Capital controls (Cyprus)

Given the result of the negotiations over the Cypriot banking crisis, it is worth looking at capital controls in more detail. In class before spring break, we concluded that capital controls might become more relevant again, and the standard layout of the impossible trinity (with capital mobility as a default) might change.

In a post on the Financial Times website, you can read more about capital controls (free registration required). One link in this post worth checking out is to a NBER working paper by Magud, Reinhart, and Rogoff. The paper has a section on capital controls during the financial crisis in Malaysia that is quite relevant to what we discussed and to the Cypriot situation currently.

Update: An IMF paper by Ostry et al. presents more evidence on the effect of capital controls on capital inflows. For instance:

In general, capital controls are found to have little impact on the total volume of capital inflows and thus on currency appreciation. For example, the imposition of inflow restrictions by Brazil, Chile, and Colombia in the 1990s had no significant impact on total capital inflows, nor were pressures on the exchange rate alleviated (Figure 1). In fact, over the course of their capital controls, the real effective exchange rate appreciated by about 5 and 4 percent annually in Brazil and Chile, respectively. In Thailand, the real exchange rate started appreciating within a week after controls on short-term flows were imposed in December 2006. The most recent episode of controls in Colombia (during 2007–08) was also ineffective in reducing the volume of non-FDI inflows or in moderating the currency appreciation (Clements and Kamil, 2009).

New Strategies for Central Banks

In a recent article by The Economist, central banks are seen to be moving from using just monetary policy to rejuvenate economies to "coupling monetary policy action with commitments designed to alter the public's expectation of interest rates, inflation and the economy".  The new direction on policy would include "tolerating higher inflation, in pursuit of higher output", which is directly opposite of what a central bank normally works to do.

From what we learned in class, the Federal Reserve Bank works to maintain full employment and low inflation, but has recently realized that there is a "conflict between pursuing lower inflation and higher employment" and will now look to see which of the two is at a more unsatisfactory level and focus on that one.  This would be a very different action plan for the Fed who staunchly believes in price stability.  In this link by trading economies, you can look at the inflation rate of the United States over any period of time.

A few things to consider about this new view on inflation and unemployment is that some believe that it could give the US economy a Chinese level GDP growth by letting inflation be higher that nation can create jobs to eliminate its jobs deficit. However, allowing for higher inflation also hurts bond holders and those who have a fixed income because it would lower their purchasing power.  The move by the Fed is now being replicated in Britain and Japan. What should be considered is the effects that allowing higher inflation in the long term would mean considering that higher inflation discourages investment, erodes savings, stimulates capital flight, and could even cause political unrest in extreme cases.

America Losing Its Edge?

Is America losing its competitive economic edge to compete in the global market? Although the immediate dangers and fears of the 2008 recession have gradually reduced, the long-term worries regarding growth still loom in the face of future American generations and policy makers. This question faces many as the position of the US recedes to the “world’s seventh-fittest economy, a big slide from first place just four years ago” (TheEconomist). These conclusions come from a report conducted by the WorldEconomic Forum, which rate a country’s global competitiveness (1-7 scale) according to 12 pillars. These include: institutions, infrastructure, macroeconomic environment, health and primary education, higher education and training, goods market efficiency, labor market efficiency, financial market development, technological readiness, market size, business sophistication, and innovation. The only pillar in which the US trumps all other countries as number one is market size. The others seem to come under competition from emerging and expanding economies such as China.  

Recalling President Obama’s State of the Union speech, many of these issues/pillars were addressed. He vowed to advance education by redesigning high schools and making college more affordable, proposed to improve infrastructure through a “Fix-It-First” program, and make “America a magnet for new jobs and manufacturing”. Yet with all of these proposed improvements, economic growth “is sluggish, unemployment is high and investors are wary”. Various reasons can be pointed to but one that particularly stands out is America’s political gridlock. The disputes between Republicans and Democrats have led to dysfunctional politics that threaten any political, social, or economic advancements.  Even Bill Clinton has been quoted on the fighting in Washington saying, “We live in a time where there's this huge disconnect between the way the political system works and the way the economic system works”. These political battles mostly revolve on decisions regarding health care, social security, and how to approach the massive public debt.

Hearing all of these pessimistic speculations can often lead to an overwhelming sense of burden and loss of faith in America’s future. However, there is indeed hope. New reforms and innovations are occurring vigorously at the local and regional levels. Spending on research and development has dramatically increased. Intellectual property rights are well-respected and upheld. Last month, businesses added 236,000 workers, indicating that America’s economy is in fact generating jobs. It seems as if America’s growth and improvement is seen in just as much of a controversial light as the political differences in Washington. It remains a prominent debate whether the US economy is indeed recovering or declining. 

Explaining Cyprus

Over the past week, the financial crisis in Cyprus has dominated headlines.  On Tuesday the Cypriot parliament voted down the first proposed solution to the crisis, which involved a tax on bank savings at 6.75 percent on deposits of 20,000-100,000 euros, and 9.9 percent for deposits of 100,000 euros or more, that would generate the 5.8 billion euros to secure a bailout from the EU.  It comes as no surprise that this proposition was voted down, due to the political consequences that come with taxing the bank accounts of all citizens.  In the context of IPE, such a unpopular tax would anger constituents thereby making it highly unlikely that incumbents in the Cypriot government would be reelected.  In the worst case scenario, it could lead to mass protest which would threaten Cyprus's political system and eliminate faith in its economy.  

How did all of this start?  An article in The Atlantic provides a fairly detailed summary.  It highlights four essential things you should know about Cypriot banks in order to understand how this crisis came about.  First, Cypriot banks have assets equal to about eight times the country's GPD, due to its status as a tax haven.  Second, many Russian oligarchs looking to avoid taxes in Russia make up a huge percentage of the assets in Cypriot banks.  Third, Cyprus invested heavily in Greece in the form of loans to the Greek government, which has opened black holes on bank balance sheets.  Fourth, Cyprus is highly dependent on central bank financing to stay afloat--Cypriot banks are too big for Cyprus to save.  All of this led to a bailout offer by the European Central Bank (ECB), in which Cyprus has to come up with 5.8 billion euros.  

Since the Cypriot parliament voted down the first proposed plan (for good reason), the ECB has warned it will take the bailout deal off the table if a new plan is not in place by Monday, March 25th.  At a recent meeting in Nicosia, the capital, politicians again ruled out an unpopular tax on bank deposits and agreed to set up an investment fund as part of an alternative plan. 

This crisis in Cyprus highlights several important points.  First, the constraints politicians face when making decisions that affect the economy.  Second, the problem of being tax haven.  Third. the problem of the ECB, conditionality, and its implications for certain Eurozone countries (i.e. Cyprus, Greece, Spain).  If Cyprus cannot formulate a plan by Monday, it is likely that we will see contagion within the Eurozone, possibly in the form of bank runs.  

Sketchy Friends: The Story of Cyprus and Russia

Cyprus has become the Euro-zones most recent problem child.  Over nine months ago Cyprus first requested a bailout.  On March 16th Euro-zone ministers offered Cyprus a €10 billion ($13 billion) bailout; however there were multiple strings attached.  The most important condition was that part of the bailout money would be generated by a one-time tax levied on individuals who had deposits in the Cypriot banks.  There is a maximum limit on withdrawals and Cypriot banks have been on “holiday” since the crisis occurred to stop a rush on the banks.  Three days after the bailout was proposed the Cypriot parliament rejected the deal.

Individuals that have money in Cypriot banks were not thrilled with this proposal.  This is where new friend Russia comes into play.  Many banks in Cyprus have large deposits from rich Russian citizens, estimated around $31 billion.  Therefore Russia has a vested interest in the Cypriot banks.  Vladimir Putin has spoken out against the bailout proposal  He states, “such a decision, if it is adopted, will be unfair, unprofessional and dangerous.”  Russia wasn’t nearly as concerned for Cyprus’s Greek neighbors.  However, Russia didn’t have nearly as much money in Greece either.

The original bailout had potential to set precedent in the Euro-zone.  Previously, there was an agreement that stated individual savings would not be hurt by the bailouts. However, the most recent deal to Cyprus would go back on those promises.  Additionally, the money collected from depositors would only add up to around €5.8 billion.   Previous bailouts have been larger than the proposed Cypriot bailout and not included taxes on private savings.  This shift in financial policy could signal political intentions behind the bailout.   Cyprus has the reputation for attracting less than reputable deposits, especially Russian deposits.  Many individuals have money in Cyprus to avoid paying heavy taxes imposed by domestic banks.  Is the Euro-zone punishing Cypriot banks for being a tax haven?

The Economist reports that the Cypriot government might be seeking assistance from Russia.  Does the solution to Cyprus’s current financial problem include making a deal with the Russians?  Although a deal with Russia is unlikely to tax private savings, Russian will want something in return.  There is speculation that Russia will exchange bailout funds for a partial stake in Cypriot gas.  The decision is ultimately up to the Cypriot parliament but their decision will have far-reaching consequences.  What does it mean when the Euro-zone cannot save one of its own members?  How much will the Russians actually take from Cyprus?  Only time will tell.

Austerity video report

The New York Times posted a noteworthy video report about the "Austerity Zone: Life in the New Europe" in 2010. Although this is about 2.5 years old, it is very worth watching.

Unemployment, The Fed, and The Welfare State: Is it sustainable?

For the past decade, unemployment rates have been skyrocketing and college graduates looking at joining the workforce have become decidedly more discouraged. According to an article published by NBC News entitled "Fed projects high unemployment into 2015," the Fed has predicted that for the next two years unemployment will remain above 6.5%. This suggests that monetary policy will also continue to dictate extremely low interest rates for the foreseeable future. As we discussed in class, an important tactic for fixing unemployment can be raising interest rates. This will in turn raise investment in the country and encourage businesses to hire more people, effectively lowering the unemployment rate.

We also discussed the idea the while monetary policy can help reduce unemployment in the short run, it will not necessarily fix it for the long run. It is possible that the unemployment rate will even out at its own equilibrium, however that equilibrium may be too high. In the article entitled "Unemployment Rate Ticks Up to7.9 Percent," published by US News, it is suggested that while job production is growing, it is very slow and steady. Meanwhile, the unemployment rate continues to grow.

In relation to the unemployment rate is the welfare system. Through the past decade this program has been growing, especially due to the growing number of citizens claiming unemployment. On March 19, 2013, an article published in the Wall Street Journal entitled "Why Are States Cutting Unemployment Benefits," it is shown that those programs may now be shrinking once again. The reason lies in the amount of debt accrued by the state due to the unemployment programs. Instead of increasing taxes on employers to pay off this debt which some groups say could deter hiring, the states are cutting back on benefits. Is this system of unemployment sustainable?

Burgernomics: Exchange Rates and Purchasing Power Parity Analysis Using the Big Mac Index

Especially during the presidential debates in 2012, but even now there has been significant discussion of China's undervalued exchange rate. In class, we have discussed the benefits of having an undervalued exchange rate. The greatest benefit is to domestic exporters, who can sell a lot more products to foreign importers because their prices seem relatively low.  Politicians worry about China's undervalued currency because it gives Chinese exporters an unfair advantage over American manufacturers. A firm is going to buy where the price is lowest, so if a dollar can buy a lot more product from a Chinese producer than an American one, the firm will buy from China. This presents a significant disadvantage for American manufacturing, and therefore should be (and is) a large concern for politicians.

However, an article by the Economist takes a much less alarmist stance on the issue. The article argues that traditional measures actually exaggerate the real value of the yuan, claiming that it is undervalued by around 44% in relation to the dollar. The Economist pegs the value closer to 7%, hardly a cause for alarm,. The Economist uses an amusingly simple system called the Big Mac Index to calculate currency valuations. For a detailed explanation of their newest version of the Big Mac Index, click here. Essentially, the Big Mac Index compares the price of Big Macs around the world with the GDP per capita in each country. The Big Mac Index is theoretically sound because it essentially represents a consumer basket similar to what is use dint he PPP method of exchange rate evalutaion. While Big Macs are not themselves easily traded goods, most of the ingredients that comprise a Big Mac (beef, cheese, sesame seeds, etc) are easily and highly traded goods.

Critics of the Big Mac Index are plentiful. The Balassa-Samuelson Effect claims that you would expect prices to be higher in high-income countries because of labor costs, which are a non-traded good. In the latest article on the topic, the Economist responds to this criticism by first acknowleding that even a seemingly small undervaluation of 7% can have a large impact on economies as large as China. Secondly the Economist says that

"Critics of burgernomics say that you would expect average prices to be cheaper in poor countries than in rich ones because labour costs are lower: PPP signals where exchange rates should head over the long run, as a country like China gets richer, not where prices should be right now. Even so, the perennially undervalued yuan has scarcely moved towards the Big Mac measure of fair value. That, many reckon, is down to meddling by the chefs at the People’s Bank of China, who are relying on export growth for sustenance: China posted a larger-than-expected $36.1 billion trade surplus in December, thanks to 14% growth in exports year-on-year."

While China's currency manipulation is certainly concerning, it is nothing to fight over. More importantly for Europe, the Economist says that the Japanese yen, and even the American dollar and the British pound, have become significantly undervalued in comparision with the euro. If the European Central Bank does not or cannot intervene to slow the appreciation of the euro,  exporters in the Eurozone could see a decrease in revenue in the very near future.

Cyprus: Proposed solutions fail, banks remained closed, a grim outlook for the island nation

Cyprus has been ridden with political conflict for so many decades, one could be easily confused just trying to figure out whether or not Cyprus is an autonomous state. Instead of political conflict, Cyprus’ most recent conflict is economic and involves their banks failing. A Wall Street Journal article entitled, “Cyprus Risks Euro-Zone With New Levy Plan” describes a new proposal, which differs from traditional bailouts quite substantially. Instead of the traditional bailout mechanisms used by the EU, a bill was drafted and sent to Parliament that would tax deposits to Cypriot Banks. The banks have been closed for fear of a bank run and do not expect to open today or tomorrow.

The bank deposit tax was rejected today (Tuesday the 19th), however, and in an article by the New York Times, entitled “Cyprus Rejects Deposit Tax, Scuttling Bailout” cites that the bailout was not put through partially because of criticism that such a measure was unprecedented and could cause further failure of the banking system. Criticism was notably vocal from the Russian government. Another reason cited by this article for why the bailout didn’t go through was that ordinary depositors with insured accounts would have to take on the cost of the deposit tax. There is danger in this because it causes a loss of faith in the banking system when they seemingly start to make up rules.

This led me to question: how is it that such a relatively small country in the Mediterranean have a large enough deposit pool to make taxation on the deposits almost equivalent to the 5.8 billion Euro bailout Cyprus is searching for? (The deposit tax is projected to leave them a couple hundred million Euro short). It turns out, according to an article by The Guardian entitled, “The Super Rich Who Have Made Cyprus Their Home” has been giving out citizenship relatively easily and drawn the worlds wealthy to be citizens of Cyprus because the taxes there are much smaller than many other nations. “Some of the super wealthy are expected to have to deposit 17 million Euro of their private fortunes due to the new tax provisions”. I am sure they are breathing a heavy sigh of relief that this bill did not go through, but it doesn’t mean that Cyprus is out of the woods. Anything but; they now have no solution and no open banks. In the New York Times article cited above they note that President Anastasiades, the EU and the IMF will have to turn back to negotiations and quickly, as reopening banks without a solution would be a tough blow for Cyprus. The question remains, what kind of solution will best suit Cyprus? And who should be making this decision, Cyprus, the EU or the IMF? Is it possible for 3 actors with differing and competing interests to come up with a solution?

Europe: A Continent Divided?

In recent years, due to fiscal conflicts in places like Greece and Italy, there has been much debate about whether the Euro is feasible as a currency and if its use should be continued. Critics of the currency argue that it should be dissolved amid questions of widespread debt, globalization and a changing European market. This has led to a split among Europeans regarding fiscal policy: one side argues that a populist policy encouraging domestic trade is the proper course of action while an opposing side argues that embracing the coming wave of globalization is the right approach. While some argue that globalization is inevitable and Europe would be better off embracing it, others say that globalization will “strip Europe of the technologies that made it rich”. The Euro zone appears to be in a downward spiral, with the many member states heavily in debt (Greece, Ireland, Spain, Italy, etc.) and the banks failing as a result. http://www.economist.com/node/21536872 The implications of the Euro being dissolved as a currency remain unclear, but what is clear is that the effect will be felt worldwide.

The debate over whether the Euro should be kept as a currency is heated, but the it is far from over. Mario Draghi, President of the European Central Bank, is cautious in pursuing monetary policies regarding the Euro, citing the need to keep the rate of inflation low. When questioned about the so-called “cuurency war” regarding the Euro, he is dismissive, though he does stress the importance of maintaining a watchful eye over the strength of the Euro. http://www.reuters.com/article/2013/02/18/us-ecb-draghi-currencies-idUSBRE91H0EX20130218

So, the question for Americans is, how will a currency crisis in the Eurozone affect the US economy? A Eurozone crisis would have an adverse effect not only on the US economy, but on the global economy. There has been much debate and frustration over the slow recovery here in the US from the recession of 2008, but it has now become clear that the recovery, fragile as it is, is threatened by the European debt crisis. http://www.nytimes.com/2011/11/12/business/global/european-turmoil-could-slow-us-recovery.html?_r=0  As one expert pointed out, the US and Europe have one of the largest trade relationships in the world, accounting for roughly a third of the world’s trade. Consequently, any action that weakens the value of the Euro weakens the value of the dollar as a result. With such a large portion of the international financial market on the line, the US should stay informed and up to date on the fiscal news in the Eurozone.

North Korea's current account

The Peterson Institute for International Economics published an interesting blog post about North Korea:

Is North Korea running a current account surplus?

Japan and The Trans-Pacific Partnership

The BBC recently published an article, in which it revealed that Japan had requested the opportunity to join on-going talks regarding the proposed Trans-Pacific Partnership, a free trade agreement being negotiated by 11 countries. The agreement itself is aimed at boosting trade ties in goods and services between its member states. Japan's economy is currently in a period of recovery, and its President, Shinzo Abe has said that "Emerging countries in Asia are shifting to an open economy one after another. If Japan alone remains an inward-looking economy, there would be not chance for growth," adding that if Japan refused to make the necessary steps to integrate further into the world economy, it "would be left behind."

Recently, in an effort to boost all-important exports, Japan announced that it was pursuing policy that would depreciate its currency. This announcement ignited fears that the Yen's depreciation could set of a competitive devaluation war with China, although almost every G20 announced that it would discourage such threats, as it could result in irreparable damage to Japan's recovery.

While Japan is doing its best to continue its rough recovery, there are domestic political constraints that could stand in the way of Japan's entry into the TPP. The trade pact is expected to lead to big reductions in tariffs on goods and services between member states, thereby boosting trade. However, while many of Japan's massive MNCs are seen as supporters of joining the group, Japan's agricultural sector has been vociferously voicing its objection to joining the TPP. The reduction of tariffs on imports would place drastically reduce the ability of its farmers to export goods. They are anxious to "win exemptions from the TPP’s “zero-tariff” principle. According to agricultural cooperative JA Group, the elimination of tariffs would threaten Japan’s $48 billion in agricultural produce, making nearly all Japanese wheat, sugar and beef uncompetitive and wiping out a quarter of all rice production."

Overall, it would be wise of Japan to avoid protectionist impulses from such pressure groups, and allow Japan to specialize its production patterns and do what it does best. This subject is a good example of our class discussions on domestic politics and their influence on international trade. Not only that, but here we can also see yet another FTA emerging, which, as we now know, are challenging to the influence and mission of the WTO. It will certainly be interesting to see where this situation will end up in the next few months.

Comparing Crises: Latin America and Europe

The debt crisis that plagued Latin America in the 1970s and 1980s created a panic that spread throughout the region and, consequently, the world.  The governments of these countries found themselves in somewhat of a disastrous situation when came the IMF’s bailout loans and structural adjustment programs in a response to the crisis.  The majority of Latin American economies “shrank by an average of 7% in total through the 1980s,” poverty increased 8% in just a decade, and “around 6% of the region's income each year was being lost overseas in debt payments,” according to a last year article from The Guardian.  The decision to bailout these countries stemmed from fears of what could result from defaulting on debt, but no interest played more of a role than that of the Western banks that fed the problem through a considerable amount of loaning during the commodity boom in the 1970s. As bluntly put in an article revisiting the crisis, the IMF lent the countries money “so that they could pay back the banks that were threatened with going bust as a result of their stupidity.” While what subsequently came to be known as the Lost Decade was certainly not intended, the interests of the Western banks were most likely taken into more consideration than the actual well being of the Latin American people. As the former Colombian minister of finance Jose Antonio Ocampo argued, the IMF's bailout in the 1980s "was an excellent way to deal with the US banking crisis, and an awful way to deal with the Latin American debt crisis."

All this directly parallels the current financial crisis troubling the Eurozone today.  In one manner of looking at the situation, Greece is in much of the same state as were the Latin American countries: Greece is having to answer to the rest of Europe and the ECB, while Latin America had to do the same to the Western banks of the 1970s and 80s. Additionally, just as the banks faced insolvency if Latin America defaulted on their loans without a bailout, Greece still poses a threat to the rest of Europe unless it too is helped.

The question is then if Greece should be “helped” in the same way that Latin America was helped thirty years ago, or should the world have simply let Greece default on its loans? Different views exist, pulling on different theories and historical lessons.  Some think that the rescheduling of debts will be ineffective, while others do not. This is the “longstanding and unresolved tradeoff that is perhaps the key pending assignment” for Europe today. Regardless, it is worth considering whether or not Europe is taking from what lessons the Latin American debt crisis has to offer.

Sequestration

The United States sequester forces politicians to focus their goals by eliminating a crucial negotiation tool- time.  Sequestration gets rid of the possibility of choosing to wait as a power move in pursuing one's own policy goals.  The two houses have already failed to meet two deadlines, and must now agree to something before March 27th, or some offices of the federal government will stop operating immediately. We have already felt the effects of this phenomenon in our personal lives, receiving emails from the administration letting us know about cuts to their budget forcing the elimination or reduced funding of our student groups. But out of this phenomenon that is regarded as a failure we get to see different actors in a more transparent light, and their true priorities are more visible. Even well known agendas will be easier to achieve with this forced lack of funding.

Obama has already made a move to support research for cleaner fuels instead of continuing oil and gas leases Obama's $2 Billion Plan. And although this sequester is partially caused by a refusal of house republicans to compromise on the debt ceiling, the shock seems to have made an impact on some  Republicans who have now expressed interest in defense spending cuts which could mean shutting many American bases worldwide. There could be some potentially devastating effects for America's economy in the long term, as some crucial research projects are being shut down and drastically cut. This is significant when you consider the shrinking number of low-skilled jobs in the United States and our general direction towards a service economy. This may have an impact on trade because it may make the American market slightly less attractive, but as we have discussed in class, the research to marketing time in America is always desirable.

The real question we face is whether the effects of this measure are extreme in the short or long term.  We will be able to predict with more certainty at the end of the month when we know if the two parties have come to an agreement.

Low Growth in the UK Economy

A recent Economist article titled Dropping Shopping explains the recent contraction of Britain’s economic growth rate is due to the drop of consumer spending. Consumer spending has gone down in the past year due to the 10% increase in gas prices and 6% increase in electricity prices. Later this year electricity prices are due to increase a further 10% in fall. Although unemployment has been decreasing gradually in Britain, wages have not. The explanation for wage stagnation is due to the lack in productivity improvements from the labor force. If the labor force cannot produce more per given hour of work then the employer will never be empowered to pay more out in the form of wages.

Britain’s government has tried to increase demand for goods in Britain by having its central bank participate in Quantitative Easing. QE in this case would allow the Central Bank to print new money in exchange for mortgage bonds in order to push down the interest rate of mortgages. The goal of this plan is to bring down the mortgage interest rates for homeowners which will help free up disposable income in households. This increase in disposable income will then help increase the demand of goods and help increase the economic growth rate. The problem with this plan is that it’s not working because interest rates are still stuck at high levels. Another problem is Britain’s high savings rate. The current savings rate is at 7%. The economist article states that if the savings rate were to drop to 4% a 3% decrease, it would lift GDP growth rate by 2.7%.

Solutions for Britain’s economic contraction range from increasing the minimal wage, stopping the job cutting in the public sector, unfreezing the public sector wages, and increasing spending from the government to the tune of 30 billion pounds. Britain’s economic solution since the 2008 Financial Crisis has been Austerity. In class we have discussed Keynes argument for increasing government spending when the private sector demand falls. In the short run this will help the economy recover from its recession. Britain has taken austerity route over the increase in government spending. A Financial Times article titled UK: budget no plan B outlines that things will get much better by the second half of this year. The IMF is quoted in the article stating the British economy has been the fastest EU economy to recover from the 2008 crisis. It also stated that austerity measures have not negatively impacted the British economic growth rate. It also predicts a .5% increase in economic growth rate per quarter in the second half of this year. If austerity measures in the British economy do lead to a healthy economic recovery in the second half of this year, will other ailing EU economies take the same prescription the British government has taken to fix its economy? 

News Horizons: Monetary Policy in the Developed World

An article from the Economist, “Brave New Worlds”, explores the strategic horizons of rich-world central banks as they turn to more “doveish” policy stances. The article explains that after four years of trying to reinvigorate economies, the central banks of America, Britain and Japan are “experimenting with a shift in approach – coupling monetary action with commitments designed to alter the public’s expectations of interest rates, inflation and the economy”. This sense of change, says the article, is reinforced particularly by the promise of new political leadership in Japan. Likewise, the article also discusses challenges facing the Bank of England and the Federal Reserve in the crosshairs of upholding mandates to maintain low inflation and high employment. It may be an era that witnesses higher inflation rates, according to the article

 In particular, I think much of what we have discusses in class can be viewed through the lens of Japan. An another article from the Economist, “Win Some, Lose Some”, takes a look at the monetary policy debate specifically Japan, an issue over which the prime minister and the central bank are butting heads. Shinzo Abe, the new prime minister, has declared to curb the independence of the Bank of Japan in order to “strong-arm” the country out of its entrenched deflation and spiraling debt. The move would sacrifice monetary autonomy, but potentially reflate the Japanese economy.

Like we have discussed in class, there is a “trilemma” that lies in the balance of fixed exchange rates, free capital flows and sovereign monetary policy. A country can fix its exchange rate without weakening its central bank, but only by maintaining control of capital flows. It can leave capital flows free and retain monetary autonomy, but let exchange rates fluctuate. Or it leave capital free and stabilize the currency through fixed exchange rates, but only by relinquishing monetary autonomy.  Referencing comments made by Krugman, the article describes Japan’s situation as a “looking-glass realm in which virtue is vice and prudence is folly”, that is, perhaps the government is onto something by letting interest rates and inflation run their course.

However, as the article points out, the Bank of Japan is refusing to relinquish its sovereignty without a fight, expressing misgivings about its ability to meet the expectations of Abe’s regime change” in economic policy. It set a 2% inflation target and agreed to open-ended asset purchases, but time frame appears to be a vision on broad horizons rather than a tactical plan. The Bank of Japan has also attempted to mediate another part of Abe’s economic policy – fiscal stimulus. The article explains, “Monetary easing alone does not boost GDP much if the private sector cannot be persuaded to borrow, so the government provides the missing demand via stimulus”. The central bank’s asset purchases are meant to ensure financing will be available for the stimulus. Altogether, the Bank of Japan has not yet taken the reforms in stride, weakening Abe’s leverage on monetary policy.

           

In addition, there is talk of deregulation and new trade agreements. Another big idea floating on the table is using the bank to buy government bonds. However, the most controversial ideas may have to wait on the back burner until an upper-house election in July. But many feel that the country cannot “afford to linger”. Altogether, this also brings into account the importance of institutions in determining how governments make monetary policy decisions.  For an interesting article on that front, check out “The Voice of Public Choice”. In a testament to the late economist, James Buchanan, the article analyzes an era of fiscal deficit and growing debt from misguided monetary policy in the United States.

Raising the Minimum Wage

I ran across an interesting set of letters in my sacred Sunday New York Times that were written by readers reviewing an article in last weeks paper that covers the issues of income inequality and raising the minimum wage.  The writer of the article,Christina D. Romer, an economics professor at the University of California, Berkeley, and was formerly the chairwomen of President Obama’s Council of Economic Advisers, wrote the article explaining her skepticism of raising the minimum wage.  Like most progressives I support the majority of the President’s policies and thought initially that raising the minimum wage from the national average of $7.25 to $9.00 an hour, raising the annual income of a full time minimum wage worker by $3,500 sounded like a good idea for targeting inequality for those living under $40,000 a year.  After reading the article there was some interesting points that Romer brings up that should be thought about critically.  Romer says, “Evidence suggests that employment doesn’t fall much because higher minimum wage lowers labor turnover, which raises productivity and demand.”  Romer goes on to argue that perhaps productivity increases because a higher minimum wage attracts better workers that are part of a higher socio economic status such as middle class workers, which then take the jobs from lower income workers which defeats the idea of helping the poor.  Romer goes on to say that another reason employment will not drop off is that businesses deal with a higher minimum wage by raising prices on their products that put the burden on consumers.  The Catch 22 here is that consumers that pay low prices on goods such as the regular customers at McDonald’s, have typically lower incomes and are affected greater by price increases and the minimum wage is hurting rather helping in this scenario.  Romer advocates increasing the earned income tax credit, a subsidized payment from the government added to wages, which is more efficiently targeted to helping the poor without the other consequences of raising the minimum wage.  According to Romer this increased tax credit would increase the amount of labor leading to increased employment without minimum wage deterring employers from hiring.

In the letters, Matthew Atkin from Boulder, takes a collective view stating that Romer is somewhat careless in her write off of the small amount of money redistributed and spent by the poor when compared to the whole economy if minimum wage is increased.  Another letter written by Cleroa from California gives a more positive view of the article by stating that increasing the minimum wage would lead to more jobs being cut.  As has been a theme in this class those with capital have a different set of interests than labor.  Those with capital want more capital and those in labor want to keep their jobs that have good wages.  However as we see with Matthew and Cleroa, they have different interests even though they would likely be described as on the side of labor.  Matthew wants to see inequalities addressed and living conditions improved by raising the minimum wage whereas Cleroa wants to keep her job and she fears that a raising minimum wage would lead to job cuts.  Both have good points relating to the article with different interests. Is raising the minimum wage the best way to deal with the inequalities of our nation’s disadvantaged?  The simple answer to this complicated question is no but it’s not the worst way either according to Romer.

Australia's biggest job increase since 2000

According to BBC news article, "Australia adds 71,500 which is the biggest job growth since 13 years.  In February of 2013 full time employment rose by 17,800 and part time employment went up by stagnering 53,700 reported by the Bureau of Statistics when analyst had only expected only 9,000 jobs job increase.  There was also a rise in the over all workforce which includes people which were employed and people who were still looking for jobs.  The unemployment rate remained at 5.4%.  According to the article of course with the huge job boost for the last month economic conditions seems to be getting better in Australia.  Governor Glenn Stevens who heads Central Bank had been easing monetary policy since 2011 to increase job growth and the reason for that was Australia's mining boom was going decreasing during the global economic meltdown.  Therefore central bank tried there best in boosting performance in other sectors of the economy however the interest rates remains at 3%.   Over all economy is looking great in Australia for now since there housing market shows signs of improvement as well.  However it seems like the strengthening of the Australian dollar remains the main concern because it increased more than half a cent to $1.036 as traders were fearing that there might be another interest rate cut on it's way.

Having learned about how low interest rate makes consumer wants to borrow money worked in Australia.  There interest reduction probably lead to people wanting to invest in properties as well besides the job increase.  When people have jobs they are more likely to buy things or invest because there is strong consumer confidence.  However the demand for employment seems to be much more part time than full time in Australia right now which  might lead to problems because people would rather mostly work full time than part time hours.  My concern is that if the employment rate rose up so quick than how long would it last?  It probably won't be sustainable for too long because how long can the central bank keep it's interest rate low.
http://www.bbc.co.uk/news/business-21781493

Insourcing Apple Production

In early December, Apple CEO Tim Cook finally confirmed that one of the existing Mac lines would indeed be exclusively manufactured in the United States early next year during his interview with NBC's Brian Williams. The idea of bringing Apple's outsourced production back to the States has been a growing rumor since November and mixed responses have risen since Cook's announcement.

Cook however, is proud to be apart of this expanding insourcing (reshoring) trend, telling multiple news outlets that it's extremely vital to bring jobs back to the United States. He points out since January Apple has already created 600,000 jobs in the States. These jobs vary from research and development to assembly production and marketing. Apple currently has data centers in North Carolina, Nevada and Oregon and is expecting to build a new centers in Texas this month. Cook notes that Apple was forced to consider alternative venues for production after criticism from the global community still emerged regarding the alarming suicide rates seen at their plants in China, which notably are still run by Foxconn. With such success seen in insourcing back to the United States , why doesn't Apple leave China completely and begin manufacturing everything from home?

Cook simply responded "it's not about price , but rather the lack of skills". Surprisingly, Cook and many other businesses who have production abroad feel that the United States education system is failing to produce enough people with the skills needed for modern manufacturing production processes. He also notes that the consumer electronic market is not as large in the United States as many people think. Harry Moser, head of the Chicago based Reshoring Initiative , seconds Cook's claim that American workers are far behind in terms of modern manufacturing production. Moser believes the United States should stick to what they are efficiently trained in when it comes to manufacturing and notes that other countries will continue to dominate high tech production in terms of manufacturing processes this year. He further states that the U.S. won't be able to make a dent in this high tech market , at least not enough to balance the trade deficit.

 With all this being said what truly is the future of manufacturing in the U.S.? We further explored this idea earlier in the course by posing the bigger question,  if the overall goal is to create jobs in the United States , why produce at home? I can see Cook agreeing that the flexibility and quick feedback loops obtained from consumers domestically would be appealing to produce in the States, but would he maybe argue that the labor force might actually be less productive at home due to the fact that they are lacking the skills demanded to compete within the modern manufacturing production processes? Does China have a comparative advantage in producing these modern high tech goods? These are questions I think are good to ponder , especially with insourcing growing in popularity. Regardless of what one thinks, no one can deny that recent data points to manufacturing at home as an increasing trend.

Spain: Rising from the Rubble

Troubled with the a triple shock of property values crash, the global financial crisis, and a frail Eurozone, Spain is facing unemployment that tops 25%. According to the Keynesian course of action, the government is required to instill policies that can raise unemployment and instill a prosperous outlook for domestic companies. However, many of the larger companies in Spain are balancing their losses in the domestic market with foreign gains. Spain’s largest retail bank, Santander, was able to handle a 6.5% loss in the European markets with a 5.5% gain in Latin America. Along with other major companies, these foreign gains are raising the stability of domestic producers by promoting foreign investment. Spain has taken a different approach than a traditional Keynesian one by loosening their restrictions on many monetary policies, specifically their national wage agreements. This has created a situation that has allowed for lower unit labor costs. The Keynesian cycle claims a high unemployment rate creates a scenario that results in a cycle of low demand and continued unemployment. Rather than attempt to adjust wages domestically to increase demand, Spain is allowing wages to continue to drop in order to increase foreign investment. Doing so has already resulted in Renault, Nissan, and Ford to invest in production facilities throughout Spain, mirroring Germany’s course of action in the past decades. Coupled with the increasing revenue from international companies, Spain is poised to rise out of its devastating position.

The problem arises when attempting to balance domestic woes and promoting local stability. The EU is pressing Spain to change their sales tax and wage laws to reflect IMF standards. Bonds in Spain are holding the lowest yields in 14 months. In order to create lower borrowing costs, Spain recently sold €803 million in both long term and short term bonds. Together with wage reforms, they are attempting to promote a stronger domestic market. Germany has warned Spain against this course of action; they claim that the only reason such reforms are passing is due to strong political stability, compared to Italy’s predicament. Germany asserts that by creating such low interest rates and wage costs, it detracts from the stability of the EU as a whole. Spain and Italy are in similar situations, and if Spain continues down this path it has the potential to offset production in Italy. This poses the threat that if Italy were to decline once again, it would drag Spain down with it, and in turn lower the value of the Euro.

Spain has a promising future, as they are increasing textile and manufacturing jobs to ail the high unemployment rate. They are lowering borrowing costs and using their strongest companies to act as a beacon for sustained growth. Realistically, they can’t act so selfishly in the global market. Lowering their costs and selling their bonds are having direct effects on the gains in Italy. This threatens market stability in hopes of raising domestic stability. There is growing concern, especially among Germany and the UK, that Spain’s new reforms are overly expansive. Due to the nature of the Euro, Spain’s actions have the potential to cause devaluation, holding drastic consequences for the hard fought gains of other EU nations. Is there course of action the right one? Should they be fixing the home front before adjusting fully to assist their neighbors, or should they adjust their laws to reflect IMF averages, which may cause long term stability, but handicap domestic producers.

Banking in Africa

One of the world’s largest untapped markets is the banking system in Africa. Currently, only about a quarter of adults have bank accounts at formal financial institutions. Many domestic banks have begun to start up all over Africa. They face two major problems, a lack of infrastructure and short-term returns. The reason why a good amount of the big international banks (such as Citi) have stayed away from banking in Africa is that in order to develop this market there needs to be a network of branches opened wherever they want to do business. Large banks will usually not go into a new place until the per-person GDP of the area is $10,000 dollars. If they want to tap into the market of people who don’t have bank accounts they need to go into poorer regions, which is too risky for them. This is why regional banks are the ones putting their own networks together. It is risky, but they really have no choice if they want to do business domestically. Starting from scratch requires a good amount of capital and a group a very patient investors to be successful. The investors need to be patient because the returns in the short-term will be very little compared to the possible returns of the long-term. These regional banks take a bottom-up strategy in that they have to build their infrastructure by collecting deposits locally and meeting with clients face to face.

The regional startups do have one advantage over the larger, older banks. And this is the technology that they are starting with. Companies such as MasterCard have made it extremely easy for a bank to set up a credit card business. The startups have to purchase all the modern technology in order to be competitive. The advantage of this is that the regional banks have to buy just one level of technology, while big international banks have to piece together their “legacy system” together that has been around since the 1960’s. A banking-technology firm estimates that the regional banks will only have to pay 30% of their income to costs such as technology. This is in sharp contrast to the major international banks that average out at paying around 50% of their income. 

So, do you think that this “boom” in domestic banking startups is good or bad? Is the lack of infrastructure in Africa going to be the demise of these banks? 

American equity markets are recovering. However, they are not out of the woods yet.

For now, it looks like the low interest-rate; easy money jump start policies are working out for the American economy.  Equity markets are rising, and many economic metrics such as employment, down from about 10% in 2009 to around 7% today, are showing signs of improvement.  So for now, it looks like lower interest rate and monetary expansion policies are helping to lower unemployment and fuel economic growth – Just like we discussed in class.   In addition, “tale risks” have been avoided for now; the Euro zone is still in one piece and Washington DC did not kill the economy over tax and spending policies.   For the moment, it looks like the expansionary Keynesian economic policies are doing their job.

Unfortunately however, Keynesian expansionary pump up policies are primarily designed to jump start an economy that needs to recover from a shock and are not intended to be used on a continual, never ending basis.  Such is human nature - naturally, governments have a very hard time taking their foot off the gas.  It is very much like an addiction to pain medication.  Just take a look under the hood and you will find signs that this recovery is, not that solid.  First of all, Washington DC still has much real work to get done regarding tax and spending policies decision making.  In addition, some EPS measures show the equity market is overvalued as much as 50%.  With profit growth slowing, lower expected EPS, and spendy, indecisive government bureaucrats, greater risks for the equity markets lie ahead unless the fundamentals start to catch up to the lofty valuations and Washington figures out a way to get their job done.

America's Economy - Ready to Work

The recession that took place in America in 2009 brought a lot of questions to the table in regards to the  economy. According to the Bureau of Labor Statistics (BLS), unemployment reached a historic high of 10% in October of 2009, which ultimately lead to new legislation and policy reform. Since then nearly 6 million new jobs have been created, causing the unemployment rate to fall to its current level of 7.7%. This is all good news in regards to the American economy, but the big question still remains. How will employment stand up in the face of so much uncertainty surrounding the "fiscal showdown"? One thing is for sure though, the automatic sequester to cut government spending is certain to eliminate jobs in some sectors.

In February alone, the U.S. economy added roughly 236,000 new jobs. This is no doubt good news, but in order for the positive employment trend to continue, economic growth must increase. While unemployment has been falling and wages have been rising, the sequester still looms to push these positive trends in the opposite direction. Since we have been talking about fiscal and monetary policy in regards to the exchange rate, I felt it would be a good idea to look at the effects of the upcoming sequester on employment, interest rates, and the exchange rate.

It is uncertain what till happen to unemployment in the long run, but in the short run, many government funded industries will experience job losses due to the sequester. Since the major aspect of the sequester is to cut government spending, many of these cuts will be seen in the healthcare and defense industries, as they are greatly financed by the government. While the Federal Reserve has promised to keep its target interest rate at zero, it will only do so until the unemployment rate falls below 6.5%, and medium-term inflation must not rise too far over 2%.

These numbers all point to a positive future for labor, but not as bright a future for capital. As we have learned in class, labor wants low unemployment and capital wants low inflation and high interest rates. With the Fed targeting an unemployment rate of 6.5%, monetary policy seeks to keep interest rates low, while increasing the money supply. While interest rates remain near zero, it seems as if the government wants to shift the demand for capital towards an increased demand for labor. As these low interest rates will help the unemployment problem, they tend to make money worth less (depreciate) which ultimately causes inflation. Once the unemployment level has reached the Fed's target of 6.5% it will be interesting to see where the demand for capital is. I think that America seems to be fixing its battle with unemployment, however, once the unemployment rate reaches the Fed's target, I think that demand for labor will begin to decrease and the demand for capital will start to increase again.

A Brave New World of Finance

Many factors contributed to the 2008 financial crisis.  Among them were collateralized debt obligations, CDO’s, and over the counter derivatives, OTC's.  CDO’s are collections of many different types of bonds, which can consist of AAA-rated bonds, to junk bonds.  When many different bonds are put into a larger portfolio they can be labeled as less-risky and sold at a price that reflects the risk.  OTC derivatives are derivatives traded outside of listed exchanges, like NYSE or NASDAQ; so, it is possible only the two parties involved in the trade are aware it ever happened.  Back in 2002, Warren Buffett went as far as to call derivatives, “ticking time bombs,” and “financial weapons of mass destruction.”

After the financial crisis, the Dodd-Frank Act was passed in an effort to promote financial stability by improving transparency and accountability in financial markets. To achieve this, many financial practices were regulated, including OTC’s, and oversight was increased for institutions that posed a “significant systemic risk.”  James Glattfelder gives an interesting Ted talk about the highly centralized nature of the global financial system, which leads to increased systemic risk.

      

In an effort to circumvent new regulation some banks are turning to a new technique called collateral transformation, which is essentially a process where you give the bank low-quality bonds, pay a fee, and get high-quality bonds in return. Kyle Spencer, a writer for the blog, seeking alfa, claims this will create additional systemic risk.  A recent article in the Financial Times half-jokingly compares the practice to ancient alchemists trying to make gold.

“It’s not a new idea, it’s a new way of packaging” Jamie Lake – Former Goldman Sachs collateral manager

So why does all this matter?  Some estimates put the size of the world derivative markets in excess of 600 trillion dollars, which is around 9 times the world GDP. New regulations, like the Dodd-Frank act, are intended to prevent these huge markets from getting out of hand, again.  However, if ways around this legislation are found, there could be another financial crisis on the horizon.

China & Cars

Earlier in the semester we discussed how trade & globalization are affecting the environment. For example a negative affect that comes with increased trade is the exploitation of natural resources, but the affects of trade are not all negative, as we are also seeing an increase in wealth. However, with this increased wealth there are externalities that are beginning to surface. An example of an externality from increased wealth may be pollution from production or newly acquired automobiles. The problem of pollution and smog is something that China has been dealing with over the last few years.

The Economist talks about China's "Blackest Day" The article shows how hazardous the smog is for the people of Beijing, but I think it is interesting that it does not mention how this smog might affect the world community's air quality as well. Air pollution often cannot be constrained to only one country, and will therefore transcend borders and effect many people. If "tens of thousands of Chinese are reckoned to die each year because of this foul air" then what are the consequences for the world?

Clearly, this increase in smoggy days is due to the fact that China's  becoming more "wealthy" due to trade and globalization. As discussed, as a country becomes more wealthy, they start purchasing things that often signify an increased salary, like meat or cars. Over the last few years, the automobile market in China has increased. While this article is a bit outdated, it gives a good idea to how many people in China aspire to own a car and the effects that may come with that, and have, as we have seen in the articles posted above and with the exploding car population.

As discussed in lecture, as a country becomes "post industrial  it will demand more environmentally sustainable technology, like cars with better gas mileage or even electric cars. In the future, this might be a solution to China's smog problem.

Fix exchange rates to revive growth

With the 2008 financial crisis, it has been crucial to increase worldwide economic growth. Central bankers have discussed the possibility of using currency depreciation to help improve competitiveness, production and employment.  Though this leads to a currency war and an exchange rate battle.

“With the exchange rate itself having little intrinsic value, fixing it would allow governments to use monetary and fiscal policy to target desired levels of unemployment and inflation”.

In the post second world war era, the exchange rate “…served as the anchor enabling western market economies and Japan to facilitate a greater role for the private sector domestically, and to pursue freer trade externally, reviving the global economy”. And even though the Eurozone is not perfect, the single currency did help encourage the free flow of goods.

The author argues that China would benefit from having a fixed exchange rate again, after dropping it in 2005. As learned in class a fixed exchange rate is easier for engaging in trade and exports. Such a system would be easier for a country like China, who extensively trades with the US. Fixed exchange rates in China would help support the competitiveness for their goods abroad. The article also states that in the countries of the US, Europe, Japan and China, “…they find that competitive monetary easing measures, and uncertainty about exchange rates, hold back rather than promote recovery”. The security of the fixed exchange rate will help the growth of the countries by increasing capital flows and encourage longer- term investment in projects.

As learned in class, if China pegs to the US dollar, they will give up sovereign monetary policy. This is a result of the Impossible Triangle also known as the unholy trinity, trilemma or the inconsistent trinity. A country can only pick two of the three options, a fixed exchange rate, free capital flows or sovereign monetary policy. If a fixed exchange rate falls, governments will buy its own currency, which increases demand, and if it appreciates governments will buy foreign reserves and sell its own currency.

http://www.ft.com/intl/cms/s/0/c3486b18-6c7f-11e2-b73a-00144feab49a.html#axzz2NG7CWtAt

What to Expect from the ECB

The President of the ECB, Mario Draghi has high hopes for gradual recovery for the bank by cutting interest rates. As we talked about in class, interest rates in some cases can be good, but others bad. Low interest rates can be good in situations such as home buyers and borrowers, but not often for others. Those trying to make interest on their savings will continue to struggle. Central Banks in many developed nations are engaged in an “easy money” policy. When interest rates start to rise in countries, it is a good sign because it indicates that business loans are in higher demand. This is not the case in Europe and instead interest rates are being cut and inflation is still an issue. “Three months ago they had expected the euro-zone economy to shrink by 0.3% this year and to grow by 1.2% in 2014. Now they are forecasting a contraction of 0.5% in 2013 and growth of only 1% next year”. It is impossible for central banks anywhere to always have stable targets without paying attention to the activities of banks and other agreements.  These activities can be affected by a various central bank policies that redistribute the monetary across the different economic sectors.

Today, the main problem facing the European Central Bank (ECB) is “that the improvement financial markets over the past six months has not helped firms in southern Europe”.  It is important that instead the ECB keep moving instead of remaining on hold. If businesses are not borrowing money and banks are not lending, the flow of money will be less and more money will be printed causing greater inflation. Europe needs to develop a better strategy for growth such as changing incentives on loans.

What should the ECB do? Not set their expectations so high? While raising interest rates may not seem like a good short term goal it is important to find an alternative solution sooner than later. 

article source: http://www.economist.com/blogs/freeexchange/2013/03/central-banks-europe

European interest rates

Today the European Central Bank announced it would not cut interest rates further as many had hoped.  Due to the ongoing Eurozone crisis, the ECB is projecting that growth will continue to slow throughout the year.  As we discussed in class earlier today, a way to deal with this slowdown potentially could involve cutting interest rates down.  This would spur further investment and consumption and would help dig the Eurozone countries out of a recession.

Struggling Eurozone countries seem to be hoping for a further decrease in the interest rate.  Since cutting rates causes the euro to depreciate relative to other currencies, this could help spur exports and stimulate local economies further.  In the past month's Italian elections, voters turned down austerity measures and budget cuts that were listed on the ballot.  Greece has voted similarly in the past as well.  Yet Mario Draghi, the ECB head, seems determined for these countries to put their fiscal houses in order in spite of voter sentiment before they receive any other help.

A second interesting article that is worth a read describes the potential benefit to struggling Eurozone countries of a large depreciation of the euro.  For most of the Eurozone except Germany, countries are running a negative current accounts balance.  A depreciation of the Euro would help these countries to reverse the trend and end current accounts deficits.  Although the magnitude of depreciation in the article seems a little unrealistic, it is interesting to see that the ECB refuses to cut interest rates any lower given how much it could help out.  Germany must be applying a lot of political pressure to keep them higher.

Brazil: Interest rates to remain at all time low

According to the Financial Times, as of Wednesday March 6th, The central bank of Brazil will keep the country's interest rates at an all time low of 7.25%. Copom, which is the Central Bank of Brazil's monetary policy committee, released  a vague statement that left many on edge. "The Committee will accompany the evolution of the macroeconomic scenario until its next meeting, and then set out the next steps in its monetary policy strategy." While Brazil remains one of the largest economies in South America, it is not alone in its desire to keep interest rates low. The Untied States, who has been a long time friend and partner with Brazil in terms of trade and bilateral agreements, has also been keeping interest rates low. (near zero %)

The reason both the United States and Brazil, two economic powerhouses, have set their interest rates so low, is to encourage borrowing and spending by consumers and help boost the economy. Low Interest rates "help households and businesses finance new spending and help support the prices of many other assets, such as stocks and houses." The Federal Reserve in the Untied states is required by law to set monetary policy to achieve maximum employment, stable prices and moderate long-term interest rates. Copom in Brazil is set to similar standards and many people in both nations trust these institutions. 

Such low interest rates are fond amongst domestic consumers but do not sit well with foreign investors. If people can borrow more, they will buy more and help stimulate the economy. With lower interest rates often comes the devaluation or weakening of the dollar or currency. With your domestic dollar weakening, imported or foreign goods will be more expensive, thus making more sense to buy domestically produced goods, helping to stimulate the economy overall. When interest rates are set low, inflation is something to worry about. When demand exceeds the supply of a good, prices go up and slow the economy down. Raising the interest rate can help fight  high inflation and attack foreign investors. Higher interest rates typically bring a stronger dollar into play which ultimately leads to more demand for a stronger dollar. Foreign investors are looking for the highest rate of return on their investments, and with a high interest rate and strong currency, that is their best bet. 

Time and inflation rates will tell how long Brazil and the United States can keep their interest rate low. For now, strengthening the domestic economy in terms of consumer spending is all that matters for each. 

European Migration

As the world moves increasingly towards globalization, human migration can be seen as a right. Britain's government has been forced to deny allegations that they have had a plan to use propaganda in Romania and Bulgaria to discourage them from coming to Britain. They have also moved to implement "entitlement cards" that would be required for all citizens. These cards would be issued to all citizens that would allow them the benefits and services of the government. Cards like these are just another way for countries to discriminate against migrants. This is curious economically, because immigration has its benefits. Britain offers some of the finest universities in the world, and many of the brightest minds are foreigners. Many of these students may stay in the country, and an educated population stimulates the economy. This article says net migration is at its lowest since 1999 in the UK. This is seen as a success by many in Britain, and it boils down to perceived abuse of the their benefit system.

They don't have one of the most generous benefits system in Europe, yet many believe that migrant workers would be a drain to that system. All evidence points otherwise, as migrants show to be a net gain to the system, as they are much less likely to tax credits or live in social housing. It seems from a government standpoint that perceived racism is bad for their image, and makes little sense economically.

Money seems to be the main concern for the UK, as they continue to recover from the economic downturn. Their GDP growth was only .2% for all of 2012, but they have a historic low for their interest rates. Meaning they are leading an expansionary monetary policy in the attempt to lead themselves to economic success. This very much discourages foreign investment. Britain is discouraging migration, while hoping to spur domestic lending. Meanwhile their net migration is falling. It will be interesting to see if their current policies and attitudes lend themselves to future success.

Euro Zone Crisis: Time to Celebrate?

This Economist article talks about the decrease of the interest rates in Spain and Italy, which as of January 2013, both countries closed with a 2.5 percentage points lower than last years. This January closure has set optimism to the minds of the European investors and economists such as Huw van Steenis, an analyst at Morgan Stanley, "reckons that banks (mainly those in the core of Europe) may repay €100 billion-200 billion ($133 billion-266 billion) of the €1 trillion in cash they borrowed from the central bank in 2011 and 2012. As well as Mario Draghi, the president of the European Central Bank (ECB), says that a 'positive contagion' is sweeping through Europe." Institutional investors such as pension funds and insurers are now also returning to these markets. Part of the explanation for this is that Spanish and Italian bonds still offer strong yields. Although these numbers may sound promising, “cautious investors such as insurers tend to sell bonds that display high volatility or that fall rapidly in price because these variables affect their internal measures of risk.” This optimist idea that Europe may give the illusion of a light outside of the tunnel approach, but that may be a little premature; there is a whole other side of Europe that still has to have an economical upgrading.

Perhaps, it is not yet time to celebrate, it is time to cooperate in order to have a fiscal policy that can lead to the time of celebration, as an article on Foreign Policy stated, “every month Europe's stronger economies are getting pulled deeper and deeper into a crisis they neither can control nor have fully explained to their citizens.” This vast European economic scandal just may also have another ally that can contribute to the closure of the Euro Zone Crisis, the US has increased its free trade agreement with the EU, in which can promote security and stability in the European market, creating incentives for investors to invest in Europe and increase the export of manufactured goods from Europe.