Blanchard: Looking Forward, Looking Back

Interview of Olivier Blanchard – He was Economic Counsellor and Head of Economic Research at the IMF

Olivier Blanchard will step down as Economic Counsellor and Director of the IMF’s Research Department at the end of September.

He will join the Peterson Institute for International Economics in October as the first C. Fred Bergsten senior fellow, a post named for the founder of the influential 35-year-old, Washington-based think tank.

When French-born Blanchard, a former chairman of the economics department at the Massachusetts Institute of Technology, joined the IMF on September 1, 2008, little did he realize that he would be at the center of a global economic storm. Two weeks later, Lehman Brother’s bank collapsed, marking what many consider the start of the 2008-09 global financial crisis.

“The crisis was a traumatic event during which we all had to question many cherished beliefs,” said Blanchard. This included questioning various assumptions on the role of fiscal policy, including the size of fiscal multipliers, the use of unconventional monetary policy measures and macroprudential tools, capital flows and measures to control them, labor market policies and the role of micro and macro flexibility. “And being in a position to question gave me the opportunity to make a difference,” he said.

Blanchard says he now wants to take the time to research fewer issues more intensely.

“For the past seven years, he says “I’ve been answering a thousand questions, but not in a very deep way. I want to take ten of these thousand questions and answer them more deeply.” One of the issues he plans to examine is the various measures countries can use to control and mold capital flows.

IMF Survey interviewed Blanchard about global economic issues, the IMF’s role in furthering economic and financial stability, and what is was like to be in the hot-seat job of chief economist.

IMF Survey: You have at times pushed the envelope of IMF thinking and policy positions. How has this been received inside and outside the IMF? Continue reading

Central Bankers and Inflation

I have liked central bankers’ discussions on inflation at the Jackson Hole symposium.
The ECB confirms that there will be a bit more inflation and that it justifies the implementation of QE
The Fed and the BoE expect an acceleration of the inflation rate in the future because, when this will be the case, it will justify the contemporary implementation of more restrictive policies.
But in all three cases, inflation is non-existent today.
This gives a very weird vision indicating that central banks still do not really understand inflation trigger mechanism. That is why there is no urgency to intervene. It will probably be more effective to intervene a little too late a little too soon.
Note also that 2% inflation is just the what is considered as neutral for central bankers it is the target for every central bank. An inflation rate of 2% is equivalent to price stability. It doesn’t correspond to an inflation rate that diverge with a high risk to go much higher.
Central bankers do not succeed to find a way to converge to the 2% target. Moreover they give the impression that the situation around the target is asymmetric: not so bad below and combat it urgently beyond. Not sure that the asymmetry is desirable when it is accompanied by limited wage growth which affects the dynamics of domestic demand, major source of growth (see here)

Chinese Fluctuations

China has played a major role in all of the stock market fluctuations seen in recent days. However, analysis of this should be discriminating. The Chinese economy has not suddenly collapsed, it is more the Shanghai stock market that has adjusted sharply downwards.
A clear distinction should be made between the two phenomena and we should keep in mind that stock market fluctuations are always excessive relative to economic movements. Paul Samuelson, probably the most influential economist in the post-war period, indicated that the stock markets had forecast nine out of the last five recessions.
The Chinese economy is no longer that which enjoyed growth of 10% a year over two decades. The development of a sizeable middle class has radically changed its growth model. This middle class has other needs than those noted in an economy that is taking off. China is currently in this transition phase. It needs to adapt its economy to more diversified growth with a larger share for services.
This transition is causing and will continue to cause a lower growth rate. If the Chinese economy’s profile follows that of Japan and South Korea, in around 10 years, GDP should therefore grow in range of 3-5% a year. Continue reading

The graph that worries me a lot: An Update

I have recently written a series of posts (here, here and here) in which I said I was worried by the poor trend of the world economy.

The point I developed was the following
World trade momentum is atypical and low, lower than what it used to be in the past.
The main reason is the absence of growth drivers that could pull up the world economy. In the past the United States did the job. More recently, at the beginning of the 2000’s, China was the main source of world growth improvement. They were able to push up the world economy in order to converge to a higher trajectory.
Currently neither the US nor China have the possibility to play this role. Europe which is at the start of a moderate recovery is not able to create such impetus.
In other words, even if trade level is still very high, there are no sources that are able to improve world growth trade dynamics. Continue reading

Uncertainty and adjustment on markets

Five points on the current situation
1 – Global level: the expected growth for the world economy is low, no strong drivers in the US, Europe and China. That’s our scenario (we had before the current crisis see my blog here)
The Chinese move on its currency a week ago is a signal that after having done a lot to support their internal market (large SOE indebtedness, stock market bubble) they have tried to improve the situation by depreciating their currency.
It’s a signal that says that the situation is worse than expected
2 – On market the message is: the world economy will have a longer period of low growth without inflation. It means that investors have to rescale their expectations to this trajectory. By itself it’s not a contagion from China to the rest of the world by mechanical means, it’s the fact that growth prospects are persistently lower than thought
3 – Chinese authorities have a role here: they didn’t accept the convergence of the equity market to a kind of fair value after the burst of the bubble. What we’ve learned from 1987 notably is that , in order to reallocate resources, it’s better to let the market to adjust by itself with an accommodative monetary policy
The Chinese authorities have blocked the adjustment by forbidding sales and by imposing investment to brokers. The market is probably still far from its fair value and this will imply further adjustments. This will lead to uncertainty as every Chinese investor will try to exit from the market. (see here)
4 – The good point associated with this situation is the fact that oil price drops dramatically. This will be positive for European economies as consumers’ purchasing power will be boost.
So the impact for western countries will be limited:
a- Because if growth is weak in China, the equity market adjustment is not the sign of a recession
b- Equity markets will adjust downward with volatility in Europe but if the sequence is not too long it will not affect behaviors. It is just if the crisis lasts that we could have an impact on confidence
c- Lower oil price will have a positive impact – The price could go lower (remember 1998 )
5 – This situation will lead to lower interest rates. This is what we currently see with 10Year TBonds at 2% but the probability of a non-action from the Fed at its next meeting (16-17 September) is increasing. The global monetary stance is still accommodative and will remain for an extended period (see here)

On the usefulness of Public Debt for Growth

Public debt is always the source of deep and intense discussions. It’s often the case in France but it’s currently also the case in the USA with republicans’ candidates. Usually, public debt concentrates all the uncertainties and concerns about the future. A too rapid increase of the public debt is often perceived as a persistent deterioration of the future.
Happily this is not that simple
Continue reading