Shinzo Abe’s Monetary-Policy Delusions

Stephen S. Roach

28 December 2012

NEW HAVENThe politicization of central banking continues unabated. The resurrection of Shinzo Abe and Japan’s Liberal Democratic Partypillars of the political system that has left the Japanese economy mired in two lost decades and counting – is just the latest case in point.
Japan’s recent election hinged critically on Abe’s views of the Bank of Japan’s monetary policy stance. He argued that a timid BOJ should learn from its more aggressive counterparts, the US Federal Reserve and the European Central Bank. Just as the Fed and the ECB have apparently saved the day through their unconventional and aggressive quantitative easing (QE), goes the argument, Abe believes it is now time for the BOJ to do the same.
It certainly looks as if he will get his way. With BOJ Governor Masaaki Shirakawa’s term ending in April, Abe will be able to select a successor – and two deputy governors as well – to do his bidding.
But will it work? While experimental monetary policy is now widely accepted as standard operating procedure in today’s post-crisis era, its efficacy is dubious. Nearly four years after the world hit bottom in the aftermath of the global financial crisis, QE’s impact has been strikingly asymmetric.
While massive liquidity injections were effective in unfreezing credit markets and arrested the worst of the crisiswitness the role of the Fed’s first round of QE in 2009-2010subsequent efforts have not sparked anything close to a normal cyclical recovery.
The reason is not hard to fathom. Hobbled by severe damage to private and public-sector balance sheets, and with policy interest rates at or near zero, post-bubble economies have been mired in a classic liquidity trap.” They are more focused on paying down massive debt overhangs built up before the crisis than on assuming new debt and boosting aggregate demand.
The sad case of the American consumer is a classic example of how this plays out. In the years leading up to the crisis, two bubbles property and creditfueled a record-high personal-consumption binge. When the bubbles burst, households understandably became fixated on balance-sheet repairnamely, paying down debt and rebuilding personal savings, rather than resuming excessive spending habits.
Indeed, notwithstanding an unprecedented post-crisis tripling of Fed assets to roughly $3 trillion probably on their way to $4 trillion over the next yearUS consumers have pulled back as never before. In the 19 quarters since the start of 2008, annualized growth of inflation-adjusted consumer spending has averaged just 0.7%almost three percentage points below the 3.6% trend increases recorded in the 11 years ending in 2006.
Nor does the ECB have reason to be gratified with its strain of quantitative easing. Despite a doubling of its balance sheet, to a little more than €3 trillion ($4 trillion), Europe has slipped back into recession for the second time in four years.
Not only is QE’s ability to jumpstart crisis-torn, balance-sheet-constrained economies limited; it also runs the important risk of blurring the distinction between monetary and fiscal policy. Central banks that buy sovereign debt issued by fiscal authorities offset market-imposed discipline on borrowing costs, effectively subsidizing public-sector profligacy.
Unfortunately, it appears that Japan has forgotten many of its own lessons – especially the BOJ’s disappointing experience with zero interest rates and QE in the early 2000’s. But it has also lost sight of the 1990’s – the first of its so-called lost decades – when the authorities did all they could to prolong the life of insolvent banks and many nonfinancial corporations. Zombie-like companies were kept on artificial life-support in the false hope that time alone would revive them. It was not until late in the decade, when the banking sector was reorganized and corporate restructuring was encouraged, that Japan made progress on the long, arduous road of balance-sheet repair and structural transformation.
US authorities have succumbed to the same Japanese-like temptations. From quantitative easing to record-high federal budget deficits to unprecedented bailouts, they have done everything in their power to mask the pain of balance-sheet repair and structural adjustment. As a result, America has created its own generation of zombies – in this case, zombie consumers.
Like Japan, America’s post-bubble healing has been limited – even in the face of the Fed’s outsize liquidity injections. Household debt stood at 112% of income in the third quarter of 2012 down from record highs in 2006, but still nearly 40 percentage points above the 75% norm of the last three decades of the twentieth century. Similarly, the personal-saving rate, at just 3.5% in the four months ending in November 2012, was less than half the 7.9% average of 1970-99.
The same is true of Europe. The ECB’s über-aggressive actions have achieved little in the way of bringing about long-awaited structural transformation in the region. Crisis-torn peripheral European economies still suffer from unsustainable debt loads and serious productivity and competitiveness problems. And a fragmented European banking system remains one of the weakest links in the regional daisy chain.
Is this the “cure” that Abe really wants for Japan? The last thing that the Japanese economy needs at this point is backsliding on structural reforms. Yet, by forcing the BOJ to follow in the misdirected footsteps of the Fed and the ECB, that is precisely the risk that Abe and Japan are facing.
Massive liquidity injections carried out by the world’s major central banks – the Fed, the ECB, and the BOJ – are neither achieving traction in their respective real economies, nor facilitating balance-sheet repair and structural change. That leaves a huge sum of excess liquidity sloshing around in global asset markets. Where it goes, the next crisis is inevitably doomed to follow.
Stephen S. Roach was Chairman of Morgan Stanley Asia and the firm's Chief Economist, and currently is a senior fellow at Yale University’s Jackson Institute of Global Affairs and a senior lecturer at Yale’s School of Management. His most recent book is The Next Asia.

12/28/2012 05:57 PM

Fear of Global Recession

Germany Urges US to Resolve Budget Dispute

By Severin Weiland


All eyes are on Washington where US President Barack Obama and lawmakers are due to launch last-ditch talks Friday to avert automatic tax hikes and spending cuts that could plunge the country into recession. German Foreign Minister Guido Westerwelle reminded all sides that they have a responsibility not just to the US, but to the global economy.

Time is running out. Leading Democrats and Republicans only have a few more days left to reach a deal in their bitter dispute over spending cuts, tax hikes and the budget. If they don't, the US economy could tumble into a recession and drag the global economy down with it. At 3 p.m. EST (8 p.m. GMT) on Friday, President Barack Obama will meet congressional leaders from both parties at the White House for a last-ditch round of talks.

World attention is focused on the negotiations, for which Obama broke off his Christmas vacation in Hawaii. A deal must be reached by Sunday at the latest otherwise the US economy will go off a "fiscal cliff," shorthand for the automatic spending cuts and tax hikes worth $600 billion that will begin to take effect on Jan. 1.

The German government too is closely watching the budget battle. It could have a crippling effect on a euro-zone economy that is already struggling to keep its head above water.

"I am sure all the decisionmakers in the US are aware of their responsibility for their country and the global economy," German Foreign Minister Guido Westerwelle told SPIEGEL ONLINE hopefully on Friday.

He then added what sounded like a dig at a US that has for months been urging Europe to spend its way out of crisis. "We welcome that there is unity in Washington about the need for budget consolidation."

Still, Congressional leaders in Washington have shown no unity whatsoever when it comes to measures that might actually achieve such consolidation. And it is a division that is beginning to worry the world. The director of the International Monetary Fund's Monetary and Capital Markets Department, José Viñals, warned a few days ago that a fall off the fiscal cliff would have "dramatic consequences" for the US, the global economy and financial markets which would be likely to become far more nervous.

Accounting Tricks to Buy Time

US Treasury Secretary Timothy Geithner informed Congress on Wednesday that without any action, the government is set to reach its $16.4 trillion debt ceiling on December 31. He said the Treasury would begin a series of "extraordinary measures" to buy time. "These extraordinary measures ... can create approximately $200 billion in headroom under the debt limit," Geithner wrote in a letter to congressional leaders.

The accounting tricks could buy the government about two months to resolve the dispute.

If no deal of any sort is reached, the consequences would be disastrous, with the spending cuts slowing the economy. The Congressional Budget Office calculates that economic growth in 2013 would be reduced by up to four percentage points, which would probably plunge the economy back into recession.

The rate of unemployment would rise from 7.9 percent at present to 9.1 percent, according to US forecasts, which translates into two million more jobless people.

Many economic analysts fear there could be a long-term recession resulting from the various measures that are set to take effect in the coming months in the form of income tax hikes, cuts in unemployment benefit and increased taxes on income from capital and real restate.

December 27, 2012 8:26 pm

Seismic events will shape the Middle East
The region offers no respite to international or local actors, writes David Gardner
©Matt Kenyon

The past two years have put paid to the notion that the Arab world was secure in the hands of pliable tyrants, a lazy equation of autocracy with stability that ignored the many ways in which Arab despotism was almost a purpose-built assembly line for the manufacture of Islamists. Yet, at the start of year three in the messy unfolding of the Arab awakening, the region approaches four potentially seismic moments.

The Syrian revolution and pending fall of the blood-soaked Assad dynasty; the dangerous stand-off with Iran; the wrenching succession facing the House of Saud; and the imminent death of the two states solution to the Israeli-Palestinian conflict will all test the nerves and ingenuity of policy makers. America may wish to pivot towards Asia and Europe may be turned inward, but the Middle East offers no respite to international or regional actors. It is equally unforgiving of the reckless and the feckless.

It was the Anglo-American invasion of Iraq, a rash roll of the regional dice, that reignited the historic battle between Sunni and Shia Islam. Syria and, potentially, Lebanon are currently the main frontline of this corrosive contest. Bashar al-Assad’s Alawite minority, an esoteric offshoot of Shiism that is the backbone and nervous system of his crumbling security state, is the Shia proxy around which Iran and Hizbollah, Lebanon’s parastatal Shia Islamist movement, have grouped.

Conversely, the west’s decision to stand back from Sunni majority Syria’s attempt to break free from the Assad regime in effect leaves the provision of aid and arms to the rebels to the Gulf monarchies, led by Saudi Arabia and Qatar. In Libya, the US chose to “lead from behind”. In Syria, America and its European allies have chosen to subcontract to the Sunni supremacists of the Gulf. That has consequences. It has turned Syria into a magnet for jihadi extremists and enhanced the influence of local Islamist radicals beyond what Syria’s plural mosaic society would normally engender.

Something similar happened while the west dithered over Bosnia, creating an opening for veterans of the western-backed jihad against the Soviet Union in Afghanistan. The consequences then were limited. The Wahhabis, as the Bosniaks called them, moved on to Chechnya. This time the jihadis are unlikely to give up a strategic position in the Levant, especially after they squandered the opportunity given them by the US-led occupation of Iraq, where they alienated the Sunni tribes and launched a self-defeating campaign of terror against the Shia majority.

The eventual fall of the Assads will strip Iran of its main Arab ally. That may encourage Israel, under an almost inevitably re-elected Benjamin Netanyahu, to attack Iranian nuclear installations. If Barack Obama wishes to avoid being sucked into conflict with Iran, he and his allies must set realistic negotiating goals. Tehran will have to be allowed to enrich uranium to a low level, under strict international monitoring and with the clear understanding that any attempt to develop a nuclear weapon is a red line.

If Israel holds to its red line of no enrichment, war looks inevitable. That would enable Tehran to: further corral its citizens; consolidate its power bases in Iraq and Lebanon; and reassert itself in the Arab arena, where the trend has been towards mainstream political Islam rather than its violent tributaries. Nothing would please the mullahs more than to re-emerge as the vanguard of the resistance to the great and lesser Satans, and champion of the Shia against the Sunni.

Across the Gulf in Saudi Arabia, self-appointed champion of the Sunni, the House of Saud confronts a succession crisis. The cautious reforms of the ageing and infirm King Abdullah, who has been predeceased by two crown princes in just over a year, have evaporated in the face of regional uprisings and Iranian assertiveness. The ruling family is brandishing carrots and sticks: vast subsidies for everything from cheap housing to debt forgiveness, alongside a crackdown on all dissent and a revitalised role for the Wahhabi clerical establishment, which is sectarian and inimical to all reform.

The al-Saud, so factionalised they revere consensus, amount to an absolute monarchy with no absolute monarch, a symbiosis of temporal and religious power that needs to skip a generation and progress gradually towards a constitutional monarchy, open to the world and under the rule of law, offering opportunity as well as expanding social and political freedoms to its increasingly educated if conservative citizens.

If Syria, Iran and Saudi Arabia are facing their moment of truth, then Israel is fast approaching the point of no return in its relations with the Palestinians.

The dimension of Israeli colonisation of the West Bank and Arab east Jerusalem has long been clear to anyone who can read a map. But the Netanyahu government’s latest plans to expand Jewish settlements on occupied land kill the idea of a viable Palestinian state stone dead. Every rampart to enclose east Jerusalem and encircle Bethlehem, and every wall and segregated bypass road to divide the West Bank, will shortly be in place, herding the Palestinians into Bantustans with, perhaps, the eventual possibility of some sort of supra-municipal and superintended government.

That can lead only to an apartheid-style struggle by a (probably reunified) Palestinian movement, demanding equal rights in a binational state, blackening the name of Israel internationally and calling into question the legitimate right of Jews to a state in the eternally disputed Holy Land.

There can be no unerring compass in this kind of minefield. But dithering over Syria, strategic ambiguity over Iran, and the west’s almost reflexive pandering to the Saudi and Israeli governments is hardly a way through. Stability requires strategic clarity and an underpinning of universal values, even if they are not uniform.

Copyright The Financial Times Limited 2012.

sábado, diciembre 29, 2012



India’s Second Wind

Martin Feldstein

27 December 2012


NEW DELHIThe Indian economy is coming back. After several years of disappointing performance, the authorities are shifting to policies aimed at boosting the annual growth rate closer to the roughly 9% level that India achieved from 2004 to 2008.

That won’t be easy. India has many handicaps and lacks many of the things that are needed to sustain rapid growth.
Although India has outstanding universities and technological institutes, the primary-education system is disastrously poor. The caste system and labor laws prevent an efficient labor market.

The policy of quotas for lower castes and for members of certainscheduledtribes affects educational institutions, government employment, and even private firms. Populist policies that transfer scarce budget funds to hundreds of millions of rural men and women end up encouraging them to withdraw their labor services, driving up wages and undermining international competitiveness.
True, bureaucratic rules are not nearly as constraining as they were during the pre-1991license raj.” But business activity remains bogged down by myriad restrictions and a frustratingly slow judicial system, which, together with a complex system of price subsidies, encourage widespread corruption at every level of government.
Moreover, India’s infrastructure is inadequate for a modern economy. With too little electricity, blackouts are common. Ports are inefficient, roads are congested, and traffic is astonishingly chaotic.

And, while India urgently needs to reform its tax system, spending policies, and regulation, political change is difficult in a multiparty federalist democracy of 1.2 billion people spread over a large subcontinent. The current government is a fragile multiparty coalition. The Congress party leads the government, but lacks a majority in both chambers of Parliament. Coalition infighting and the prospect of a national election in 2014 further complicate efforts to enact reform legislation.
And yet, despite everything, India’s economy did record roughly 9% growth for several years, and even now is growing by nearly 6% annually, behind only China and Indonesia among major economies.
One key to India’s economic success is a large population of technically educated entrepreneurs, who are creating new companies and building a modern middle class. A high rate of private saving and strong inflows of capital from abroad have supported investment in plant and equipment. The Indian states have substantial policy discretion and often compete to attract businesses and achieve rapid economic growth.
The main ingredient needed to achieve faster sustained growth is increased investment. Reducing the budget deficit – by limiting government spending and combating a culture of tax avoidance – will increase total domestic savings available to invest. Convincing foreign direct investors that India is a reliable destination will increase the inflow of long-term funds.
Fortunately, the recent threat of a downgrade of India’s sovereign credit rating – which would have made it difficult to finance the current-account deficit – has led to a government reshuffle and a shift in policies. The key political change was the appointment of a new finance minister, Palaniappan Chidambaram, whose selection by Prime Minister Manmohan Singh and Congress party leader Sonia Gandhi sent a strong positive signal to the Indian business community and to financial markets.
Chidambaram, a Harvard-trained lawyer who has held the finance portfolio twice before, is committed to increasing growth and to adopting pro-market policies. He knows what needs to be done – and is pushing his political colleagues to do it.
One sign of progress is that a new cabinet committee, chaired by Singh, will review large private investment projects that have been held up by regulatory issues or other legal barriers. Breaking this logjam will be important, both in itself and for the message that it conveys to domestic and foreign investors.
Likewise, India’s recent decision to allow large foreign retailers like Wal-Mart to enter the market reflects an encouraging change of attitude that is important beyond the specifics of the particular firms that will now come to India. And legislation will soon create the opportunity for expanded foreign ownership in the financial sector.
On the fiscal front, the shift from a complex system of state-level indirect taxes to a national goods and services tax (a type of value-added tax) will improve efficiency and raise revenue. Lowering the subsidy for diesel fuel was politically difficult, but will reduce both the fiscal deficit and excessive use of diesel products.
Government investment in infrastructure, both alone and in partnership with private firms, will also directly benefit growth and attract larger inflows of foreign investment.
Finally, a remarkable plan to enroll every Indian adult in a program using fingerprint identification as a substitute for bank debit cards will allow more efficient distribution of funds to poor villagers and the urban poor. More than three hundred million Indians have already been enrolled.

All of this is an enormous undertakingone that confronts innumerable potential impediments, both economic and political. But I am betting that India is rising again: millions more will be lifted out of poverty in the coming years, while the increasingly prosperous Indian middle class will expand further.
   Martin Feldstein, Professor of Economics at Harvard University and President Emeritus of the National Bureau of Economic Research, chaired President Ronald Reagan’s Council of Economic Advisers from 1982 to 1984. In 2006, he was appointed to President Bush's Foreign Intelligence Advisory Board, and, in 2009, was appointed to President Obama's Economic Recovery Advisory Board. Currently, he is on the board of directors of the Council on Foreign Relations, the Trilateral Commission, and the Group of 30, a non-profit, international body that seeks greater understanding of global economic issues.   
Copyright Project Syndicate -