FT stumped!

The FT has been looking over some recent remarks of the IMF president Christine Lagarde and is baffled.

Christine Lagarde’s remarks show the damage done to emerging markets by a recent round of “taper talk”, over the possibility of the US Federal Reserve slowing the pace of its asset purchases and their vulnerability to future changes in the pattern of global capital flows.

“The immediate priority is to ride out the turbulence as smoothly as possible,” said Ms Lagarde. “Currencies should be allowed to depreciate. Liquidity provision can help deal with dysfunctional market behaviour. Looser monetary policy can also help.”

But she warned that countries with inflationary pressures – such as Brazil, India, Indonesia and Russia – have less scope to use monetary policy and that high debt and deficits mean many developing countries have little space for fiscal stimulus either.

The FT say they have no idea what she is talking about.  Or more precisely, certain paragraphs seem to have one implication [not enough AD in the developing world] and other paragraphs seem to flatly contradict that interpretation [too much inflation.]  Taken literally, she seems to imply that places like Brazil, India, Indonesia and Russia are in better shape than most, but the clear implication of the remarks is exactly the opposite.

Even if you prefer to talk about other topics, say capital flows, how do they impact RGDP/NGDP or AS/AD.


Note:
AD = aggregate demand
AS = aggregate supply
GDP = gross domestic product
NGDP = nominal GDP
RGDP = real GDP

2015

The next election might be better than we expect.

As the conference season winds down it has become clear that Labour has moved to the left and the conservatives have moved to the right, both leaving the magical centre ground which of course does not actually exist.

As a result of this the next election is shaping up to be a vicious one at which each of the parties will accuse the other of living in the past. Labour will shout: "Same old nasty Tories [and their newspapers]. " Tories will snarl: "Same old dangerous Labour." On current form, it is the Conservatives, answering tomorrow's challenges by dusting off dated narratives, rusty tactics and stale slurs from 20 years ago, who are looking the most retro.

Right to buy

I have mentioned this before

http://caldariborderzone.blogspot.co.uk/2013/08/new-housing-scheme.html

but the government is still going ahead with it, not only that but David Cameron has brought the scheme forward by three months and the banks are not ready apparently.

What I did not mention last time which is the message I am trying to get across is, going back to the bad old days of 2008 and the economic crisis, Basel III has put pressures on banks to keep "more" capital on the balance sheet, hence business moaning about not getting at funding which they need.

Now the government has realised that ‘would be’ home owners are snookered by this action too and so have retracted on the ‘out of fashion’ 90% mortgages and is in fact recommending them. This is quite simply a cynical ploy to get votes for 2015 and cannot possibly help the economy in either the short term or the long term.

Has the world order changed?

Have the events of September 2013 changed the way the world is run?

At the start of the month it seemed pretty certain that America would bomb the Assad regime in Syria as a punishment for using chemical weapons.

Then a number of wholly unexpected things happened. Britain's parliament voted not to join in a bombing campaign; President Obama decided he would have to put the issue to Congress before going ahead; and some clever diplomatic footwork by Russia resulted in an offer by Syria to destroy its chemical warfare arsenal.

The world looked like a distinctly different place by the end of the month. It was not simply that war had been averted, the United States seemed diminished, and its previously reliable ally, Britain, was shown to be irrelevant in an area of the world which it once dominated.

Now America is heading for bankruptcy!

So who is next?

Russia, I think not, their little spat is merely political malarkey.

China, well frankly China seem to be a little quiet as the new regime is trying to woo the west, not ruffle it's feathers.

Brazil, once the talk of the world as the new black but south America has dwindled, so who will be next?

The depressed economy is all about austerity

Right now the official unemployment rate is over 7 percent. That’s bad, and many people think it understates the true badness of the situation. On the other hand, there are some people arguing that at this point, possibly thanks to long-run damage from the Great Recession, “full employment” is now a number north of 6 percent. So there is considerable uncertainty about just how depressed we are relative to potential.

But we are clearly still well below potential. And we have also had exactly the wrong fiscal policy given that reality plus the zero lower bound on interest rates, with unprecedented austerity. So, how much of our depressed economy can be explained by the bad fiscal policy?

To have something that would arguably look like full employment, at this point we would not need a continuation of actual stimulus, all we would need is for government spending to have grown normally, instead of shrinking.

Let us compare actual government purchases of goods and services since the Great Recession with what would have happened if those purchases had grown as fast as they did starting in the first quarter of 2001.

The gap is large and has been growing rapidly, it is currently more than 2 1/2 percent of GDP. Given reasonable multipliers, this suggests that real GDP is somewhere between 3 and 3.75 percent lower than it would have been without the austerity. And given the usual Okun’s Law rule of half a point of unemployment per point of GDP, this in turn says that without the austerity we would have an unemployment rate well under 6 percent.

I want to make the point that given what we know and have learned about macro these past five years, and given the modest recovery that has taken place, we are now at a point where, to repeat, to a first approximation the depressed state of the economy is entirely due to destructive fiscal policy.

The austerians have a lot to answer for.

America bankrupt

The US government does not have money to spend. In fact, if America does not increase its spending limit, all the programmes functioning under the government would have to be closed down. But this has happened before because America has faced a tough situation 17 years ago. Bear in mind that The U.S. has not had a trade surplus in 37 years.

The problem is the government requires a budget to pay for services and that has to be agreed by the senate [parliament].

It is one of those numbers that is so unbelievable you have to actually think about it for a while... Within the next 12 months, the U.S. Treasury will have to refinance $2 trillion in short-term debt. And that's not counting any additional deficit spending, which is estimated to be around $1.5 trillion. Put the two numbers together. Then ask yourself, how in the world can the Treasury borrow $3.5 trillion in only one year? That's an amount equal to nearly 30% of our entire GDP. And we're the world's biggest economy. Where will the money come from?

But it is not about numbers, it is about a group of republicans who are miffed at losing a vote earlier on America's health bill and they are having a tantrum, surely the American people can see their politicians for what they are and will respond accordingly at the next election.

Chancellor of the exchequer

First he starts on the current situation and why we are here, then he mentions the other party conferences with the usual splash of humour at the Lib Dems & Labour expense. His main aim is to show that "our" priority is the economy so there must be a credible plan and whereas the other two do not have one, the conservatives do.

He then goes on to flesh out the details, frankly I am impressed, but will they pull it off?