Economic Recovery: Sustaining U.S. Economic Growth in a Post-Crisis Economy
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The most obvious possibility is that Chinese holdings of US Treasuries could be dumped, either as a move in the trade war or to secure liquidity in response to a slowdown in China. That could easily produce a systemic collapse. Hopefully, the Chinese authorities are aware of this fact and will move cautiously. John Quiggin is an Australian laureate fellow in economics and professor at the University of Queensland, and a board member of the Climate Change Authority of the government of Australia.
Visit John's website his website here and follow him on Twitter here. Jeff Miller. The business cycle has become longer in recent decades. It follows no schedule. Many are itching to call a cycle top, but the actual evidence does not support that conclusion. This is possibly the most important topic for investors, so I have sought those with the best expertise and records.
I have learned three things. First, no one can do an accurate business cycle forecast more than a year in advance.
Even a cursory review of past records will show that. Third, many of those who have the right tools use too many variables in their forecasts. There are not enough relevant past cases to apply a large number of independent variables. Using a lot of variables seems sophisticated, but it actually over-fits the model to past data. What do I think? I am careful not to exaggerate what we can actually conclude. We can safely say that a recession has not already begun despite some doomsayer claims and that the odds against a recession starting in the next year are And the cause?
No one knows that either, although it usually happens after a pop in the ten-year yield, a later move in short-term rates via the Fed, and a yield curve inversion. That process may play out again, but we are early in the story. Visit Jeff's website Dash of Insight and follow him on Twitter here.
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Wolf Richter. Financial crises happen all the time.
Currently, there are several underway, including in Argentina and Turkey. A financial crisis is generally limited in impact, unless the economy where it takes place is very large and very interwoven with the rest of the world.
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The Financial Crisis in the US — when credit froze up in a credit-dependent economy — became the Global Financial Crisis because the US economy and banking system are so massive, and because US investment products, assets, and speculative bets are shuffled far and wide around the world. If a financial crisis breaks loose in China, it will become a global crisis, but likely on a much smaller scale than the US Financial Crisis since Chinese bonds and other assets and bets are not nearly as globally distributed as those originating in the US. But a financial crisis in Italy will not become a global financial crisis.
It will be tough on Italy and perhaps some other Eurozone member states, and it will ruffle some feathers globally. But that will be it. Going forward, there will be many financial crises, and they will be mostly limited to the economy where they occur. But every now and then there will be a big one. Ken Houghton. Often the crisis comes from somewhere entirely different.
Equities, Russia, Southeast Asia, global yield chasing; each time is different but the same. The first unforced error is Interest on Excess Reserves. This was a quaint, arguably academic, problem with Fed Funds running in the 0. As bank liabilities decline, balance sheet adjustment is an identity. Increasing assets, though, would require greater lending.
Earnings Before Management, once removed from reality. For that, we need more complications. Two things happened in The first was floating exchange rates finished correcting from long-sustained imbalances. The second was that energy costs moved closer to their fair market values, also from an artificially-low level. When expected losses dwarf menu costs, you change the menu—raise prices, even as your customers are seeing the same issues on a micro scale. Finding an equilibrium takes time. Additionally, they are complications in the Chinese economy, even ignoring a general slowdown in their growth, there are possible squalls on the horizon.
As part of that, the land was nationalized and then leased out by the state—for 70 years. Those leases expire beginning in October of —less than twelve months from now. If Chinese real estate and rental prices move closer to a fair market value, the consequences of that will have to be managed domestically, leaving China with limited options in the event of a global contraction. If the early s taught us anything, it is that an exogenous shock can wither Aggregate Demand.
If the rest of the world repeats its austerity gaffes and China cannot stimulate, whither Aggregate Demand? Corporations continue not to invest, banks continue not provide viable investment options, and demand continues to slow in the face of rising global interest rates. Miles Kimball. There are two different types of extreme financial events; one is a crisis, the other isn't.
In , banks and other financial firms were so highly leveraged that a modest decline in housing prices across the country led to a wave of bankruptcies and fears of bankruptcy. By contrast, the dot-com crash at the beginning of the millennium led to a large decline in stock prices, but no domino effect beyond that. Because most stock-holding is done with wealth people actually have, rather than with borrowed money, people's portfolios went down in value, they took the hit, and basically there the hit stayed.
"Economic Recovery: Sustaining U.S. Economic Growth in a Post-Crisis Ec" by Craig K. Elwell
Leverage or no leverage made all the difference. Stock market crashes don't crash the economy. Waves of bankruptcies in the financial sector—or even fears of them—can. The lesson is: Don't allow much leverage in the financial sector! Financial leverage means borrowing a lot. What does it mean to not allow much leverage? When people buy common stock, they know they are taking on risk. By contrast, when banks borrow, whether in simple or fancy ways, those they borrow from may well think they don't face much risk, and are liable to panic if there comes a time when they are disabused of the notion that the don't face much risk.
Common stock gives truth in advertising about the risk those who invest in banks face. If banks and other financial firms are required to raise a large share of their funds from stock, the emphasis on stock finance. This book has persuaded many economists. Sometimes people point to aggregate demand effects as a reason not to reduce leverage with "capital" or "equity" requirements as described above.
New tools in monetary policy should make this much less of an issue going forward. And in any case, raising capital requirements during times of low unemployment such as now is the right thing to do. Sometimes people think the economy as a whole will take on too little risk if banks are required to have low leverage.
My view is that if the taxpayers are going to take on risk, they should do it explicitly through a sovereign wealth fund, where they get the upside as well as the downside. See the links here. The US government is one of the few entities financially strong enough to be able to borrow trillions of dollars to invest in risky assets. However controversial that is, providing an implicit guarantee to financial firms that get the upside while the taxpayers foots the bill for the bailouts should be more controversial.
The way to avoid bailouts is to have very high capital requirements, so bailouts aren't needed. Miles Kimball is the Eugene D. Eaton Jr. Professor of Economics at the University of Colorado and also a columnist for Quartz.