Newly Revised & Updated for 2013
“As much a guidebook for our times as an explainer of economics.”
–From the foreword, by Mohamed El-Erian, CEO of PIMCO
If you’re looking for an easy-to-read, authoritative and witty guide to the economy, then The Little Book of Economics: How the Economy Works in The Real World is for you. The first edition, released in the fall of 2010, won rave reviews (see below) from media, readers, teachers and financial professionals alike. I’ve now updated it with plenty of new material to cover developments in the global economy in the last two years. Among the changes:
- • Extensive new discussion of debt, deficits, fiscal stimulus and austerity
- • New detail and descriptions of the Federal Reserve’s unconventional monetary policy, including quantitative easing
- • A new chapter about currencies and the euro crisis
For readers of The Little Book of Economics I’ve put together this brief overview of books, organizations, blogs, articles and other resources for those who want to dive more deeply into particular subjects or acquire more expertise. You can access it by clicking here. I welcome suggestions for additions.
Dove used to be a pejorative in central banking. Bob McTeer, a Dallas Fed president, once cracked that “Only hawks go to central banker heaven.” Read the rest of this entry »
If Congress fails to lift the limit on America’s debts, the consequences are uncertain but definitely unpleasant
Oct 12th 2013 | WASHINGTON, DC |From the print edition
[Greg Ip] WHEN big chunks of America’s federal government suspended business on October 1st markets mostly yawned. Although the “shutdown” was the first in 17 years, the political dysfunction that caused it has become the norm in Washington, and the economic consequences are slight. Nerves are now beginning to fray, however, because something far worse looms. On October 17th the Treasury will run out of ways to sidestep the limit Congress places on the federal government’s debt and so will no longer be able to borrow.
As a result it could, within weeks, be unable to pay some bills. Whether this would mean defaulting on its bonds, and thus throwing financial markets into chaos, is unclear. But the prospect is causing jitters. It is becoming more expensive to insure against an American default using credit-default swaps (see chart). Meanwhile, the Chinese government, among others, has urged America not to let its partisan paralysis infect the world economy.
The forward march of globalisation has paused since the financial crisis, giving way to a more conditional, interventionist and nationalist model. Greg Ip examines the consequences.
Oct 12th 2013 |From the print edition
[Greg Ip] FIVE YEARS AGO George W. Bush gathered the leaders of the largest rich and developing countries in Washington for the first summit of the G20. In the face of the worst financial crisis since the Great Depression, the leaders promised not to repeat that era’s descent into economic isolationism, proclaiming their commitment to an open global economy and the rejection of protectionism.
They succeeded only in part. Although they did not retreat into the extreme protectionism of the 1930s, the world economy has certainly become less open. After two decades in which people, capital and goods were moving ever more freely across borders, walls have been going up, albeit ones with gates. Governments increasingly pick and choose whom they trade with, what sort of capital they welcome and how much freedom they allow for doing business abroad.
Virtually all countries still embrace the principles of international trade and investment. They want to enjoy the benefits of globalisation, but as much as possible they now also want to insulate themselves from its downsides, be they volatile capital flows or surging imports.
Read the rest of this entry »
The Federal Reserve: A new hand on the tiller
Oct 9th 2013, 18:29 by The Economist
[Greg Ip] JANET YELLEN’S nomination to chair the Federal Reserve is ground breaking, and not just because she will be the first woman in the job. She would also be the first known dove to hold the position.
Monetary doves worry more than their peers about unemployment, and worry less than hawks about inflation. Presidents once felt compelled to appoint hawks such as Paul Volcker and Alan Greenspan, or at least people not thought to be doves, such as Ben Bernanke, to reassure markets that the Fed would not succumb to the political system’s inflationary bias. Ms Yellen was, by most accounts, not Barack Obama’s first choice to succeed Ben Bernanke. But in appointing her he has implicitly acknowledged how much the world, and the Fed’s priorities, have changed. Since 2008 America and much of the world have struggled with slack demand and high unemployment while inflation, excluding energy, has persistently fallen short of the Fed’s 2% target.
Ms Yellen is not alone in believing that unemployment is a bigger problem than inflation now. So did Larry Summers, the front runner for the job until Democratic opposition forced him to withdraw last month. Most of her colleagues on the Fed’s policymaking Federal Open Market Committee agree. But she has felt that way longer, and more strongly. She pushed, publicly, in 2012 to hold interest rates near zero for longer than the Fed then expected, to hasten the fall in unemployment, even if it meant inflation briefly rising above 2%. She was the principle architect of the Fed’s current statement of long-term goals and operating principles which notes the equivalent importance of the Fed’s goals of full employment and low inflation and the circumstances under which it might put more weight on one versus the other.
Read the rest of this entry »
Sep 14th 2013 |From the print edition
IN THE five years since Lehman Brothers failed, proposals to make the financial system safer have proliferated. One of the few on which there is widespread agreement is that banks should be less leveraged—in other words, that they should fund themselves more with equity and less with debt. This means a given loss would be less likely to render a bank insolvent. But a new paper casts leverage in a far more flattering light: it is necessary to meet the public’s demand for money-like assets.
This perspective is largely missing from the debate on just how much extra equity banks should hold. Bankers argue that equity is dearer than debt. Requiring them to issue more of it forces them to charge more on loans, hurting economic growth. Rubbish, critics respond. As Franco Modigliani and Merton Miller noted in 1958, other things being equal, the value of an enterprise does not depend on its mix of debt and equity. If a bank issues more equity, it will be less likely to go bankrupt. Its equity should be safer as a result, and therefore cheaper. Forcing banks to reduce their leverage also has the advantage of neutralising the subsidies that banks receive—deposit insurance and the implicit promise that any bank deemed too big to fail will be bailed out.
Less bank leverage is not unambiguously good, however. Banks are useful not just because they make loans but also because they issue debt in a form that is extremely handy to the people that fund them. Like money, bank deposits are highly liquid, a store of value, convenient for settling transactions, and require no due diligence. The price of this convenience is that households get less interest on their deposits than on bonds, a spread known as the “liquidity premium”.
Read the rest of this entry »
Sep 11th 2013, 20:38 by G.I. | WASHINGTON, D.C.
THE two most convulsive days in my career as an economics journalist came on September 11th 2001 and at the depth of the financial panic in mid-October 2008, a month after the failure of Lehman Brothers.
Despite their different origins, both events brought about similar feelings: fear and the conviction that the world had changed forever. I remember going home late those nights on a half-empty subway, looking at my fellow passengers and wondering how many of them realised, as I did, that our livelihoods would feel the upheaval of the day’s events for years to come.
I was only half right. While 9/11 had lasting humanitarian and strategic consequences, the economic impact was remarkably transient. We now know a recession, brought on by the dotcom bust, was underway when 9/11 happened, but two months later it ended. Though the recovery was halting, unemployment was almost back to normal levels by the third anniversary of the terrorist attacks. We spend more time boarding airplanes and entering government buildings, but all in all 9/11 has left remarkably little imprint on the economy.
By contrast, the 2008 crisis has had much longer-lasting reverberations than I expected. Read the rest of this entry »