The global economy: Phoney currency wars

The world should welcome the monetary assertiveness of Japan and America

Feb 16th 2013 |From the print edition
OFFICIALS from the world’s biggest economies meet on February 15th-16th in Moscow on a mission to avert war. Not one with bombs and bullets, but a “currency war”. Finance ministers and central bankers worry that their peers in the G20 will devalue their currencies to boost exports and grow their economies at their neighbours’ expense.

Emerging economies, led by Brazil, first accused America of instigating a currency war in 2010 when the Federal Reserve bought heaps of bonds with newly created money. That “quantitative easing” (QE) made investors flood into emerging markets in search of better returns, lifting their exchange rates. Now those charges are being levelled at Japan. Shinzo Abe, the new prime minister, has promised bold stimulus to restart growth and vanquish deflation. He has also called for a weaker yen to bolster exports; it has duly fallen by 16% against the dollar and 19% against the euro since the end of September (when it was clear that Mr Abe was heading for power).

The next fiscal fight: From cliff to ceiling

The debt ceiling in America serves no useful purpose and should be abolished

Jan 12th 2013 | from the print edition

AMERICA sidestepped one fiscal disaster at the turn of the year when Barack Obama and Congress agreed to keep most tax rates from rising. A much bigger one is as little as five weeks away, when the Treasury Department runs out of legal authority to borrow. Failure to raise the “debt ceiling”, Mr Obama has warned, would force the government to default on its obligations. Republicans say they need some sort of leverage to drag a spendthrift president to the negotiating table. They have a point, but the debt ceiling is a dangerous tool with which to make it.

America’s taxes: Higher taxes the easier way

Setting a cap on deductions is a better starting point than raising tax rates

Nov 17th 2012 | from the print edition

[Greg Ip] AMERICA’S presidential election was supposed to be a head-clearing referendum on the size of government. It was not: voters split their vote, giving Barack Obama a second term and Republicans in the House of Representatives another big majority. Yet in one respect the election has clarified matters. Mr Obama has long argued that repairing America’s finances will require raising more tax as well as cutting spending. Influential Republicans, most importantly including John Boehner, the Speaker of the House, now appear to agree.This comes not a moment too soon. In less than two months America will reach a “fiscal cliff”, when George W. Bush’s tax cuts will expire and automatic spending cuts will take effect (seearticle). The economy could suffer a fiscal tightening of as much as 5% of GDP over a full year, easily enough to bring on recession.

America’s economy: Cliffhanger (leader)

Ben Bernanke has done his bit to help the American economy. Now the politicians must do theirs

Sep 22nd 2012 | from the print edition

EVEN by the standards of a weak recovery, America’s economy has looked frail lately. Growth has sunk below 2%. Unemployment is stuck above 8%. Factory activity seems to be shrinking. Yet there is no mistaking the green shoots of optimism, in particular on Wall Street: the stockmarket has hit its highest level since 2007. Consumer confidence is edging up, and along with it approval of Barack Obama, raising his odds of re-election even before Mitt Romney’s gaffes (see article).

Give credit to central bankers and their printing presses for the improving mood.

Emerging markets: The great slowdown

A sticky spell for the emerging world carries warnings for its long-term growth

Jul 21st 2012 | from the print edition

IN THE past decade emerging markets have established themselves as the world’s best sprinters. As serial crises tripped up America and then Europe, China barely broke stride. Other big developing nations paused for breath only briefly. Investors bet heavily that rapid growth in emerging markets was the new normal, while leaders from Beijing to Brasília lectured the world on the virtues of their state-centric economic models.

Lately, though, the sprinters have started to wheeze. Last week China reported its slowest growth in three years (see article). India recently recorded its weakest performance since 2004. Brazil has virtually stalled. This week the International Monetary Fund sharply cut its growth forecast for three of the four so-called BRICs; only Russia was spared (and even there growth is vulnerable to falling energy prices). Some investors darkly recall the developing world’s crisis-prone history and wonder whether the worst is yet to come.

No crisis looms, but serious concern is justified, for the emerging world faces two distinct risks: a cyclical slowdown and a longer-term erosion of potential growth. The first should be reasonably easy to deal with. The second will not.

Revival of the fittest

By rich-world standards, the emerging markets are still doing exceedingly well. The IMF still reckons developing economies will grow by 5.6% this year. Moreover, this deceleration is partly intentional. When the global financial crisis struck, emerging economies responded energetically: China launched a huge stimulus, Brazil’s state-owned banks lavished credit, interest rates were slashed. They succeeded so well that by 2010 they were forced to reverse course. To squash price pressures they raised interest rates, curbed speculation and allowed their currencies to appreciate. With a lag, that tightening has had the predicted result.

The American economy: Comeback kid

America’s economy is once again reinventing itself

Jul 14th 2012 | from the print edition

[Greg Ip]

ALMOST the only thing on which Barack Obama and Mitt Romney, his Republican challenger, agree is that the economy is in a bad way. Unemployment is stuck above 8% and growth probably slipped below an annualised 2% in the first half of this year. Ahead lie the threats of a euro break-up, a slowdown in China and the “fiscal cliff”, a withering year-end combination of tax increases and spending cuts. Mr Obama and Mr Romney disagree only on what would make things worse: re-electing a left-wing president who has regulated to death a private sector he neither likes nor understands; or swapping him for a rapacious private-equity man bent on enriching the very people who caused the mess.

America’s economy is certainly in a tender state. But the pessimism of the presidential slanging-match misses something vital. Led by its inventive private sector, the economy is remaking itself (see article). Old weaknesses are being remedied and new strengths discovered, with an agility that has much to teach stagnant Europe and dirigiste Asia.

America’s budget woes: Shift this cliff

Politicians love postponing problems. America’s budget is a rare case where it makes sense to do so, briefly

Jun 16th 2012 | from the print edition

WHEN quarrelling politicians got into a deadlock in 2010 and again last year over how to close America’s gaping budget deficit, they picked the easy way out. They applied temporary patches that would expire after this November’s presidential and congressional elections.

For the political parties, this made sense. Then as now, they seemed incapable of compromise. Democrats were hostile to spending cuts; Republicans as fond of tax increases as they were of flag-burning. Rather than moderate their views, both sides preferred to fight it out during an election campaign.

For the country, however, the strategy has been costly. The temporary patches postponed a premature fiscal tightening, but created a fiscal “cliff” at the end of this year. It included the reimposition of the taxes that George W. Bush cut, an increase (in effect) in payroll taxes and a string of across-the-board spending cuts (“sequesters”). You do not have to be Sherlock Holmes to see that wrestling on a cliff-edge is dangerous.

Altogether America is set to see a fiscal tightening equivalent to some 5% of GDP. That is easily enough to tip the economy, which is expected to grow by 2.2% this year, back into recession. Around the same time, the Treasury’s legal authority to keep borrowing more will run out. The last time Congress squabbled over raising this “debt ceiling”, one credit-rating agency stripped America of its precious AAA rating, spooking the markets. With the euro wobbling and emerging markets slowing, businesses are fearful. The cliff adds another huge uncertainty, discouraging companies from investing or hiring until they can see the future more clearly (see article).

Numerous Republicans, Democrats and this newspaper have repeatedly argued that the solution is a grand bargain that raises taxes, preferably through base-broadening reform, and curbs the growth of entitlements (ie, public spending on health care and pensions). This is also the formula that Barack Obama and John Boehner, the leading Republican in the House of Representatives, toyed with last year, before the deal fell apart.

Time to buy time

The best solution by far would be to agree on some version of this grand bargain sooner rather than later.

Mitt Romney’s economics: Flip back please

The probable Republican nominee should stop pandering to the left on China and to the right on taxes

Apr 21st 2012 | from the print edition

[Greg Ip]

TO UNDERSTAND why Mitt Romney has triumphed over his rivals for the Republican presidential nomination, look no further than March’s disappointing job numbers. With growth fragile and petrol prices soaring, the economy is Barack Obama’s gaping weak spot, and Republican primary voters have backed the candidate best equipped to exploit it.

Yet it is very far from clear what they are getting. Blame that, in part, on a nominating contest that repeatedly veered into irrelevancies. But blame the candidate, too. In the past year Mr Romney’s views have metamorphosed worryingly as he has tried to protect his flank against a succession of conservative challengers. It is no exaggeration to say that there are now two Romneys when it comes to economics (see article).

Trade with China: And now, protectionism

America’s latest anti-China bill tackles a problem already being solved

Oct 15th 2011 | from the print edition

[Greg Ip] THE global economy is sicker than a man with a bellyful of bad oysters. The last thing it needs now is a trade war. Yet on October 11th America’s Senate passed the Currency Exchange Rate Oversight Reform Act, which would allow any “fundamentally misaligned” currency to be labelled a subsidy subject to countervailing duties. No prizes for guessing which large Asian nation the senators have in mind.

Variants of this bill have been introduced regularly since 2003; all have failed. But this time may be different: anti-China sentiment in both parties has grown. Republican leaders have so far resisted holding a vote on a similar bill in the House of Representatives and look unlikely to change their minds; but if they do, the bill would almost certainly pass.

It may seem contradictory that the Senate is threatening to raise barriers to trade with China even as it has just passed bilateral trade pacts with Colombia, South Korea and Panama. But those treaties were first signed four to five years ago. Public support for free trade has been withering for a decade, tracking the decline in middle-class American manufacturing jobs. The main cause of that decline is rising productivity, which lets factories produce more stuff with fewer workers, but cheap Chinese imports have also been a factor (seearticle). America’s resentment of China has grown as its economy sputters while China’s has galloped ahead. Barack Obama has pinned his hopes for recovery on a doubling of exports, a goal that China’s many barriers to trade, from discriminatory government procurement to the undervalued yuan, impede.

America has legitimate beefs with China, but this bill is the wrong way to address them.

America’s downgrade: Substandard & Poor

The messenger may be flawed, but the United States should take heed of the message

Aug 13th 2011 | from the print edition

[Greg Ip]

IT WAS a humbling moment for America, and the decision by Standard & Poor’s to strip the country of its triple-A credit rating on August 5th came at a particularly sensitive time. Furious Obama administration officials immediately attacked the ratings agency—and the criticisms increased on August 8th, the first trading day following S&P’s announcement, when the Dow Jones Industrial Average plummeted by 5.5%.

Was S&P justified? This matters for the downgrader as well as the downgraded. The reputations of the ratings agencies are still stained by their gross overstating of the quality of mortgage-backed bonds before the credit crisis (see article).

The entire article is linked here.