The Euro turns 20


January 13, 2019

The Euro turns 20

The euro’s first 20 years played out very differently than many expected, highlighting the importance of recognizing that the future is likely to be different from the past. Given this, only a commitment to flexibility and a willingness to rise to new challenges will ensure the common currency’s continued success.

euro banknotes

https://www.project-syndicate.org/commentary/four-lessons-from-euro-s-first-20-years-by-daniel-gros-2019-01

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BRUSSELS – Twenty years ago this month, the euro was born. For ordinary citizens, little changed until cash euros were introduced in 2002. But in January 1999, the “third stage” of Economic and Monetary Union officially started, with the exchange rates among the original 11 eurozone member states “irrevocably” fixed, and authority over their monetary policy transferred to the new European Central Bank. What has unfolded since then holds important lessons for the future.

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In 1999, conventional wisdom held that Germany would incur the biggest losses from the euro’s introduction. Beyond the risk that the ECB would not be as tough on inflation as the Bundesbank had been, the Deutsche Mark was overvalued, with Germany running a current-account deficit. Fixing the exchange rate at that level, it was believed, would pose a severe challenge to the competitiveness of German industry.

Yet, 20 years on, inflation is even lower than it was when the Bundesbank was in charge, and Germany maintains persistently large current-account surpluses, which are viewed as evidence that German industry is too competitive. This brings us to the first lesson of the last 20 years: the performance of individual eurozone countries is not preordained.

The experiences of other countries, such as Spain and Ireland, reinforce that lesson, demonstrating that the ability to adapt to changing circumstances and a willingness to make painful choices matter more than the economy’s starting position. This applies to the future as well: Germany’s current predominance, for example, is in no way guaranteed to continue for the next 20 years.

Yet the establishment of the eurozone was backward-looking. The main concern during the 1970s and 1980s had been high and variable inflation, often driven by double-digit wage growth. Financial crises were almost always linked to bouts of inflation, but had previously been limited in scope, because financial markets were smaller and not deeply interconnected.

With the creation of the eurozone, everything changed. Wage pressures abated throughout the developed world. But financial-market activity, especially across borders within the euro area, grew exponentially, after having been repressed for decades. For example, eurozone member countries’ cross-border assets, mostly in the form of bank and other credit, grew from about 100% of GDP in the late 1990s to 400% by 2008.

Then the global financial crisis erupted a decade ago, catching Europe off guard. The first deflationary crisis since the 1930s was made especially virulent in Europe by the mountain of debt that had been accumulated in the previous ten years, when countries had their eyes on the rear-view mirror.

Of course, the eurozone was not alone in being taken by surprise by the financial crisis, which had started in the United States with supposedly safe securities based on subprime mortgages. But the US, with its unified financial (and political) system, was able to overcome the crisis relatively quickly, whereas in the eurozone, a slow-motion cascade of crises befell many member states.

Fortunately, the ECB proved robust. Its leadership recognized the need to shift focus from fighting inflation – the objective the ECB was designed to achieve – to curbing deflation. Ultimately, the euro survived, because, when push came to shove, leaders of the eurozone’s member states expended political capital to implement needed reforms – even after blaming the euro for their countries’ problems.

This pattern of demonizing the euro before recognizing the need to protect it continues to unfold today – and it should serve as a second lesson of the last 20 years. Italy’s populist coalition government used to speak bravely about flouting the euro’s rules, with some advocating an exit from the eurozone altogether. But when financial-market risk premia increased, and Italian savers did not buy their own government’s bonds, the coalition quickly changed its tune.

In fact, the eurozone’s economic performance has not been as bad as the seemingly endless stream of bleak headlines implies. Per capita GDP growth has slowed over the last 20 years, but not more so than in the US or other developed economies.

Moreover, continental European labor markets have undergone an under-reported structural improvement, with the labor-force participation rate increasing every year, even during the crisis. Today, a higher proportion of the adult population is economically active in the eurozone than in the US. Employment has reached record highs, and unemployment, though still high in some southern countries, is continuously declining.

These economic realities imply that, even if the euro is not particularly well loved, it is widely recognized as an integral element of European integration. According to the latest Eurobarometer poll, support for the euro is at an all-time high of 74%, while less than 20% of the eurozone’s population opposes it. Even Italy boasts a strong pro-euro majority (68% versus 18%). Herein lies a third key lesson from the euro’s first two decades: despite its many imperfections, the common currency has delivered jobs, and there is little support for abandoning it.

But probably the most important lesson lies elsewhere. The euro’s first 20 years played out very differently than many expected, highlighting the importance of recognizing that the future is likely to be different from the past. Given this, only a commitment to flexibility and a willingness to rise to new challenges will ensure the common currency’s continued success.

 

Daniel Gros

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Daniel Gros is Director of the Brussels-based Center for European Policy Studies. He has worked for the International Monetary Fund, and served as an economic adviser to the European Commission, the European Parliament, and the French prime minister and finance minister. He is the editor of Economie Internationale and International Finance.

 

Japan First


January 13, 2019

shinzo abe japanese flag

Japan First

Japanese nationalists, starting with Prime Minister Shinzo Abe, need no encouragement to follow US President Donald Trump’s example. But if they do, they will echo the worst aspects of contemporary America – and throw away the best of what the US once had to offer.

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TOKYO – Even whales have now been affected by US President Donald Trump. This year, Japan will withdraw from the International Whaling Commission and resume commercial whaling. Prime Minister Shinzo Abe’s conservative government claims that eating whale meat is an important part of Japanese culture, even though the number of Japanese who actually do so is tiny compared to a half-century ago. And leaving the IWC will mean that Japanese whalers can fish only in Japan’s coastal waters, where the animals are relatively few.

The truth is that the decision was a gift to a few politicians from areas where whaling is still practiced, and to nationalists who resent being told by foreigners in international organizations what Japan can and cannot do. It is an entirely political act, inspired, according to the liberal Asahi Shimbun, by Trump’s insistence on “America First.” This is a matter of Japan First. Even though Trump is unlikely to mind, Japan’s insistence on whaling is bad for the country’s image.Abe, himself a staunch Japanese nationalist, has a complicated relationship with the United States.Image result for nobusuke kishi and Abe


Abe, himself a staunch Japanese nationalist, has a complicated relationship with the United States.Like his grandfather, Nobusuke Kishi, also a nationalist who was arrested as a war criminal in 1945, but who then became a loyal anti-communist ally of the Americans, Abe does everything to stay close to the US, while also wanting Japan to be first. One of his dreams is to finish his grandfather’s attempt to revise the postwar pacifist constitution, written by the Americans, and come up with a more patriotic, and possibly more authoritarian document that will legalize the use of military force.

Abe, himself a staunch Japanese nationalist, has a complicated relationship with the United States. Like his grandfather, Nobusuke Kishi, also a nationalist who was arrested as a war criminal in 1945, but who then became a loyal anti-communist ally of the Americans, Abe does everything to stay close to the US, while also wanting Japan to be first. One of his dreams is to finish his grandfather’s attempt to revise the postwar pacifist constitution, written by the Americans, and come up with a more patriotic, and possibly more authoritarian document that will legalize the use of military force.

Japan has to be a stalwart American ally. Germany and Italy, the other defeated powers in World War II, have NATO and the European Union. Japan has only the 1960 Treaty of Mutual Cooperation and Security with the US to protect itself against hostile powers, and the rise of China terrifies the Japanese. That is why Abe was the first foreign politician, after British Prime Minister Theresa May, to rush to congratulate Trump in person in 2017.

In some important ways, Japan has benefited greatly from being under America’s wing, and from the postwar constitution, which is not just pacifist, but more democratic than anything the country had before, enshrining individual rights, full suffrage, and freedom of expression. Constitutionally unable to take part in military adventures, except as a highly paid goods producer during America’s various Asian conflicts, Japan, rather like the countries in Western Europe, could concentrate on rebuilding its industrial power.

But the democracy that Americans are still proud of installing after 1945 has also been hindered by US interference. Like Italy, Japan was on the front lines in the Cold War. And, like Italy’s Christian Democrats, Japan’s conservative Liberal Democratic Party benefited for many years from huge amounts of US cash to make sure no left-wing parties came to power. As a result, Japan became a de facto one-party state.

This led to a kind of schizophrenia among Japan’s conservative nationalists like Abe. They appreciated American largesse, as well as its military backing against communist foes. But they deeply resented having to live with a foreign-imposed liberal constitution. Like the Tokyo War Crimes Tribunal in 1946, in which foreign judges tried Japan’s wartime leaders, the constitution and all it stands for is seen as a national humiliation.

The Japanese right would like to overturn much of the postwar order, established by the US with the support of Japanese liberals. Abe’s revisionist project does not only concern the pacifist Article 9, which bars Japan from using armed force, but also matters like education, emergency laws, and the role of the emperor.

To change Article 9, the current coalition government would need support from two-thirds of the Diet, as well as a popular referendum. After his landslide election victory in 2017, Abe has the required parliamentary majority. Whether he would win a referendum is still doubtful, although he has vowed to test this soon.

On education, he has already won some important victories. “Patriotism” and “moral education” are now official goals of the national curriculum. This means, among other things, that obedience to the state, rather than individual rights and free thought, is instilled at an early age. It also means that the history of Japan’s wartime role, if taught in classrooms at all, will be related more as a heroic enterprise, in which the young should take pride.

In the past, the US, despite all its own flaws and criminal conflicts, still stood as a force for good. An ideal of American openness and democracy was still worthy of admiration. At the same time, again as in the case of Western Europe, dependence on US military protection has had a less positive affect. It made Japan into a kind of vassal state; whatever the Americans wanted, Japan ends up having to do. This can have an infantilizing effect on politics.

In the age of Trump, America is no longer so dependable. This might at least help to concentrate Japanese minds on how to get on in the world without the Americans. But the US has also ceased to be a model of freedom and openness. On the contrary, it has become an example of narrow nationalism, xenophobia, and isolationism. Japanese nationalists need no encouragement to follow this model. If they do so, Trump certainly will not stand in their way. They will echo the worst aspects of contemporary America – and throw away the best of what the US once had to offer.

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The Year of Trump?


January 10,2019

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The Year of Trump?

If Trump’s iconoclastic style was merely a breach of traditional presidential etiquette, one might argue that his critics were being too fastidious, or were trapped in old-fashioned views of diplomacy. But crudeness can have consequences.

 

BEIJING – Time magazine did not choose Donald Trump as its Person of the Year in 2018, but it may do so this year. Trump ended 2018 facing criticisms for announcing troop withdrawals from Syria and Afghanistan without consulting allies (resulting in the resignation of his respected defense secretary, General James Mattis) and partially shutting down the government over a Mexican border wall. In 2019, with Democrats having taken over the House of Representatives, he will face increasing criticism of his foreign policy.

Administration supporters shrug off the critics. Foreign policy experts, diplomats, and allies are aghast at Trump’s iconoclastic style, but Trump’s base voted for change and welcomes the disruption. In addition, some experts argue that the disruption will be justified if the consequences prove beneficial for American interests, such as a more benign regime in Iran, denuclearization of North Korea, a change of Chinese economic policies, and a more evenly balanced international trade regime.

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Niall Ferguson

Of course, assessing the long-term consequences of Trump’s foreign policy now is like predicting the final score in the middle of a game. Stanford historian Niall Ferguson has argued that “the key to Trump’s presidency is that it is probably the last opportunity America has to stop or at least slow China’s ascendency. And while it may not be intellectually very satisfying, Trump’s approach to the problem, which is to assert US power in unpredictable and disruptive ways, may in fact be the only viable option left.”

Trump’s critics respond that even if his iconoclasm produces some successes, one must assess them as part of a balance sheet that includes costs as well as benefits. They argue that the price will be too high in terms of the damage done to international institutions and trust among allies. In the competition with China, for example, the United States has dozens of allies and few disputes with neighbors, while China has few allies and a number of territorial disputes. In addition, while rules and institutions can be restraining, the US has a preponderant role in their formulation and is a major beneficiary of them.

This debate raises larger questions about the relevance of personal style in judging presidents’ foreign policy. In August 2016, 50 primarily Republican former national security officials argued that Trump’s personal temperament would make him unfit to be president. Most of the signatories were excluded from the administration, but were they correct?

As a leader, Trump may or may not be smart, but his temperament ranks low on the scales of emotional and contextual intelligence that made Franklin D. Roosevelt or George H.W. Bush successful presidents. Tony Schwartz, who co-wrote Trump’s book The Art of the Deal, notes that “Trump’s sense of self-worth is forever at risk. When he feels aggrieved, he reacts impulsively and defensively, constructing a self-justifying story that doesn’t depend on facts and always directs the blame to others.”

Schwartz attributes this to Trump’s defense against domination by a father who was “relentlessly demanding, difficult, and driven…You either dominated or you submitted. You either created and exploited fear, or you succumbed to it – as he thought his elder brother had.” As a result, he “simply didn’t traffic in emotions or interest in others,” and “facts are whatever Trump deems them to be on any given day.”

Whether Schwartz is correct or not about the causes, Trump’s ego and emotional needs often seem to color his relations with other leaders and his interpretation of world events. The image of toughness is more important than truth. Journalist Bob Woodward reports that Trump told a friend who acknowledged bad behavior toward women that “real power is fear…You’ve got to deny, deny, deny and push back on these women. If you admit to anything and any culpability, then you’re dead.”

Trump’s temperament limits his contextual intelligence. He lacked experience, and has done little to fill the gaps in his knowledge. He is described by close observers as reading little, insisting that briefing memos be very short, and relying heavily on television news. He is reported to have paid scant attention to staff preparations before summits with experienced autocrats like Russian President Vladimir Putin or North Korea’s Kim Jong-un. If Trump’s iconoclastic style was merely a breach of traditional presidential etiquette, one might argue that his critics were being too fastidious, or were trapped in old-fashioned views of diplomacy.

But crudeness can have consequences. While pressing for change, he has disrupted institutions and alliances, only grudgingly admitting their importance. Trump’s rhetoric has downplayed democracy and human rights, as his weak reaction to the murder of Saudi dissident journalist Jamal Khashoggi demonstrated. Although Trump has echoed President Ronald Reagan’s rhetoric about the US being a city on the hill whose beacon shines to others, his domestic behavior toward the press, the judiciary, and minorities has weakened the clarity of America’s democratic appeal. International polls show a decline in America’s soft power since he took office.

While critics and defenders debate the attractiveness of the values embodied by Trump’s “America First” approach, an impartial analyst cannot excuse the ways in which his personal emotional needs have skewed the implementation of his goals – for example in his summit meetings with Putin and Kim. As for prudence, Trump’s non-interventionism protected him from some sins of commission, but one can question whether his mental maps and contextual intelligence are adequate to understand the risks posed to the US by the diffusion of power in this century. As tensions grow, reckoning with Trump may well become unavoidable in 2019.

Trump vs. the Economy


 

Trump vs. the Economy

December 30, 2018  by

https://www.project-syndicate.org/commentary/trump-behavior-causes-stock-market-drop-by-nouriel-roubini-2018-12

Between publicly chastising US Federal Reserve Chair Jerome Powell and escalating his trade war with China, US President Donald Trump has finally rattled the markets. While investors were happy to look the other way during the first half of Trump’s term, the dangerous spectacle unfolding in the White House can no longer be ignored.

NEW YORK – Financial markets have finally awoken to the fact that Donald Trump is US president. Given that the world has endured two years of reckless tweets and public statements by the world’s most powerful man, the obvious question is, What took so long?

For one thing, until now, investors had bought into the argument that Trump is all bark and no bite. They were willing to give him the benefit of the doubt as long as he pursued tax cuts, deregulation, and other policies beneficial to the corporate sector and shareholders. And many trusted that, at the end of the day, the “adults in the room” would restrain Trump and ensure that the administration’s policies didn’t jump the guardrails of orthodoxy.

These assumptions were more or less vindicated during Trump’s first year in office, when economic growth and an expected increase in corporate profits – owing to forthcoming tax cuts and deregulation – resulted in strong stock-market performance. In 2017, US stock indices rose more than 20%.

But things changed radically in 2018, and especially in the last few months. Despite corporate earnings growing by over 20% (thanks to the tax cuts), US equity markets moved sideways for most of the year, and have now taken a sharp turn south. At this point, broad indices are in correction territory (meaning a 10% drop from the recent peak), and indices of tech stocks, such as the Nasdaq, are in bear-market territory (a drop of 20% or more).

Though financial markets’ higher volatility reflects concerns about China, Italy and other eurozone economies, and key emerging economies, most of the recent turmoil is due to Trump. The year started with the enactment of a reckless tax cut that pushed up long-term interest rates and created a sugar high in an economy already close to full employment. As early as February, growing concerns about inflation rising above the US Federal Reserve’s 2% target led to the year’s first risk-off.

Then came Trump’s trade wars with China and other key US trade partners. Market worries about the administration’s protectionist policies have waxed and waned throughout the year, but they are now reaching a new peak. The latest US actions against China seem to augur a broader trade, economic, and geopolitical cold war.

An additional worry is that Trump’s other policies will have stagflationary effects (reduced growth alongside higher inflation). After all, Trump is planning to limit inward foreign direct investment, and has already implemented broad restrictions on immigration, which will reduce labor-supply growth at a time when workforce aging and skills mismatches are already a growing problem.

Moreover, the administration has yet to propose an infrastructure plan to spur private-sector productivity or hasten the transition to a green economy. And on Twitter and elsewhere, Trump has continued to bash corporations for their hiring, production, investment, and pricing practices, singling out tech firms just when they are already facing a wider backlash and increased competition from their Chinese counterparts.

Emerging markets have also been shaken by US policies. Fiscal stimulus and monetary-policy tightening have pushed up short- and long-term interest rates and strengthened the US dollar. As a result, emerging economies have experienced capital flight and rising dollar-denominated debt. Those that rely heavily on exports have suffered the effects of lower commodity prices, and all that trade even indirectly with China have felt the effects of the trade war.

Even Trump’s oil policies have created volatility. After the resumption of US sanctions against Iran pushed up oil prices, the administration’s efforts to carve out exemptions and bully Saudi Arabia into increasing its own production led to a sharp price drop. Though US consumers benefit from lower oil prices, US energy firms’ stock prices do not. Besides, excessive oil-price volatility is bad for producers and consumers alike, because it hinders sensible investment and consumption decisions.

Making matters worse, it is now clear that the benefits of last year’s tax cuts have accrued almost entirely to the corporate sector, rather than to households in the form of higher real (inflation-adjusted) wages. That means household consumption could soon slow down, further undercutting the economy.

More than anything else, though, the sharp fall in US and global equities during the last quarter is a response to Trump’s own utterances and actions. Even worse than the heightened risk of a full-scale trade war with China (despite the recent “” agreed with Chinese President Xi Jinping) are Trump’s public attacks on the Fed, which began as early as the spring of 2018, when the US economy was growing at more than 4%.

Given these earlier attacks, markets were spooked this month when the Fed correctly decided to hike interest rates while also signaling a more gradual pace of rate increases in 2019. Most likely, the Fed’s relative hawkishness is a reaction to Trump’s threats against it. In the face of hostile presidential tweets, Fed Chair Jerome Powell needed to signal that the central bank remains politically independent.

But then came Trump’s decision to shut down large segments of the federal government over Congress’s refusal to fund his useless Mexican border wall. That sent markets into a near-panic, and the government shutdown was soon followed by reports that Trump wants to fire Powell – a move that could turn a correction into a crash. Just before the Christmas holiday, US Treasury secretary Steven Mnuchin was forced to issue a public statement to placate the markets. He announced that Trump was not planning to fire Powell after all, and that US banks’ finances are sound, effectively highlighting the question of whether they really are.

Recent changes within the administration that do not necessarily affect economic policy making are also rattling the markets. The impending departure of White House Chief of Staff John Kelly and Secretary of Defense James Mattis will leave the room devoid of adults. The coterie of economic nationalists and foreign-policy hawks who remain will cater to Trump’s every whim.

As matters stand, the risk of a full-scale geopolitical conflagration with China cannot be ruled out. A new cold war would effectively lead to de-globalization, disrupting supply chains everywhere, but particularly in the tech sector, as the recent ZTE and Huawei cases signal. At the same time, Trump seems to be hell-bent on undermining the cohesion of the European Union and NATO at a time when Europe is economically and politically fragile. And Special Counsel Robert Mueller’s investigation into Trump’s 2016 election campaign’s ties to Russia hangs like a Sword of Damocles over his presidency.

Trump is now the Dr. Strangelove of financial markets. Like the paranoid madman in Stanley Kubrick’s classic film, he is flirting with mutually assured economic destruction. Now that markets see the danger, the risk of a financial crisis and global recession has grown.

Nouriel Roubini, a professor at NYU’s Stern School of Business and CEO of Roubini Macro Associates, was Senior Economist for International Affairs in the White House’s Council of Economic Advisers during the Clinton Administration. He has worked for the International Monetary Fund, the US Federal Reserve, and the World Bank.

 

 

In Defense of the Fed


December 26, 2018

jerome powell fed

In Defense of the Fed

Despite howls of protest from market participants and rumored threats from an unhinged US president, the Federal Reserve should be congratulated for its commitment to normalizing interest rates. There is simply no other way to break the US economy’s 20-year dependence on asset bubbles.

 

NEW HAVEN – I have not been a fan of the policies of the US Federal Reserve for many years. Despite great personal fondness for my first employer, and appreciation of all that working there gave me in terms of professional training and intellectual stimulation, the Fed had lost its way. From bubble to bubble, from crisis to crisis, there were increasingly to question the Fed’s stewardship of the US economy.

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That now appears to be changing. Notwithstanding howls of protest from market participants and rumored That now appears to be changing. Notwithstanding howls of protest from market participants and rumored unconstitutional threats from an unhinged US President, the Fed should be congratulated for its steadfast commitment to policy “normalization.” It is finally confronting the beast that former Fed Chairman Alan Greenspan unleashed over 30 years ago: the “Greenspan put” that provided asymmetric support to financial markets by easing policy aggressively during periods of market distress while condoning froth during upswings.

Since the October 19, 1987 stock-market crash, investors have learned to count on the Fed’s unfailing support, which was justified as being consistent with what is widely viewed as the anchor of its dual mandate: price stability. With inflation as measured by the Consumer Price Index averaging a mandate-compliant 2.1% in the 20-year period ending in 2017, the Fed was, in effect, liberated to go for growth.

And so it did. But the problem with the growth gambit is that it was built on the quicksand of an increasingly asset-dependent and ultimately bubble- and crisis-prone US economy.

Greenspan, as a market-focused disciple of Ayn Rand, set this trap. Drawing comfort from his tactical successes in addressing the 1987 crash, he upped the ante in the late 1990s, arguing that the dot-com bubble reflected a new paradigm of productivity-led growth in the US. Then, in the early 2000s, he committed a far more serious blunder, insisting that a credit-fueled housing bubble, inflated by “innovative” financial products, posed no threat to the US economy’s fundamentals. As one error compounded the other, the asset-dependent economy took on a life of its own.

As the Fed’s leadership passed to Ben Bernanke in 2006, market-friendly monetary policy entered an even braver new era. The bursting of the Greenspan housing bubble triggered a financial crisis and recession the likes of which had not been seen since the 1930s. As an academic expert on the Great Depression, Bernanke had argued that the Fed was to blame back then. As Fed Chair, he quickly put his theories to the test as America stared into another abyss. Alas, there was a serious complication: with interest rates already low, the Fed had little leeway to ease monetary policy with traditional tools. So it had to invent a new tool: liquidity injections from its balance sheet through unprecedented asset purchases.

The experiment, now known as quantitative easing, was a success – or so we thought. But the Fed mistakenly believed that what worked for markets in distress would also spur meaningful recovery in the real economy. It raised the stakes with additional rounds of quantitative easing, QE2 and QE3, but real GDP growth remained stuck at around 2% from 2010 through 2017 — half the norm of past recoveries. Moreover, just as it did when the dot-com bubble burst in 2000, the Fed kept monetary policy highly accommodative well into the post-crisis expansion. In both cases, when the Fed finally began to normalize, it did so slowly, thereby continuing to fuel market froth.

Here, too, the Fed’s tactics owe their origins to Bernanke’s academic work. With his colleague Mark Gertler of NYU, he argued that while monetary policy was far too blunt an instrument to prevent asset-bubbles, the Fed’s tools were far more effective in cleaning up the mess after they burst. And what a mess there was! As Fed governor in the early 2000s, Bernanke maintained that this approach was needed to avoid the pitfalls of Japanese-like deflation. Greenspan concurred with his famous “mission accomplished” speech in 2004. And as Fed Chair in the late 2000s, Bernanke doubled down on this strategy.

For financial markets, this was nirvana. The Fed had investors’ backs on the downside and, with inflation under control, would do little to constrain the upside. The resulting “wealth effects” of asset appreciation became an important source of growth in the real economy. Not only was there the psychological boost that comes from feeling richer, but also the realization of capital gains from an equity bubble and the direct extraction of wealth from the housing bubble through a profusion of secondary mortgages and home equity loans. And, of course, in the early 2000s, the Fed’s easy-money bias spawned a monstrous credit bubble, which subsidized the leveraged monetization of housing-market froth.

And so it went, from bubble to bubble. The more the real economy became dependent on the asset economy, the tougher it became for the Fed to break the daisy chain. Until now. Predictably, the current equity market rout has left many aghast that the Fed would dare continue its current normalization campaign. That criticism is ill-founded. It’s not that the Fed is simply replenishing its arsenal for the next downturn. The subtext of normalization is that economic fundamentals, not market-friendly monetary policy, will finally determine asset values.

The Fed, it is to be hoped, is finally coming clean on the perils of asset-dependent growth and the long string of financial bubbles that has done great damage to the US economy over the past 20 years. Just as Paul Volcker had the courage to tackle the Great Inflation, Jerome Powell may well be remembered for taking an equally courageous stand against the insidious perils of the Asset Economy. It is great to be a fan of the Fed again.

Stephen S. Roach, former Chairman of Morgan Stanley Asia and the firm’s chief economist, is a senior fellow at Yale University’s Jackson Institute of Global Affairs and a senior lecturer at Yale’s School of Management. He is the author of Unbalanced: The Codependency of America and China.

 

May’s BreXit Christmas


December 25, 2018

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May’s BreXit Christmas

by

https://www.project-syndicate.org/commentary/exit-from-brexit-referendum-by-jacek-rostowski-2018-12

After invoking Article 50 of the Treaty of Lisbon prematurely, British Prime Minister Theresa May has spent the past 21 months dancing around the impossibility of a quick withdrawal from the European Union. But with the House of Commons set to reject the exit deal she negotiated with EU leaders, the music is about to stop.

 

LONDON – British Prime Minister Theresa May’s plan to withdraw her country from the European Union in an orderly fashion is collapsing. Though she has survived a no-confidence vote, in January the House of Commons will almost certainly reject the exit deal she negotiated with EU leaders. In order to avoid a chaotic “no-deal” Brexit, her government will have to ask the EU for an extension on the departure date, or withdraw its “intention to leave” notification, at least temporarily.

Either way, the next step would be to hold a second referendum with the option of a so-called exit from Brexit, which would reverse the 2016 decision to leave. Voters could still decide to back May’s deal, opt for a “Norway-style” arrangement, or crash out of the EU with no deal. But recent polling suggests that the choice of remaining in the EU would win the day.

How did a country with 400 years of constitutional governance and a culture of political compromise end up here?

Most commentators point to the seemingly insoluble problem of the . Under the 1998 Good Friday Agreement, which put an end to decades of violent hostility between Protestants and Catholics in Northern Ireland, Britain agreed to permit the free movement of persons, goods, and some services across the border with the Republic of Ireland. A binding international treaty with no provision for exit, the Good Friday Agreement was signed under the assumption that both Britain and Ireland would remain in the EU indefinitely.

May’s deal with the EU includes a “backstop” that would prevent the reintroduction of a hard border between Northern Ireland and the Irish Republic in the absence of a formal post-Brexit trade deal. The problem is that well over 100 members of May’s own party have rejected the backstop outright and will vote against her deal for that reason alone, making it dead on arrival.

But the Irish backstop is, in fact, a side issue. Even if there were no Irish problem, an orderly Brexit would have been impossible within the two years allotted to the UK under Article 50 of the Treaty of Lisbon. As I pointed out in October, British manufacturing supply chains are so deeply integrated with those of continental Europe that they could not survive the sudden establishment of customs and other checks on the British border. Britain’s automotive, aerospace, and precision-instruments industries would be decimated.

To be sure, many non-European countries export large volumes of industrial goods to the EU. But, unlike British goods, these generally cross the EU border only once. The same would hold true for Britain’s goods only aftert he country disentangles itself from the web of European supply chains. That task alone would be comparable to the restructuring of post-communist countries following the collapse of the Council for Mutual Economic Assistance (Comecon, the Soviet-era trade bloc). Completing it could well take five or more years.

After the 2016 referendum, May’s government should have had an adult discussion about the shape Brexit would take, rather than simply declaring, “Brexit means Brexit.” Scenarios in which the UK could remain in the single market, the customs union, or both were on offer from the EU. The government also should have done far more to apprise the business community of its plans.

Moreover, if the intention was always to leave both the single market and the customs union, retaining only a free-trade agreement with Europe, the government should have made clear that it would need an “implementation period” of at least five years to do this in an orderly manner. During this time it would be bound by European laws – including its obligation to pay around £13 billion ($16.4 billion) per year to the EU budget. May should not have invoked Article 50 until all of these decisions had been made, communicated to the relevant parties, and agreed upon at least in principle.

One reason May’s government ended up taking the exact opposite approach is that neither senior politicians nor bureaucrats understood the degree to which the British economy is intertwined with Europe. The fact that a quick Brexit into a free-trade agreement is logistically impossible seems to have been totally lost on them.

But the bigger problem was that a balanced consideration of possible options would have laid bare the lie upon which the “Leave” campaign was based. The idea that Britain could secure a “bespoke deal” and maintain “frictionless” access to the single market while pursuing its own trade accords elsewhere was always a fantasy.

Fearing the political consequences of acknowledging this basic truth, May adopted a completely unrealistic negotiating strategy, hoping that “some kind of Brexit” would happen before the British public realized it had been duped. Today, just three months before the departure date, this deeply deceitful démarche has disintegrated before May’s eyes – as well it should.

Jacek Rostowski was Poland’s Minister of Finance and Deputy Prime Minister from 2007 to 2013.