Joseph E. Stiglitz
JAN 13, 2014
NEW YORK – Economics is often called the dismal science, and for the last half-decade it has come by its reputation honestly in the advanced economies. Unfortunately, the year ahead will bring little relief.
Real (inflation-adjusted) per capita GDP in France, Greece, Italy, Spain, the United Kingdom, and the United States is lower today than before the Great Recession hit. Indeed, Greece’s per capita GDP has shrunk nearly 25% since 2008.
There are a few exceptions: After more than two decades, Japan’s economy appears to be turning a corner under Prime Minister Shinzo Abe’s government; but, with a legacy of deflation stretching back to the 1990’s, it will be a long road back. And Germany’s real per capita GDP was higher in 2012 than it was in 2007 – though an increase of 3.9% in five years is not much to boast about.
Elsewhere, though, things really are dismal: unemployment in the eurozone remains stubbornly high and the long-term unemployment rate in the US still far exceeds its pre-recession levels.
In Europe, growth appears set to return this year, though at a truly anemic rate, with the International Monetary Fund projecting a 1% annual increase in output. In fact, the IMF’s forecasts have repeatedly proved overly optimistic: the Fund predicted 0.2% growth for the eurozone in 2013, compared to what is likely to be a 0.4% contraction; and it predicted US growth to reach 2.1%, whereas it now appears to have been closer to 1.6%.
With European leaders wedded to austerity and moving at a glacial pace to address the structural problems stemming from the eurozone’s flawed institutional design, it is no wonder that the continent’s prospects appear so bleak.
But, on the other side of the Atlantic, there is cause for muted optimism. Revised data for the US indicate that real GDP grew at an annual pace of 4.1% in the third quarter of 2013, while the unemployment rate finally reached 7% in November – the lowest level in five years. A half-decade of low construction has largely worked off the excess building that occurred during the housing bubble. The development of vast reserves of shale energy has moved America toward its long-sought goal of energy independence and reduced gas prices to record lows, contributing to the first glimmer of a manufacturing revival. And a booming high-tech sector has become the envy of the rest of the world.
Most important, a modicum of sanity has been restored to the US political process. Automatic budget cuts – which reduced 2013 growth by as much as 1.75 percentage points from what it otherwise would have been – continue, but in a much milder form. Moreover, the cost curve for health care – a main driver of long-term fiscal deficits – has bent down. Already, the Congressional Budget Office projects that spending in 2020 for Medicare and Medicaid (the government health-care programs for the elderly and the poor, respectively) will be roughly 15% below the level projected in 2010.
It is possible, even likely, that US growth in 2014 will be rapid enough to create more jobs than required for new entrants into the labor force. At the very least, the huge number (roughly 22 million) of those who want a full-time job and have been unable to find one should fall.
But we should curb our euphoria. A disproportionate share of the jobs now being created are low-paying – so much so that median incomes (those in the middle) continue to decline. For most Americans, there is no recovery, with 95% of the gains going to the top 1%.
Even before the recession, American-style capitalism was not working for a large share of the population. The recession only made its rough edges more apparent. Median income (adjusted for inflation) is still lower than it was in 1989, almost a quarter-century ago; and median income for males is lower than it was four decades ago.
America’s new problem is long-term unemployment, which affects nearly 40% of those without jobs, compounded by one of the poorest unemployment-insurance systems among advanced countries, with benefits normally expiring after 26 weeks. During downturns, the US Congress extends these benefits, recognizing that individuals are unemployed not because they are not looking for work, but because there are no jobs. But now congressional Republicans are refusing to adapt the unemployment system to this reality; as Congress went into recess for the holidays, it gave the long-term unemployed the equivalent of a pink slip: as 2014 begins, the roughly 1.3 million Americans who lost their unemployment benefits at the end of December have been left to their own devices. Happy New Year.
Meanwhile, a major reason that the US unemployment rate is currently as low as it is, is that so many people have dropped out of the labor force. Labor-force participation is at levels not seen in more than three decades. Some say that this largely reflects demographics: an increasing share of the working-age population is over 50, and labor-force participation has always been lower among this group than among younger cohorts.
But this simply recasts the problem: the US economy has never been good at retraining workers. American workers are treated like disposable commodities, tossed aside if and when they cannot keep up with changes in technology and the marketplace. The difference now is that these workers are no longer a small fraction of the population.
None of this is inevitable. It is the result of bad economic policy and even worse social policy, which waste the country’s most valuable resource – its human talent – and cause immense suffering for affected individuals and their families. They want to work, but the US economic system is failing them.
So, with Europe’s Great Malaise continuing in 2014 and the US recovery excluding all but those at the top, count me dismal. On both sides of the Atlantic, market economies are failing to deliver for most citizens. How long can this continue?
Joseph E. Stiglitz, a Nobel laureate in economics and University Professor at Columbia University, was Chairman of President Bill Clinton’s Council of Economic Advisers and served as Senior Vice President and Chief Economist of the World Bank. His most recent book is The Price of Inequality: How Today’s Divided Society Endangers our Future.
The Single Most Important Chart For Markets Right Now
by James Gruber
on January 12, 2014
Last year, developed market equities were the big winners and if you didn’t have a large dollop of them in your portfolio, you invariably under-performed. Bonds had some of their worst losses in almost two decades while gold had its poorest year since 1981. And shock, horror – the vast majority of analysts and commentators are forecasting more gains for equities and more losses for bonds and gold (the end of their respective bull markets, apparently). Investor flows have been reflecting this advice. So far this year though, things haven’t gone according to plan with bonds and gold bouncing back and stocks under-performing.
Moving beyond price action, one of the most critical issues going forward will be the ongoing battle between inflation and deflation. For five years, central banks have been fighting deflationary forces in order to spur their economies into action again. Deflation is seen as preceding recession or even depression, while inflation has the nice benefit of reducing bloated government debts (inflation leading to depreciating currencies and therefore lower local currency debts). So far, the central banks efforts have met minimal success with a weak economic recovery and disinflation (declining inflation).
Rising inflation expectations
The world’s central bankers have fought desperately to prop up economies for the past five years, after the worst downturn (at least, in much of the developed world) since the 1930s. Undoubtedly, their massive doses of stimulus combined with interest rates near zero prevented an even greater downturn. Whether they also prevented a faster recovery will be debated for years to come.
The Fed has bought bonds off commercial banks in the hope that these banks would lend the said money to the public.
Unfortunately, bank loan growth has been tepid, and trending down of late. That’s indicative of weak demand for debt from consumers.
That’s resulted in money velocity dropping to more than 60 year lows. This means money isn’t changing hands and circulating in the economy. A strengthening economy has rising velocity, or the same quantity of money being used for several transactions.
The U.S. inflation rate itself has reflected the above. Inflation peaked near 4% in 2011 before declining to 1% in November last year, and a minor pick-up to 1.2% in December.
The important thing to note is that these charts are all lagging indicators: they tell us what’s happened rather than what’s going to happen.
Inflation expectations are measured by the difference between U.S. Treasury yields and Treasury Inflation Protected Securities (TIPS). TIPS are indexed to CPI and as the latter increases, so does the value of TIPS. In other words, you own TIPS as a hedge against inflation.
The rise in U.S. inflation expectations is consistent with recent market action. Markets are forward-looking and the considerable out-performance of stocks versus bonds in 2013 has been telling us that a U.S. recovery may be gaining hold and inflation is coming.
Inflation only becomes bad for equity multiples in the U.S. once it reaches above 4%. More than 6% inflation leads to the more dramatic de-rating of stocks.
Therefore, rising inflation without a concomitant rise in interest rates is very bullish for stock markets. Given developed market central banks are pledging to hold interest rates near zero for a considerable period of time, there may be a sweet spot for equities to outperform further.
The question then becomes: do you buy into this scenario? Asia Confidential doesn’t and here’s why:
Put simply, I’m betting on the unintended consequences of either a deflationary shock (my preference) or conversely serious inflation. Mild inflation from here seems like a central bank (wet) dream.
Les doy cordialmente la bienvenida a este Blog informativo con artículos, análisis y comentarios de publicaciones especializadas y especialmente seleccionadas, principalmente sobre temas económicos, financieros y políticos de actualidad, que esperamos y deseamos, sean de su máximo interés, utilidad y conveniencia.
Pensamos que solo comprendiendo cabalmente el presente, es que podemos proyectarnos acertadamente hacia el futuro.
Gonzalo Raffo de Lavalle
Las convicciones son mas peligrosos enemigos de la verdad que las mentiras.
Quien conoce su ignorancia revela la mas profunda sabiduría. Quien ignora su ignorancia vive en la mas profunda ilusión.
“There are decades when nothing happens and there are weeks when decades happen.”
Vladimir Ilyich Lenin
You only find out who is swimming naked when the tide goes out.
No soy alguien que sabe, sino alguien que busca.
Only Gold is money. Everything else is debt.
Las grandes almas tienen voluntades; las débiles tan solo deseos.
Quien no lo ha dado todo no ha dado nada.
History repeats itself, first as tragedy, second as farce.
We are travelers on a cosmic journey, stardust, swirling and dancing in the eddies and whirlpools of infinity. Life is eternal. We have stopped for a moment to encounter each other, to meet, to love, to share.This is a precious moment. It is a little parenthesis in eternity.
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