“America First”, Fiscal Policy and Financial Stability: a report on the US economy

What does the future hold for the US economy, given its current trajectory and recent changes in government policy?

The Levy Economics Institute of Bard College, of which distinguished former associates include post-Keynesians Hyman Minsky and Wynne Godley, has just published its Strategic Analysis report on the medium-term prospects for the US.

Godley is recognised as having predicted a severe recession in the US some years before it began in 2008, due to the unsustainable build-up in private sector debt, particularly among households.

Minsky is also well known for his ‘financial instability hypothesis’ and its implication that ‘stability is destabilising’ in the financial sector of capitalist economies: periods of stable economic growth can create fragile balance sheets in the private sector, which often lead to stagnation or crisis. Continue reading

Michael Pettis on China, the US, debt and trade tensions

Michael Pettis is a Professor of Finance at Peking University’s Guanghua School of Management, and an economist whose work I have found to be original, interesting and inspiring. His book The Great Rebalancing explores the role of current account imbalances in the Great Recession and its aftermath of slow growth. I explore some of his ideas in more detail here.

Particularly relevant to today’s events is his prediction that, just as in the 1930s, in a world of limited demand, tensions over international trade are inevitable.

In the short video below, he explores some of the issues facing China’s economy over the next decade, its misallocated investment and unsustainable rise in debt, relations with the US including trade tensions, GDP and its measurement, and liberalization under different economic and financial circumstances.

Austerity, household debt and Brexit: the case for a weaker pound

What are we to make of the current performance and future prospects for the British economy and for the JAM (Just About Managing) households which the Conservative government proclaims to be trying to help?

According to recent figures from the Office for National Statistics (ONS), households, on average, became net borrowers in 2017 for the first time since records began in 1987. The savings ratio fell to its lowest annual level since 1963.

Household spending growth also fell to 1.7%, the lowest since 2011.

There was some better news on the current account deficit for 2017, which fell to 4.1% of GDP, also the lowest figure since 2011. And in the fourth quarter of last year, it fell to 3.6%. The improvement is at least partly down to the weakness of the pound and a stronger world economy boosting net exports and net earnings on foreign investments.

But the improvement in the current account is also being flattered by weaker growth in imports due to their higher cost reducing real household income and consumption growth. In an open economy, part of household income is inevitably spent on imported goods and services. A fall in the current account deficit can come from a reduced demand leakage into imports as well as increased growth in exports.

With the weaker pound and higher inflation reducing real household income, and interest rates still at very low levels, households are taking the opportunity to add to their already substantial levels of debt, rather than reduce consumption even further.

With the household sector spending more than its income, it is adding to the growth of aggregate demand, as credit acts as a net injection of purchasing power into the economy.

But with household debt already high, interest rates set to rise gradually, and real wage growth still negative, these trends will prove unsustainable. Although inflation has perhaps peaked, and real wages should start to grow once again, there is some way to go before the JAMs start to see a sustained and substantial rise in living standards. Continue reading

Inequality, global imbalances and crisis

Tracing a connection between rising inequality and the Great Recession of 2008 is appealing to leftist economists. It suggests that what they see as two of the potential downsides of capitalism and in particular the neoliberal economic order can perhaps be mitigated via appropriate policies. Thus, a more egalitarian capitalism can become less prone to crisis or recession.

Of course, what is appealing as social and economic outcomes is not a good enough reason to investigate linkages between them, though I suspect that I am far from the only one who is drawn to particular ideas as a matter of bias.

Perhaps there is nothing wrong with that as a starting point, followed by economic analysis of the chosen object of study.

An article in the latest issue of the heterodox Cambridge Journal of Economics explores the potential linkages between the distribution of income and current account imbalances in a simplified model of the global economy consisting of the US, Germany and China, prior to the 2008 recession.

These three countries had the largest current account imbalances in absolute terms in the run-up to the recession. The US ran a deficit, and Germany and China were running surpluses. Since these imbalances have been pinpointed by some economists as a cause of the recession itself, analysing them is important. Continue reading

Heterodox critiques of quantitative easing

Following last week’s quote from Michael Hudson on quantitative easing (QE), here are some other insightful perspectives which for me offer explanatory power, given the course of economic and financial events over the decade since the crisis began.

The aim of QE is to reduce long-term interest rates, boost private sector lending, and raise asset prices to generate a positive wealth effect on private spending. Altogether, these are meant to raise private sector consumption and investment, and thus economic growth.

Richard Koo, economist at Nomura and originator of the theory of balance sheet recessions, has outlined the potential problem of the ‘QE Trap’ (2015). While QE might have the effect of mitigating such a recession, once the recovery is underway, its withdrawal could lead to slower growth than otherwise. In other words, over the longer term, its overall effect might be negligible or even negative: Continue reading