The US economy’s worrying change of pace – My Monday column

Is the US economy’s current pace set to trigger major imbalances, disrupt the current cycle and spark off a significant downturn in economic activity?

The stockmarkets’ severe recent downturn reflects investors’ concerns on forthcoming trends for the global economy, and in particular the performances we can expect from the US. Firstly, they reacted to the change in stance from the Federal Reserve on forthcoming inflation trends, expected to converge towards the central bank’s target of 2% and stay there in the long term. Secondly, rising wages confirmed this idea of nominal pressure, even if the 2.9% gain announced in January’s figures was probably a result of the reduction in number of hours worked due to unusually cold weather conditions. Lastly, the handover at the Fed added another level of uncertainty. Janet Yellen did a good job of steering the US economy, will Jay Powell do the job equally well?
I have already written at length on these matters, and an article published on will provide details on the uncertainties surrounding Powell’s arrival to chair the Fed. However, looking beyond these factors, a number of other questions are being raised about the US economy.

The first question involves economic policy and the way fiscal and monetary policies can coordinate against a backdrop of full employment. This coordination has worked pretty well so far. The US economy nosedived in 2009 and both policy areas instantly loosened: it was vital that every effort be made to avoid a drastic chain of events that would end up creating higher unemployment and a long-term hit to the standard of living. This approach was successful and the country hit its cycle trough in the second quarter of 2009, moving into an upward phase that has lasted ever since. Monetary policy continued to accommodate, but fiscal policy became restrictive in 2011 and then converged to a sort of neutral situation to avoid hampering the economy. This policy combination drove the US into one of the longest periods of growth it has enjoyed since the Second World War: the pace of GDP growth was admittedly not as brisk as before, but it did not trigger any major imbalances, as reflected by an economy running on full employment and continued moderate inflation, remaining below the Fed’s target. Continue reading

My contribution “The World Has Changed, …”

You will find below the link to an article, “The World Has Changed, and There Is a Need for Proactive Fiscal Policies” that was published in “International Banker” in the January issue.
It analyses the economic outlook and the risk associated with imbalances in the economic policy mix

“There is an economic and political malaise in many developed countries. For most of them, their growth profile is lower than what it was before the 2007/2008 crisis. In the US, the trend growth is marginally above 2 percent, and this cycle is the weakest since World War II. And even if the unemployment rate is low, close to full employment, the perception is that there are still rooms for improvement, but in an environment without wage pressures. This is a new situation…..”
Read here


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

A Discussion on Public Debt

Is public debt a constraint? Lars P. Syll gave recently an answer by quoting Abba Lerner who, in 1948, made a distinction between private debt and public debt. The first is reflected ultimately in a transfer of an actor of the economy to another to meet his commitments. In this case the debt is actually a constraint for one who is committed to repay.

For public debt indicates Abba Lerner, the question is not posed in the same way as generally residents of the country hold the debt. It’s a debt a country has on itself and it shouldn’t be an issue. Nevertheless there is the question of the intertemporal allocation of resources. A general argument is that a higher public debt could lead to impoverishment of children and grandchildren. This argument is swept by Lerner indicating interests and repayments of the debt will be done in the future to children and grandchildren. This is what has long been observed and still is in Japan, where public debt is majority owned by residents. The level of public debt is circa 240% of GDP and this doesn’t provoke a crisis.

Beyond Japan, the argument developed by the Moldavian-born economist is not always relevant. Continue reading

Mario Draghi’s speech in Jackson Hole? A game changer

In his speech in Jackson Hole, Mario Draghi has launched new thinking for a new economic policy in the Euro Area.
His starting point is the analysis of unemployment (major theme this year in Jackson Hole) which has short-term and more structural explanations. He said that in such an environment, monetary and fiscal policies must be coordinated in the short run to support demand and that at a mid-term horizon structural reforms were needed in order to improve competitiveness and growth autonomy (his text is here)

Short term issues
Mario Draghi is clearly worried as the Euro Area can be characterized by its low economic momentum, its high structural unemployment rate and its low inflation rate (0.4% in July)
Continue reading

Euro Area: A new policy mix that could favor growth

Last week was important may be decisive for the Euro Area. For the first time since the end of 2008, just after Lehman bankruptcy, government policies and monetary policy will both support economic activity on the same side. They will support internal demand in order to boost growth and employment.

This can be a game changer. Until now and since 2011 monetary strategy was accommodative but governments were committed to stabilize their public finance and their debt. This policy mix was compatible with an economic dynamic that requires fine tuning. This was not compatible with the drop of activity seen since spring 2011. The policy mix change seen last week reflects mainly a change in the European Commission policy as the EC forecasts a recession in 2013 after a recession in 2012. The situation does need a fine tuning but a deep change that recognizes that the Euro Area is still far from its potential trend and from full employment.
Continue reading

Public Debt and Growth: Elements of a Controversy

Economists like controversies. An important one has emerged recently. The issue is the importance and the role of public debt and more generally of fiscal policy in the business cycle management.

The starting point is an article published in 2010 by two American economists: Carmen Reinhart and Kenneth Rogoff. The main result of this paper is the following: when public debt is above 90% of GDP it has a strong negative impact on growth. Below this level there is no clear statistical link between public debt and growth. In other words, when public debt is above the threshold then average growth on the sample used by the authors is -0.1%. The sample is 20 developed countries from 1946 to 2009.
Too much debt kills growth.

Continue reading