectability, Woodford presented his long Jackson Hole paper, basically endorsing NGDP targeting this summer, but I don’t think that they’re so close yet.

BI: So in the meantime do you expect the Fed to adopt something close to an Evans Rule, where it’s not necessarily NGDP targeting, but where they’d get rid of the date-based targets and come up with some other threshold?

HATZIUS:
That’s very much the signal that I would take away from what we’ve heard over the past couple of months. In particular, the speech by Janet Yellin the day before the last set of FOMC minutes – and it’s very much for the reasons that Woodford made out in his Jackson Hole paper – which is that they’re conceptually much happier with forward guidance that specifies how the economy performs as opposed to forward guidance that’s specified in the calendar.

So my expectation is that they will adopt an Evans-style rule or threshold guidance, probably not at the meeting next week, but I would expect it for sometime in the first quarter.

One thing I would say is I don’t think it’s a done deal yet.

While I expect it, I don’t think it’s a 90 or 95 percent probability.

It’s still an ongoing discussion and there are a number of practical issues that have to be sorted out, one of which was illustrated in (Friday’s) employment report, namely the fact that the unemployment rate can fall for reasons that don’t really indicate a stronger labor market because of declines in labor force participation, which basically means the unemployment rate may not be such a good indicator of how the broad labor market is performing or how the overall economy is performing.

The less direct correspondence we have between where the unemployment rate is, ,what the overall economy is doing and what the overall labor market is doing, it gets trickier to adopt this sort of threshold guidance. Another issue is that I don’t think it’s clear how you would define the threshold guidance in terms of inflation. You don’t want to use headline inflation because it can move for spurious reasons like commodity shocks, which don’t really tell you what monetary policy should do.

On the other hand, the Fed has basically said in the minutes, that they don’t want to talk about core inflation anymore. They don’t want to talk about core inflation or even underlying inflation, and it’s sort of put a little bit of a shift in their position if they now specify the inflation threshold for tightening in terms of the core measure of inflation.

BI: Let’s talk about Fed efficacy. There’s this idea in the popular press that after multiple rounds of QE, there’s only so much more the Fed can do. On the other hand, there’s this argument that now, for the first time since the crisis, that Fed policy is actually loose, and that with housing coming back a bit, that monetary policy can find some teeth and help boost the economy. Where do you fall in that debate?

HATZIUS:
I think that their policy has been effective up to a point. I do think that unconventional policy, both in terms of forward guidance and in terms of reduction in the term premiumhave eased financial conditions, and that has translated into stronger growth than what you otherwise would have seen. But at the same time I don’t think it’s particularly powerful.

So one of the big lessons that we’ve taken away from the past few years is that the zero lower bound on nominal short-term rates is a really big deal because it does get quite a bit more difficult for central banks to provide stimulus once you’ve hit that zero bound.

The last chapter hasn’t been written yet. What you say is certainly possible. It would be a good outcome, it’d be nice to see. If we found that we haven’t gotten that much traction yet with unconventional policy but the real beauty of it will become apparent when there is a bit of natural velocity in the economy and the Fed has, by that time, put in place a framework where they’re committed not tightening policy for an extended period of time even in a more rapidly-improving economy and labor market. It’s possible.

I wouldn’t put really huge stakes on the idea that we’re going to get much bigger effects from monetary policy than we’ve had so far, but it certainly would be nice to see.

JW: When I think of the balance sheet approach to analyzing about the economy, one of the economists I think about is the work of Richard Koo, who has argued that in a balance sheet recession, that monetary policy just doesn’t work, and that clearly the answer is more fiscal policy. Do you see it quite that strongly or do you see that it’s more of a balance?

HATZIUS:
No, I would say I see a little more shades of grey. I think a lot of the points that he makes are well taken, but I think at the moment fiscal policy is likely to have bigger effects on growth than monetary policy.

I think fiscal policy surprises, certainly in the run-up to the fiscal cliff, are measured in percentage points, whereas monetary policy surprises are measured in tenths of a percentage point in terms of potential impact.

Clearly fiscal policy is the more important driver and the bigger source of uncertainty about the growth environment than monetary policy at the moment. But I wouldn’t be so extreme as to say that monetary policy has no role to play.

BI: On the matter of the fiscal cliff, there’s this idea that “fiscal cliff” is the wrong term; that it’s a fiscal slope – that we can go into January, and as long as we get a deal fairly soon that it’s not too big of a problem. How far can we go into next year without a deal and still feel comfortable that we’re not going to go into a recession?

HATZIUS:
I think there’s probably something to that. Purely from the perspective of fiscal policy itself, you can reverse some of these effects, for example, essentially restoring tax rates to where they were a couple weeks after the end of the year.

The problem with the argument, though, is the uncertainty effects and the potential impact on financial conditions – if you went into the first week, second week of January or longer without a sense of how this is going to be resolved, I think the impact on financial conditions would be much more negative.

So I think even though you can reverse the dollars and cents on fiscal issues, I think you could do quite a lot of damage to the economy and I would get worried about a return to recession pretty quickly.

BI: So if we don’t have a deal by the end of January, would we go into a recession?

HATZIUS:
I think that would make it pretty likely that you get a contraction in the economy. I mean, how long-lasting will that be, whether it’s that long-lasting enough to be classified as an NBER recession, an officially defined recession, that’s harder to say.

But I do think the economy will be contracting, and potentially contracting pretty rapidly. It’d be a very unpleasant environment.

BI: One last topic, because it’s been the subject of fascination lately, but what do you make of the current debate that’s going on in Japan, and the idea that perhaps Japan could try a much more aggressive inflationary regime. How beneficial do you think that would be?

HATZIUS:
I do think that somewhat higher inflation target in Japan than 1 percent would be helpful. 1 percent inflation target is very low, by the standards of what monetary policy experts say. How big of an effect it would have is hard to know. If you look at the sort of models that economists like to look at and evaluate, based on monetary policy frameworks, it should be pretty beneficial. The same is true with respect to the earlier question about NGDP targeting.

We do think a switch to NGDP targeting could be very expansionary, the problem is that we have very little actual experience with central banks actually making these regime shifts. There are some that come somewhat close, but typically you have to go back to the Great Depression of the 1930s, FDR-induced policy changes, there were some regime shifts in Europe – Sweden is an example – but you don’t have the same kind of systematic data about monetary policy regimes to make a very confident prediction.

BI: Thank you.


As the main article says, Mr Hatzius deserves our attention; let's all hope he's right ... again.
 
More about the BRICS in the news again:

link

 

Associated Press

Once-poor BRICS countries are preparing a better future without us
COLIN ROBERTSON

Published Wednesday, Mar. 27, 2013 07:18AM EDT

Last updated Wednesday, Mar. 27, 2013 07:29AM EDT

On Wednesday, the leaders of the increasingly powerful group of countries known as BRICS – Brazil, Russia, India, China and South Africa – will meet for their fifth summit in Durban.

At the top of the BRICS agenda will be serious efforts to alleviate poverty and secure greater weight as newly emerging powers – both of which the five countries seem ready and able to do without any help from the West, using a new set of financial institutions they hope to create.

Setting the tone for the meeting, Xi Jinping of China, who is making his international debut as part of a trip that has taken him to Moscow and then Dar es Salaam, told journalists that these emerging economies “have become an important force for world peace” – while arguing that the “global economic governance system must reflect the profound changes in the global economic landscape, and the representation and voice of emerging markets and developing countries should be increased.”

Ending poverty is ambitious but doable mostly because of efforts in India and China. The World Bank global poverty rate fell from 42 per cent in 1990 to 25 per cent in 2005, and may yet fall by 205 to 15 per cent, or 900 million people.

To make this goal possible, this summit will debate a proposal to create a BRICS development bank. The idea came from economists Joseph Stiglitz, Nicholas Stern and Mattia Romani in the belief that the BRICS should “consolidate” funds to build infrastructure and “boost confidence for developed-country investors to participate in the expanding markets of the world and the growth story of the future.”


It would supplement but perhaps undermine, as former prime minister Paul Martin suggests,  the International Monetary Fund, the World Bank and the African Development Bank – institutions that BRICS members find sluggish and inflexible.

But what would it do that the others cannot? And would they not be better to seek reform of these existing institutions? The idea is likely to remain a topic for discussion at future meetings.

The BRICS countries together represent about 43 per cent of the world’s population and approximately one-fifth of global gross domestic product (GDP). In 2012, the BRICS accounted for approximately 11 per cent of global foreign direct investment flows ($465-billion) and about 17 per cent of world trade.

By 2020, the UNDP says in its 2013 report, the combined economic output of Brazil, China and India will surpass the aggregate production of Canada, France, Germany, Italy, the United Kingdom and the United States.

Other countries, including Nigeria, Indonesia and Turkey are looking toward eventual membership in the BRICS group. Egyptian President Mohamed Morsi, who will be at the meeting, has suggested the grouping be expanded to “E-BRICS.”

Goldman Sachs economist Jim O’Neill coined the BRIC acronym in 2001 as a clever shorthand to describe the largest emerging markets. He is unconvinced that South Africa, which joined the association in 2010, merits membership.

Within the BRICS there are tensions, old and new. There remain border tensions between China and Russia, and between China and India. South Africa, Brazil and India are democracies. China is not, and Russia is only in name. China and India, as consumers, want lower commodity prices, while Russia, Brazil and South Africa, as producers, want higher prices.

Then there are the disparities: China’s economy is 25 per cent larger than those of the other four BRICS nations combined, and 22 times larger than South Africa’s.

Some Africans decry China’s “neo-colonialism.” Nigeria’s central-bank governor Lamido Sanusi recently argued that Chinese activity in Africa is a new form of imperialism, sucking oil and resources out of the continent then selling back its manufactures.”

The BRICS also want more influence on issues of peace and security. Syria’s President Bashar al-Assad has asked for intervention by the BRICS “to stop the violence in his country and encourage the opening of a dialogue.”

Yet neither China nor especially Russia have behaved constructively at the United Nations Security Council. With authority comes responsibility. The BRICS aren’t there yet.

But the BRICS summit raises an important question for the West.

If the World Bank and the IMF aren’t working for the emerging nations, shouldn’t we try to fix them? Isn’t it time to redress the stranglehold whereby the World Bank is always headed by an American and the IMF by a European?

President Xi is on solid ground when he argues that the global economic governance system should reflect the profound changes in the global economic landscape. The G-20 was supposed to accomplish this but its performance to date has been a disappointment. There is still a ways to go.

A former diplomat, Colin Robertson is vice-president and senior fellow of the Canadian Defence and Foreign Affairs Institute and senior strategic adviser to McKenna, Long and Aldridge.

© 2013 The Globe and Mail Inc. All Rights Reserved.
 
We need to avoid treating the BRICS as a single entity. There is not much similarity, at all, between the economies of China and South Africa or Brazil and India or between Russia and any of them. Each country deserves attention on its own merits and because of its own capabilities and limitations ~ and the limitations abound in some of them, especially Russia and, to a somewhat lesser degree in Brazil and South Africa, too.

That they are trying to cooperate is interesting but, in my personal quesstimation, likely to be pointless unless they can find a few bits of political common ground, which i find hard to imagine.

China and Russia are, for example, making nice right now, but I am certain it is a very temporary thing, having more to do with China's reaction to the US Asian Pivot than to any common ground China and Russia might have.
 
Forget the BRICS. One should look at this group of emerging nations called the TIMPS.

Take note that one of the TIMPS, the Philippines, has recently surpassed China and India as Canada's largest source of immigrants in recent years, as reported by this Globe and Mail article from 2011.

Reuters link

BRICs, move over. TIMPs are the new emerging market stars
By Conrad de Aenlle

LONG BEACH, California | Thu Mar 28, 2013 9:58am EDT

(Reuters) - One day you're a hot young thing and everybody loves you. Then suddenly you're more mature, move a bit slower, and some hotter thing is threatening to replace you.

That cruel reality confronts the four large emerging stock markets known as the BRICs: Brazil, Russia, India and China. These erstwhile ingénues have struggled - the MSCI BRIC Index fell 6.5 percent in the 12 months through March 25 - while four smaller markets with an acronym of their own - Turkey, Indonesia, Mexico and the Philippines, the TIMPs - have excelled, recording gains ranging from 9.4 percent for Indonesia to 37.7 percent for the Philippines.


The TIMPs are blessed with rapid growth, as are many emerging economies. The International Monetary Fund forecasts inflation-adjusted increases in gross domestic product this year of 3.5 percent for Mexico and Turkey, 4.8 percent for the Philippines and 6.3 percent for Indonesia.

What made the TIMPs stand out to Bob Turner, who coined the term and is chief investment officer of Turner Investment Partners, a Berwyn, Pennsylvania, asset management firm, is that they possess qualities that should keep them and their stock markets expanding rapidly and profitably. These include favorable demographics and strengthening economies and political institutions.

"They have young populations, with a high number of workers to retirees," Turner explained. "They also have infrastructure that needs to be built out and banking systems that are underleveraged." He meant that individuals and governments are not overextended on credit
, unlike in many mature countries, leaving room to borrow more to fuel growth.

But not every fast-growing small economy qualifies as a TIMP for Turner. He dismissed other countries that also have young populations and fast growth potential because they lack liquid stock markets, diverse industrial bases or adequate financial and legal systems.

APPEALING IDIOSYNCRACIES

Each TIMP country has some idiosyncratic feature that adds to its appeal, Turner said. He highlighted Turkey's location, which allows it to bridge Asia and Europe along one axis and Russia and the Arab world along the other; Mexico's "manufacturing renaissance"; Indonesia's middle class, which is growing swiftly by Asian standards; and the Philippines' booming call center industry.

Rick Schmidt, co-manager of the Harding Loevner Emerging Markets Fund, identified many of the same pluses in the TIMPs as Turner. However, Schmidt prefers to order a la carte, as it were, rather than taking the whole set menu.

"The demographics are clearly more attractive in those countries," he said. "I like the markets. I just don't like the concept of grouping them together."

Viewing them as a single entity might keep investors from scouting around for more productive markets if conditions in any of these four become less favorable, he cautioned. He also wonders if their returns are too good to last.


"All of these stories are true, and the markets have done extremely well as a result," Schmidt observed. "Is past performance a guarantee of future results?" He doesn't think so in the Philippines, which he said he's avoiding due to high valuations, although he has holdings in the other three. The MSCI Philippines Investable Market Index recently traded at a price-earnings ratio of 19, compared to 14 for the Standard & Poor's 500.

Scott Klimo, co-manager of the Amana Developing World Fund, expressed similar concerns about the Philippines, but he finds the TIMPs' collective future sufficiently bright to say that they "are certainly among the countries I feel more enthusiastic about." He encourages small investors to get exposure through funds rather than individual stocks, however, because the markets are relatively obscure.

Investors who would like to give individual issues a try can find several TIMP stocks with American depositary receipts, shares denominated in dollars and traded on U.S. markets.

Klimo is a fan of phone service providers across the TIMPs, including Perusahaan Perseroan (Persero) Telekomunikasi Indonesia Tbk PT and Indosat Tbk PT in Indonesia; Turkcell Iletisim Hizmetleri AS in Turkey and America Movil SAB de CV in Mexico.

America Movil could face additional competition as the government proceeds with plans to deregulate the industry, Klimo said, but he expects the company to benefit as broadcasting is deregulated at the same time.

He professed mixed feelings about another telecom, Philippine Long Distance Telephone Co. He likes it, but not at Wednesday's price of $71, or about 18 times earnings. "I think it's a fine company, but I'm looking for a little bit better entry point," he said.

Schmidt's selections include Astra International Tbk PT, an Indonesian car manufacturer, and the Turkish bank Turkiye Garanti Bankasi AS. Both have ADRs, although trading is very thin.

He is heavily invested in Mexico through such companies as Grupo Aeroportuario del Sureste, SAB de CV, which runs the Cancun airport and is, in his view, "a fantastic business that turns the airport into a shopping mall." Other Mexican holdings include the beverage maker Fomento Economico Mexicano SAB de CV and its subsidiary Coca-Cola Femsa SAB de CV.

Turner likes Grupo Financiero Santander Mexico SAB de CV, a subsidiary of a Spanish bank; Jasa Marga Persero Tbk PT, an Indonesian toll road builder and operator, and Turkcell.

As high as his hopes are for the TIMPs, Turner acknowledges potential hazards.

"With emerging countries, there is always sovereign risk - for instance a new leader who comes in and is less capitalistic," he said. Also, "any global slowdown has a bigger effect on emerging countries."

He expects the TIMPs, nevertheless, to stay hot for the foreseeable future as they travel the same path to progress as earlier generations - until some other hip, young things come along to replace them.


(The author is a Reuters contributor. The opinions expressed are his own)

(Follow us @ReutersMoney or here; Editing by Linda Stern and Richard Chang)
 
Interesting observation about Turkey's geographic position and ability to bridge markets in that article; the same observation is made in Robert Kaplan's "The Revenge of Geography" and alluded to in George Friedman's "The Next 100 Years".

While geography isn't the only factor, it is a "constant" which continues to work to the advantage or disadvantage of the polity on that piece of ground.
 
The end game for Japan as their decades long economic deflation fails to respond to Keynesian economics. F.A.Hayek described what happens when a credit bubble a long time ago, and one comment on Zerohedge was that while you can always create more credit, you cannot create more creditworthy borrowers:

http://www.telegraph.co.uk/business/2016/04/11/olivier-blanchard-eyes-ugly-end-game-for-japan-on-debt-spiral/

Olivier Blanchard eyes ugly 'end game' for Japan on debt spiral
Olivier Blanchard was the most influential chief economist in IMF history
Ambrose Evans-Pritchard, lake como, italy
11 APRIL 2016 • 5:59PM

Japan is heading for a full-blown solvency crisis as the country runs out of local investors and may ultimately be forced to inflate away its debt in a desperate end-game, one of the world’s most influential economists has warned.

Olivier Blanchard, former chief economist at the International Monetary Fund, said zero interest rates have disguised the underlying danger posed by Japan’s public debt, likely to reach 250pc of GDP this year and spiralling upwards on an unsustainable trajectory.

'One day the BoJ may well get a call from the finance ministry saying please think about us – it is a life or death question - and keep rates at zero'

Olivier Blanchard

“To our surprise, Japanese retirees have been willing to hold government debt at zero rates, but the marginal investor will soon not be a Japanese retiree,” he said.

Prof Blanchard said the Japanese treasury will have to tap foreign funds to plug the gap and this will prove far more costly, threatening to bring the long-feared funding crisis to a head. 

“If and when US hedge funds become the marginal Japanese debt, they are going to ask for a substantial spread,” he told the Telegraph, speaking at the Ambrosetti forum of world policy-makers on Lake Como.

Analysts say this would transform the country’s debt dynamics and kill the illusion of solvency, possibly in a sudden, non-linear fashion.

Japan

Japan's public debt is in uncharted waters for the world CREDIT: BLOOMBERG
Prof Blanchard, now at the Peterson Institute in Washington, said the Bank of Japan will come under mounting political pressure to fund the budget directly, at which point the country risks lurching from deflation to an inflationary denouement.

“One day the BoJ may well get a call from the finance ministry saying please think about us – it is a life or death question - and keep rates at zero for a bit longer,” he said.

"The risk of fiscal dominance, leading eventually to high inflation, is definitely present.  I would not be surprised if this were to happen sometime in the next five to ten years."

Arguably, this is already starting to happen. The BoJ is  soaking up the entire budget deficit under Governor Haruhiko Kuroda as  he pursues quantitative easing a l’outrance.

The central bank owned 34.5pc of the Japanese government bond market as of February, and this is expected to reach 50pc by 2017.

Japanese officials admit privately that a key purpose of ‘Abenomics’ is to soak up the debt and avert a funding crisis as the big pension funds and life insurers retreat from the market. The other unstated goal is to raise nominal GDP growth to 5pc in order to ‘bend down’ the trajectory of the debt ratio, a task easier said than done.

Prof Blanchard did not elaborate on the implications of Japan’s woes for the global financial system, but they would surely be dramatic and there are growing fears that this could happen within five years. Japan is still the world’s third largest economy by far. It is also the global laboratory for an ageing crisis that the rest of us will face to varying degrees.

Once markets begin to suspect that Tokyo is deliberately engineering an escape from its $10 trillion public debt trap by means of an inflationary ‘stealth default’, matters could spin out of control quickly.

Japan

The Bank of Japan will own half the entire public debt by 2017 CREDIT: JAPAN MACRO ADVISORS
It might lead to an abrupt reappraisal of sovereign debt risk in other parts of the world, especially in Europe with its own Japanese pathologies of low-growth and bad demographics. Roughly $7 trillion of debt is trading at negative yields worldwide, an accident waiting to happen for the bond market.

Prof Blanchard said the risk for the eurozone is the election of populist “rogue governments” that let rip with spending in defiance of Brussels. “Investors would have serious thoughts about buying their sovereign bonds,” he said.

The European Central Bank would be legally prohibited from activating its back-stop mechanism (OMT) to prevent yields soaring since these governments would not be in compliance with EU rules. “Some of them have very high debt and presumably would have to default,” he said.

He refused to single out candidates. One of them is clearly Portugal, where a Socialist government backed by Communists and the Left Bloc has already been in a fiscal fight with Brussels. Last year’s deficit was 4.2pc of GDP, far from the original target of 2.7pc.

Almost $7 trillion of debt is trading at negative rates CREDIT: BLACKROCK
Portugal’s public debt is 129pc of GDP, near the danger line for a country with no lender of last resort. Spreads on its 10-year bond yields have jumped to 325 basis points over German Bunds.

Spain is also pushing its luck on fiscal policy. Italy faces a banking crisis and its anaemic economic recovery is losing speed. Rome has cut its growth forecast to 1.2pc this year, too little to make a dent on a debt ratio still stuck at 132.7pc of GDP.

What is needed is a jump-start to a wage-price spiral of the sort feared from the 1970s
Adam Posen & Olivier Blanchard
The worry is what will happen in the next global downturn – or when the effects of cheap oil and quantitative easing fade – given that public finances are already so stretched.

One thing he is not worried about is running out of monetary ammunition. “There is an argument that QE actually becomes more effective, the more you use it,” he said.

As a central bank buys more bonds, the more it has to pay to convince the last hold-outs to sell their holdings. “The effect on the price plausibly becomes stronger and stronger,” he said.

Prof Blanchard said the authorities should stick to plain vanilla QE rather than experimenting with “exotic stuff”.

He waved aside talk of ‘helicopter money’ with contempt, calling it nothing more than a fiscal expansion by other means. It makes little difference whether spending is paid for with money or bonds when interest rates are zero. 

Italy

Italy's debt is not coming down despite the eurozone recovery. Time is running out CREDIT: TRADING ECONOMICS
He said negative interest rates – or NIRP – have complex side-effects and damage the banks, which can’t pass on the rates to depositors. “Banks are already in enough trouble without adding this one,” he said.

Professor Blanchard refuses to join the apocalyptic chorus on Brexit but advises the British people to enter these uncharted waters with open eyes. Divorce will not be a short shock followed by swift recovery.

“The cost of exiting will not be seamless, and the uncertainty will last for a very long time afterwards.  Firms deciding whether to locate plant in the UK or in the Continent will wait. Investment will drop,” he said.

But the sky will not fall for the Gilts market. “Will financing be more difficult after Brexit? Will investors see the British government as more risky? I don’t think so,” he said.

Prof Blanchard has been one of the world’s top theoretical economists over the last quarter century and might have won the Nobel Prize by now if he had not been cajoled into IMF service by his fellow Frenchman, Dominique Strauss-Kahn.

He transformed the IMF into a brain-trust of progressive ‘Keynesian’ thinking - or strictly speaking the MIT school of  New Keynesian and Neoclassical Synthesis - much to the fury of Berlin. A leaked document from the German finance ministry said the institution should be renamed the ‘Inflation Maximizing Fund’.

Professor Blanchard has had the last laugh on that joke. Seven years after the Lehman crisis the eurozone is in outright deflation and yields on 10-year German Bunds are trading at an historic low 0.11pc.  Touché.
 
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