August 6, 2013 4:26 pm

The global economy is now distinctly Victorian
The Old Normal is looming large on our horizons, bringing with it unfettered markets, writes Adam Posen
©Ingram Pinn
The global economy is getting back to normal. That does not mean a rapid return to full employment nor to a low-risk world for investors. It means that the underlying realities of globalisation are becoming clearer: ours is a multipolar world, where the technological convergence between rich nations and capable poor ones is rapid.
Middle classes are expanding quickly in emerging markets – a group that politicians focus on everywhere, while ignoring recurrent protests from others, particularly low-skilled labour. The world has and will have high real economic volatility despite relative price stability. This state of affairs is, in fact, a return to the Old Normal of the late 19th century. It is a world that we can understand, even if we do not like it.
In international politics, as has long been foretold, the “American century” of 1945-2000 has given way to a world where the US remains the leader but is losing dominance. So the global system is somewhere between outright conflict and smooth international governance. Reflecting this diffusion of economic and military dominance, a few major currenciesnot just one – are increasingly being used for invoicing and reserve management, and that trend will only continue.
The link between currency usage and geopolitical ties is strong, and so the dollar will not be suddenly displaced, but regional alternatives will continue to rise. This has a feel of the 19th century: as Barry Eichengreen, a professor at the University of California, Berkeley has argued, there have been long periods of history where multiple reserve currencies coexisted, like at the end of the 1800s, and we are now in one of those periods – which contributes to economic volatility and uncertainty for national economies and investors.
This multipolar world is also one where no one has sufficient authority to fully protect global public goods, such as intellectual property rights. A weakening of those protections will increase the pace at which emerging markets capable of converging will catch up with advanced economies. Some see this trend as a result of China’s rise or digital piracy, but remember that Germany and the US reverse engineered British innovations in the Victorian age, and even pirated the IP of Charles Dickens and Arthur Conan Doyle.
At the same time, a lack of IP protection reduces incentives to invest in innovation, as Elhanan Helpman of Harvard has demonstrated. So the technological leaders will advance more slowly, which will also boost catch-up
This, in turn, will erode the relative power of the US and other advanced economies, further reducing their ability to enforce IP rules. The whole cycle will increase competitive pressure on incumbent multinational businesses.
Active national rivalries, multiple reserve currencies, eroding intellectual property rights and increased corporate competition in many industries will increase volatility of the real economy and diminish investment. Large state-backed national infrastructure projects, as dominated late 19th century development, will be a growing asset class as a result. The división between investments yielding safer low returns and speculative higher-return assets will be quite sharp.

But as was the case from the 1840s until the first world war, today’s convergence and competition – and the volatility that resultscan and I believe will persist for a long time without globalisation breaking down. It held up for a long time then because, even as there were arms races and conflicts, France and Germany, let alone the UK and the US, had an interest in maintaining the status quo. And, as then, today’s dominant powers wish to maintain their legitimacy against non-state actors, including terrorists and revolutionaries, and preserve cross-border flows of trade and finance.

Furthermore, politicians are responsive to their own upper middle classes, whose wellbeing depends upon maintaining globalisation and keeping international disputes within limits. These groups are also creditors whose desires for price stability, combined with the pressures from currency competition, creates strong incentives for keeping inflation low. On average, such motivations will dominate over temptations to inflate their problems away. So, just as most countries usually adhered to the gold standard over a century ago, they will stick with independence for their central banks and fiscal consolidation now.

There was little or no response to recurring spasms of protest or calls for radical change by low-skilled workers in the 19th century, except when mass movements were assimilated into mainstream political parties with support from the elites. Something similar is at work today, with the protests of southern Europe and the demands of the Occupy movement largely ignored by policy makers catering to the voters of the (older) bourgeoisie.

The Old Normal is thus a tale of the global economy returning to unfettered markets in many ways, and – at the national level – to more volatile economic conditions with slower average growth as a result. This is a situation which I am predicting, not endorsing.

While domestic politics and international relations have changed greatly since 1914, the creation of safety nets and welfare states (even if now curtailed), and the development of nuclear deterrence among the major powers only strengthen the status quo bias of the current governments.

The Old Normal is not nice, but it is likely to last.

The writer is president of the Peterson Institute for International Economics

Copyright The Financial Times Limited 2013.

Dethroning King Coal

Peter Singer

06 August 2013
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MELBOURNEEarlier this year, the concentration of carbon dioxide in the atmosphere reached 400 parts per million (ppm). The last time there was that much CO2 in our atmosphere was three million years ago, when sea levels were 24 meters higher than they are today.

Now sea levels are rising again. Last September, Arctic sea ice covered the smallest area ever recorded. All but one of the ten warmest years since 1880, when global records began to be kept, have occurred in the twenty-first century.
Some climate scientists believe that 400 ppm of CO2 in the atmosphere is already enough to take us past the tipping point at which we risk a climate catastrophe that will turn billions of people into refugees. They say that we need to get the amount of atmospheric CO2 back down to 350 ppm. That figure lies behind the name taken by, a grassroots movement with volunteers in 188 countries trying to solve the problem of climate change.
Other climate scientists are more optimistic: they argue that if we allow atmospheric CO2 to rise to 450 ppm, a level associated with a two-degree Celsius temperature rise, we have a 66.6% chance of avoiding catastrophe. That still leaves a one-in-three chance of catastropheworse odds than playing Russian roulette. And we are forecast to surpass 450 ppm by 2038.
One thing is clear: if we are not to be totally reckless with our planet’s climate, we cannot burn all the coal, oil, and natural gas that we have already located. About 80% of itespecially the coal, which emits the most CO2 when burned – will have to stay in the ground.
In June, US President Barack Obama told students at Georgetown University that he refused to condemn them and their children and grandchildren to “a planet that’s beyond fixing.” Saying that climate change cannot wait for Congress to overcome its “partisan gridlock,” he announced measures using his executive power to limit CO2 emissions, first from new fossil-fuel power plants, and then from existing ones.
Obama also called for an end to public financing of new coal plants overseas, unless they deploy carbon-capture technologies (which are not yet economically viable), or else there is, he said, “no other viable way for the poorest countries to generate electricity.”
According to Daniel Schrag, Director of Harvard University’s Center for the Environment and a member of a presidential science panel that has helped to advise Obama on climate change, “Politically, the White House is hesitant to say they’re having a war on coal. On the other hand, a war on coal is exactly what’s needed.”
Schrag is right. His university, like mine and many others, has a plan to reduce its greenhouse-gas emissions. Yet most of them, including Schrag’s and mine, continue to invest part of their multi-billion-dollar endowments in companies that extract and sell coal.
But pressure on educational institutions to stop investing in fossil fuels is beginning to build. Student groups have formed on many campuses, and a handful of colleges and universities have already pledged to end their investment in fossil fuels. Several US cities, including San Francisco and Seattle, have agreed to do the same.
Now financial institutions, too, are coming under fire for their involvement with fossil fuels. In June, I was part of a group of prominent Australians who signed an open letter to the heads of the country’s biggest banks asking them to stop lending to new fossil-fuel extraction projects, and to sell their stakes in companies engaged in such activities.
Speaking at Harvard earlier this year, former US Vice President Al Gore praised a student group that was pushing the university to sell its investments in fossil-fuel companies, and compared their activities to the divestment campaign in the 1980’s that helped to end South Africa’s racist apartheid policy.
How fair is that comparison? The dividing lines may be less sharp than they were with apartheid, but our continued high level of greenhouse-gas emissions protects the interests of one group of humansmainly affluent people who are alive today – at the cost of others. (Compared to most of the world’s population, even the American and Australian coal miners who would lose their jobs if the industry shut down are affluent.) Our behavior disregards most of the world’s poor, and everyone who will live on this planet in centuries to come.
Worldwide, the poor leave a very small carbon footprint, but they will suffer the most from climate change. Many live in hot places that are getting even hotter, and hundreds of millions of them are subsistence farmers who depend on rainfall to grow their crops.

Rainfall patterns will vary, and the Asian monsoon will become less reliable. Those who live on this planet in future centuries will live in a hotter world, with higher sea levels, less arable land, and more extreme hurricanes, droughts, and floods.
In these circumstances, to develop new coal projects is unethical, and to invest in them is to be complicit in this unethical activity. While this applies, to some extent, to all fossil fuels, the best way to begin to change our behavior is by reducing coal consumption. Replacing coal with natural gas does reduce greenhouse-gas emissions, even if natural gas itself is not sustainable in the long term. Right now, ending investment in the coal industry is the right thing to do.
Peter Singer, Professor of Bioethics at Princeton University and Laureate Professor at the University of Melbourne, is one of the world’s most prominent ethicists. He is the author of Practical Ethics, Animal Liberation: A New Ethics for Our Treatment of Animals, and One World, The Ethics of What We Eat (with Jim Mason).

August 6, 2013, 6:29 p.m. ET

Behind the Middle-Class Funk

The recession hurt, but some troubles have been simmering for 40 years.



President Obama is working hard to refocus attention on the middle class, and rightly so. While a decent society will provide opportunity and, when necessary, direct assistance to the poor, the long-term health of our economy and our democracy depends on a prosperous, self-confident middle class.

That's not what we've had in recent years. Median incomes fell sharply during the Great Recession and have barely begun to recover.

Despite recent signs of recovery, housing—the principal source of wealth for middle-class households—remains priced about 25% below its pre-recession peak. Many workers who lost middle-income jobs have found only part-time or low-wage replacements and doubt that they will ever regain their pre-recession standard of living. Not surprisingly, many middle-class parents now doubt that their children will enjoy comparable lives.

Concern about the middle class is not new. Compared with the quarter-century after World War II, recent decades—though not disastrous—were disappointing, even before the Great Recession.

Many economists define the middle class as those adults whose annual household income is between two-thirds and twice the national median—today, that means roughly $40,000 to $120,000. By this standard, according to the Pew Research Center, the middle class is significantly smaller than it once was. In 1971, it accounted for fully 61% of adults, compared with 14% for the upper class and 25% for the lower class.

Four decades later, the middle class share had declined by 10 percentage points to just 51%, while the upper class share increased by six points and the lower class by four. The U.S. income distribution is still a bell curve, but the left and right tails are fatter and the hump in the middle is lower.

American suburbia, 1973. How are those kids doing today?

This means that the middle class is less economically and socially dominant than it once was. Relatively speaking, more Americans are enjoying affluent lives at the same time that more are just barely making it (if at all). But that doesn't mean the middle class got poorer. During those 40 years, Pew calculates, the median income of middle-class households (adjusted for inflation) grew by 34%. The median grew for the others as well—by 43% for upper-income households and 29% for those with incomes below the middle class. This isn't surprising, because the median income for all U.S. households rose by 32% during that period, from $44,845 in 1970 to $59,127 in 2010. Indeed, 86% of middle-class Americans, and 84% of all Americans, enjoy higher incomes than their parents did.

By some measures the middle class has done better, and by others worse, than the Pew study suggests. Pew uses a definition of income that excludes employer-provided health insurance, non-cash transfers such as food stamps and the redistributive effect of taxes. If these additional sources are included, the rate of increase in median household income between 1979 and 2007 is significantly higher. The increase looks substantially smaller if, as some economists suggest, we use the rate of medical-cost inflation rather than the consumer price index to determine the real value of employer-provided health insurance.

Another complication: Forty years ago, average household size was 3.2 persons. Today, it is only 2.5, a drop of 20%. Most analysts (including Pew's) adjust for this change, because a smaller number of persons per household means that income per person rises faster than the overall household income numbers would suggest. But some researchers disagree, on the ground that smaller households reflect, in part, lower birth rates, which are in turn influenced by gloomier economic realities and expectations.

Finally, rising household incomes reflect increasing hours of work per year to a greater extent than wage and salary increases. Between 1979 and 2007, on average, annual hours worked by middle-income households rose from 3,007 to 3,335fully 10%, a larger increase than for any other income group.

Some of the additional work reflects expanding opportunities for women. But much of it came in response to economic pressure and represents time that men as well as women reluctantly diverted from their childrenhardly an unambiguous improvement in family well-being.

We can argue about how squeezed the middle class was in the decades between the end of the postwar expansion and the onset of the Great Recession. But two things are clear: The coping mechanisms the middle class employed in those decades (fewer children, more hours worked, more borrowing against home equity) are played out, and it will take middle-class households years to recover from the recession-induced blow to their income and wealth. If we cannot restore a vigorously growing economy whose fruits are widely shared, the struggles of the middle class will persist, and our democratic distemper will deepen.

Copyright 2012 Dow Jones & Company, Inc. All Rights Reserved

Could China confiscate its citizens' gold en route to global domination?

Is China moving rapidly towards holding enough gold to have the clout it needs to replace the dollar with the renminbi as the global reserve currency?

Author: Lawrence Williams

Tuesday , 06 Aug 2013

LONDON (Mineweb) - Australia’s ANZ bank is the latest to open a gold vault in the Singapore Freeport area next to the city state’s Changi airport.  Other recent vault builders there include Deutsche Bank and JP Morgan, while Switzerland’s Metalor has one under construction and due to open in a couple of month’s time. 

Together with new gold vault openings in Hong Kong this is yet another outward sign of the continued flight of gold from West to East, although the vaults are also servicing western precious metals investors seeking safe, and relatively low cost vaulting facilities outside of the traditional depositories in the U.S. and Europe.

Now either the Western bullion banks have misjudged the power that gold still retains in the global psyche and as a key financial instrument, or the Asian investors and governments, which are continuing to accumulate gold at a high rate, have got it wrong.  Much is made of the rundown in COMEX gold bullion stocks and the drain of physical gold out of the big ETFs which are fully gold backed and certainly all the figures are telling us that the gold is indeed moving East – it is not only Asian governments which are buying gold, but also countries like Russia, Kazakhstan and Turkey (which falls between the European and Asian blocs) have been accumulating the precious metal and raising their overall gold reserves.  They obviously all see gold holdings as a vital factor in any changing world financial order.

The big question in this respect is, of course China.  Logic – and the statisticssuggests that China is at the very least buying in its own gold production, which by law has to be sold to the state.  As the world’s largest gold producer with output of around 400 tonnes annually, even if this is all it is taking into reserves, this is a very significant amount being around 15% of the world’s newly mined gold.  This amount of gold alone would mean that China will have taken around 1,500 tonnes into its reserves since it last reported an upgrade in its holdings to the current official figure of 1,054 tonnes in April 2009.  This suggests China’s gold reserves may well have at least more than doubled over the period since then and would put it in fourth place amongst the global gold holders with ca 2,500 tonnes, after the U.S. with official gold holdings of 8,133.5 tonnes, Germany with 3,390.6 tonnes and the IMF with 2,814 tonnes.

Tyler Durden, writing in Zero Hedge picked up on a recent statement by Yao Yudong of the People’s Bank of China monetary Policy Committee calling for a new Bretton Woods type system to strengthen the management of global liquidity.  In it he suggested that Yao’s statement could be the first salvo in a Chinese push for a new gold standard – or something approaching this – or at least yet another indication that China is moving towards trying to overturn dollar hegemony and make a place for the renminbi in the new global reserve currency – a point we have made on Mineweb in the past.  The suggestion is that China may look towards some kind of hard asset backedoptionality’ as a future negotiating point in rejigging the world financial order at some point in the future.

Coming back to China’s likely gold holdings, many observers feel that, in addition to taking its own gold output into some kind of separate government account which, in its view it is not obliged to disclose as part of its official reserves until it feels it is politically opportune to do so, it is also buying gold on the open market given the huge volumes of gold pouring into the nation.  Even so it would still have a way to go to match the U.S. gold reserves unless of course the government does a ‘Roosevelt’ and confiscates its citizens’ gold, at which point, in a fell swoop it could perhaps get close to matching the U.S. in total gold holdings.  This is something that, in theory, it would be easier to do in a totalitarian state than in a democracy like the U.S.  One can be sure that Chinese economists have studied what Roosevelt did and have built it into one of their possible scenarios.

One recalls that China positively encouraged its citizens to buy gold - a cynic might suggest that this was just a route to bringing more and more gold into the country which could then subsequently be used as a de facto reserve.

China might then feel, if it can match, or perhaps exceed,  the U.S. in its gold holdings it would be in a position to demand a place in a global reserve currency – or indeed replace the dollar as such with the renminbi and revalue gold to whatever level it sees fit.  Pure speculation on our part, of course, but the Chinese have learnt from the capitalist system turning it to their own advantage.  As Durden points out in his article, global reserve currencies don’t last forever and the U.S. dollar could be nearing the end of its reign as such.

IMF Executive Board Concludes 2013 Article IV Consultation with Spain

Press Release No. 13/292

 August 2, 2013

On July 26, 2013, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation with Spain.1

The Spanish economy accumulated large imbalances during the long boom that ended with the global financial crisis. Unemployment soared, the fiscal position deteriorated sharply, and funding conditions tightened for both the public and private sectors.

Key imbalances are correcting rapidly. Sovereign yields fell sharply since the European Central Bank’s announcements about Outright Monetary Transactions (OMT), the current account swung into surplus, the fiscal deficit fell sharply in 2012 despite the recession, private sector debt declined, and the banking system is stronger. But the adjustment process is proving slow and difficult. Growth has been negative in the last seven quarters, unemployment has reached unacceptably high levels, and financing conditions remain tight for small firms.

The reform process has accelerated and deepened. Decisive reforms in the labor, financial, and fiscal sectors, in line with past staff recommendations, is helping stabilize the economy. Determined action has been taken to help clean up banks in the context of a financial sector program from the European Stability Mechanism, for which the IMF is providing technical assistance. Provisions and capital were greatly increased following an independent stress test and asset quality review in summer 2012. Weak banks are being restructured and much of their real estate assets have been transferred to an asset management company (SAREB). Regulation and supervision was also enhanced.

Fiscal frameworks and transparency have been substantially upgraded. An independent council is being introduced and a commission of experts has issued a proposal to ensure pension system sustainability. Early and partial retirement rules were further tightened. Monthly reports are now available for all major levels of government.

On labor market policy, a major reform was instituted in July 2012 to improve firms’ ability to adjust working conditions (including wages), reduce duality, and promote job matching and training. Unemployment insurance was reduced by 17 percent after 6 months of benefits, and hiring subsidies were reformed. In February 2013, the government announced more flexible hiring arrangements for youth and tax incentives to support youth employment and entrepreneurship.

Product and service market reforms are underway. The government liberalized the establishment of small retail stores and retail business hours. Further reforms have been announced to remove regulations that fragment the domestic market, to liberalize professional services, and to foster entrepreneurship.

Executive Board Assessment

Executive Directors commended the authorities for strong progress on critical reforms amid challenging conditions, which is helping to stabilize the economy. External and fiscal imbalances are correcting rapidly. However the economy remains in recession, with unacceptably high unemployment, and the outlook remains difficult. Directors stressed the need for decisive further action to generate growth and jobs, both by Spain and Europe, and continued strong commitment to the reform effort.

Directors welcomed the 2012 labor market reform, which appears to be gradually delivering results. However, they underscored that labor market dynamics need to improve further in order to reduce unemployment sufficiently, including by enhancing internal flexibility, reducing duality, and improving active labor market policies. Many Directors generally saw merit in exploring a social agreement between unions and employers to bring forward the employment gains from structural reforms, while they noted that it would be difficult to achieve.

However, such an agreement should not delay the needed structural reforms. Directors also underscored the need to improve the business environment and boost competition, including through product and service markets reform. They looked forward to timely implementation of the plans envisaged under the National Reform Program.

Directors welcomed the authorities’ commitment to fiscal consolidation and agreed that the new medium-term structural targets strike a reasonable balance between reducing the deficit and supporting growth in the short term. They encouraged the authorities to specify how the targets will be achieved and to ensure that the measures are as growth-friendly as possible. In this context, they looked forward to the tax and expenditure reviews. A number of Directors also recommended flexibility in meeting the targets should growth disappoint. Directors welcomed progress on structural fiscal reforms, such as the fiscal council, and highlighted the need to follow through with ambitious legislation and rigorous implementation. Many Directors also looked forward to further progress on developing the enforcement of the Organic Budget Stability Law, and securing the sustainability of the pension system.

Directors stressed the importance of facilitating private sector deleveraging. The insolvency regime should continue to be improved. A number of Directors encouraged the authorities to consider in the future introducing a personal insolvency regime.

Directors highlighted that banks also need to play their part by promptly recognizing losses and selling distressed assets. They welcomed the progress made in the clean-up of the financial system but stressed the need to remain vigilant to risks to financial stability and to protect the hard-won solvency. Priority should be given to removing supply constraints, supporting access to credit to small and medium enterprises, implementing scenario exercises on bank resilience to guide supervisory action, and determining, in the context of the forthcoming European balance sheet review, any needs for further capital reinforcement. Directors stressed that actions at the European level, including initiatives aimed at improving monetary transmission, reversing financial fragmentation, and making progress toward a banking union are essential to support Spain’s adjustment effort.

Spain: Main Economic Indicators
(Percent change unless otherwise indicated)
Demand and supply in constant prices          
Gross domestic product-3.7-0.30.4-1.4-
Private consumption-3.80.7-1.0-2.2-2.7-0.9-
Public consumption3.71.5-0.5-3.7-3.8-2.9-3.8-3.6-2.4-2.3
Gross fixed investment-18.0-6.2-5.3-9.1-7.0-2.5-
Construction investment-16.6-9.8-9.0-11.5-8.7-3.8-2.5-
Machinery and equipment-
Total domestic demand-6.3-0.6-1.9-3.9-3.8-1.6-0.9-
Net exports (contribution to growth)
Exports of goods and services-
Imports of goods and services-17.29.2-0.9-5.0-
Savings-Investment Balance (percent of GDP)          
Gross domestic investment23.622.321.119.117.617.016.816.716.716.8
National savings18.817.817.318.019.019.920.821.422.323.1
Foreign savings4.
Household saving rate (percent of gross disposable income)17.813.
Private sector debt (percent of GDP)289294277264254247244241239236
Corporate debt198202189178172168167165163161
Household debt91928886827877767675
Potential output growth0.60.0-0.2-0.3-0.6-
Output gap (percent of potential)-2.2-2.5-1.9-3.0-3.9-3.4-3.1-2.6-2.1-1.4
GDP deflator0.
HICP (average)-
HICP (end of period)
Employment and wages          
Unemployment rate (percent)
Labor productivity 1/
Labor costs, private sector5.
Employment growth-6.8-2.3-1.9-4.5-4.0-
Labor force growth0.80.20.1-0.2-1.2-1.0-
Balance of payments (percent of GDP)          
Trade balance (goods) 2/-4.0-4.6-4.0-2.4-
Current account balance 2/-4.8-4.5-3.7-
Net international investment position-94-89-91-93-92-88-82-75-67-59
Public finance (percent of GDP)          
General government balance 3/-11.2-9.7-9.0-7.0-6.7-5.9-5.1-4.2-3.3-2.3
Primary balance-9.4-7.7-7.0-7.7-3.3-2.3-1.4-
Structural balance-9.5-8.3-8.3-6.5-5.3-4.7-3.8-3.1-2.4-1.7
General government debt546169849298102104106106
Sources: IMF, World Economic Outlook; data provided by the authorites; and IMF staff estimates.

1/ Output per worker (FTE).
2/ Data from the BdE compiled in accordance with the IMF Balance of Payments Manual.
3/ The headline deficit for Spain excludes financial sector support measures equal to 0.5 percent of GDP for 2011 and 3½ percent of GDP for 2012.

1 Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities. An explanation of any qualifiers used in summing up can be found here: