My critique if the global capitalist system falls under two main headings. One concerns the defects of the market mechanism. Here I am talking primarily about the instabilities built into financial markets. The other concerns the deficiencies of what I have to call, for a lack of better name, the non market sector. By this I mean primarily the failure of politics and the erosion of moral values on both the national and the international level.

What is reflexivity?

There is a two-way connection between present decisions and future events, which I call reflexivity.

More terms as I read the book further.

1. IMF Homepage
2. Data and Statistics

The world economy will slow sharply this year and next, with the United States likely sliding into recession reflecting mounting damage from the most dangerous financial jolt in more than a half-century.

The International Monetary Fund, in a World Economic Outlook released Wednesday, slashed growth projections for the global economy and predicted the United States — the epicenter of the financial meltdown — will continue to lose traction.

“The world economy is now entering a major downturn in the face of the most dangerous shock in mature financial markets since the 1930s,” the IMF said in its report.

The IMF now projects that the global economy, which grew by a hardy 5 percent last year, will lose considerable speed, slowing to 3.9 percent this year. It is forecast to weaken even more — to just 3 percent — next year, marking the worst showing since 2002. In the past, the IMF has called global growth of 3 percent or less the equivalent to a global recession.

The IMF’s projection was made before the Federal Reserve and six other major central banks from around the world slashed interest rates Wednesday in an attempt to prevent a financial crisis from becoming a global economic meltdown.

The Fed reduced its key rate from 2 percent to 1.5 percent. In Europe, which also has been hard hit by the financial crisis, the Bank of England cut its rate by half a point to 4.5 percent, while the European Central Bank sliced its rate to 3.75 percent.

Also taking part were the central banks of China, Canada, Sweden, and Switzerland. The Bank of Japan said it strongly supported the actions.

The financial crisis, which erupted in the United States in August 2007 and has quickly spread around the globe, entered a tumultuous new phase last month, badly shaking confidence in global financial institutions and markets, the IMF said. It has triggered a cascading series of bankruptcies, forced mergers and radical government interventions — such as the United States’ unprecedented $700 billion financial bailout — to stem the fallout.

The new projections come before a gathering of the world’s top economic powers on Friday and the weekend meetings of the IMF and the World Bank. The jarring financial crisis is likely to figure prominently in those discussions.

In the United States, the economy, which grew by 2 percent last year, is projected to slow to 1.6 percent this year. Growth would screech to a virtual halt in 2009, barely budging at just 0.1 percent. That would mark the worst showing since 1991, when the country was pulling out of a recession.

“With a recession now looking increasingly likely, the key questions are, how deep will the downturn be, when will a recovery get under way and how strong will it be?” the IMF asked. Much will hinge on how effective the United States’ steps to stabilize financial markets and get credit flowing more freely again turn out to be. Another important factor is whether these and other actions turn around U.S. consumers, whose retrenchment is hurting the economy.

The IMF — and many private economists — believe the U.S. economy will probably contract in the final three months of this year and the first three months of next year, meeting a classic definition of a recession. The economy’s last recession was in 2001.

The government’s bailout package is aimed at thawing lending by buying bad mortgage-related debt from troubled financial institutions. The idea is that the banks’ books would then be cleaner, putting them in a better position to lend and get the economy moving.

The IMF said this effort should help to stabilize markets but even so “the process of balance-sheet repair will be long and arduous.” Credit availability is likely to remain constrained throughout 2009, the IMF said.

Fed Chairman Ben Bernanke warned in a speech Tuesday that the economy’s outlook for this year has darkened and the pain could last for some time. His remarks were seen as heralding the rate cut Tuesday.

Looking at other countries, Germany’s growth will slow to 1.8 percent this year, down from 2.5 percent last year. France’s growth will weaken to just 0.8 percent, compared with 2.2 percent in 2007. Britain’s economy will see growth taper to 1 percent, down from 3 percent last year. Canada’s growth will tail off to 0.7 percent this year, from 2.7 percent last year.

In Japan, growth will cool to just 0.7 percent, from 2.1 percent last year.

Global powerhouses China and India will see growth clock in this year at a robust 9.7 percent and 7.9 percent, respectively. Even if those projections prove correct, they would still mark downgrades from their blistering performances last year. Russia’s economy should grow by a brisk 7 percent this year, down from 8.1 percent last year.

Inflation around the world remains high, driven up by surging energy and food prices through much of this year.

It will be tricky for Bernanke and his counterparts in other countries to navigate weak growth and inflation pressures, the IMF said.

“The immediate policy challenge is to stabilize financial conditions, while nursing economies through a period of slow activity and keeping inflation under control,” it said.

Some economists are discussing a worse scenario, albeit one they deem unlikely at this point: Foreign investors’ confidence in the U.S. financial system could diminish and they could curtail their large investments in U.S. dollar assets such as Treasury bonds and U.S. stocks. These investments help to finance the gap between what the country spends and what it saves.

One sign of the U.S.’s vulnerability is its current-account deficit, a broad measure reflecting how much more Americans import than export. That deficit has been shrinking, but at 5.3% of GDP last year, it still was big by international standards. It makes America dependent on foreigners’ appetite for U.S. assets, since those flows finance the deficit.

Foreign central banks take the dollars from their exports to the U.S. and recycle a great many of them by buying Treasury bonds and other debt. As of 2007, foreigners owned approximately 57% of U.S. Treasury bonds, a record. They also owned about a quarter of corporate debt and a fifth of so-called “agency” bonds issued by institutions like Fannie Mae and Freddie Mac.

If foreigners stopped buying U.S. assets, or started selling them, the dollar would fall an U.S. interests rates would jump, squeezing the economy further.

In the financial crises that shook emerging markets from Thailand to Russia in 1997 and 1998, sudden cessations in foreign investment flows were common. The risk is that foreign investors could get so worried about the prospects of the U.S. economy that they would feel less comfortable investing large sums in America.

“If we were an emerging market, the exchange rate would be down 70% and interest rates would be up at 25%-that’s what a crisis looks like,” says Kenneth Rogoff, an economics professor at Harvard University.

He and many other economists don’t believe that will happen. Indeed, so far, rather than treating from assets like U.S. Treasuries, investors around have flocked to them, indicating they continue to see U.S. government debt as a haven in an uncertain world. Foreign central banks, in particular, have shown no sign of deserting Treasuries.

Source : The Wall Street Journal - Asia, Date : September 29, 2008.

Policy makers keep a focus on inflation despite market crisis.

Frankfurt – Despite financial market mayhem and mounting evidence the 15-nation euro zone will tip into recession, the European Central Bank is unlikely to cut its key interest rate before it sees concrete evidence inflation threats are waning.

Global central banks, including the ECB, took steps Friday to calm money markets. The U.S. Federal Reserve raised its currency-swap line, which lets foreign central banks channel dollars to commercial banks on their shores by $13 billion to $290 billion. With the extra dollars, European central banks added one-week loans to the roster of U.S.-dollar funding options they offer banks.

ECB policy makers believe they can keep their efforts to prop up strained money markets separate from their interest-rate policy. Since the crisis erupted in August 2007, the ECB and other central banks have routinely pumped short term cash into markets to ensure that spooked banks keep lending to one another. But, while the Fed has cut its key rate to 2% from 5.25% a year ago, the ECB raised its policy rate to a seven-year high of 4.25% in July to counter inflation threats and is likely to keep it there at its meeting on Oct. 2.

Interest-rate futures suggest investors believe the Fed is likely to cut its key rate soon, perhaps even before its next meeting on Oct. 28 and 29. However, it is unclear whether the Fed is prepared to act. In testimony before Congress last week, Fed Chairman Ben Bernanke painted a grave picture of the economic outlook, particularly if Congress does not approve a $700 billion proposed bail out for the markets. That would argue for more reductions but officials also have been concerned about lingering inflation. Moreover, they have taken note that their aggressive rate cuts to date-3.25 percentage points in the past year-haven’t done much to push down other kinds of lending rates, such as mortgage rates, which could give them pause before acting again.

On Friday, Federal Reserve Bank of St. Louise President James Bullard said that reducing interest rates in the current environment may not be very effective. Instead, he told reporters after speaking at a conference in Tennessee that policy makers have to think about other ways to get gummed-up markets operating in a more orderly fashion again.

Grim economic data have led even some ECB policy makers to say that the euro-zone economy, second in size to the U.S. could face recession this year. The welter of bad news continued Friday as France’s budget minister said slowing growth and rising inflation derailed plans for a balanced budget by 2012 and will result in a deficit of 2.7% of gross domestic product this year and next. Spain’s government said it will rein in spending next year but run an overall budget deficit of 2% of GDP amid a rapidly slowing economy and massive fiscal-stimulus effort.

There are also signs inflation is slowing. Annual inflation in Germany likely to slow 3% in September, down from 3.3% in August, the German statistics office said Friday. Inflation across the bloc is also likely to slow from August’s 3.8% rate but remain well above the ECB’s preferred range of just less than 2%.

Source : The Wall Street Journal - Asia, Date : September 29, 2008.

Dear All,

I am quite late for this post. My appologies. Check these nice links.

1. First Draft - $700 Billion Bailout Package
2. Wall Street Bailout: $700 Billion Won’t Be Enough
3. Who wins, who loses under proposed $700 billion bailout plan?
4. Bailout cost to each US family: $6,500
5. House rejects $700B bailout in stunning defeat
6. The House leadership is left wondering what can possibly bring enough votes to pass a financial rescue

Nisarg

BANGKOK – Asia central banks intervened in the foreign-exchange market Tuesday to prop up their currencies as political turmoil in Thailand spread fears across the region.

The Bank of Thailand bought baht at around one-year lows after the countries prime minister declared state of emergency in Bangkok. Prime minister Samak Sundaravej is under pressure to resign because of his coalition’s links with ousted premier Thaksin Shinawara.

Central banks in Malaysia, Indonesia and the Philippines collectively sold at least $1 billion to support their currencies, traders said.

Baht trading was marked by a “panicky” tone, a trader said. “The market has felt very nervous. There hasn’t been much volume and every one is waiting to see what happens in Bangkok.”

The baht reached a 13-month low at 34.52 baht to U.S. dollar late Tuesday in Bangkok compared with Monday’s close of 34.30 baht. Earlier, the Thai central bank began selling dollars at around 34.45 baht, a trader at a Thai bank said.

Bank Indonesia sold an estimated $150 million, trying to slow the U.S. currency as it rose to 9,207 rupiah, its highest level since mid-August, said traders in Jakarta. Late Tuesday the dollar was at 9,205 rupiah, up from Monday’s close of 9,160 rupiah.

Bank Negara Malaysia defended the ringgit, selling at least $600 million as the dollar rose to 3.4240 ringgit from 3.4190 ringgit. Late in the day, the dollar was at 3.4250 ringgit, up from 3.3940 ringgit Monday.

The Thai woes dragged the Philippine peso to a one-year low, despite central bank efforts. Bangko Sentral ng Pilipinas sold about $300 million at around 46.50 pesos, but the U.S. currency ended at 46.60 pesos, up from 46.29 pesos Monday.

In Singapore, the regional slide hit the Singapore dollar, with the U.S. currency rising to an eight-month high of S$ 1.4303 late in the day, up from S$ 1.4238 Monday. The Singapore dollar is often traded as a liquid proxy for regional currencies.

Source : The Wall Street Journal - Asia, Date : September 3, 2008.

All countries in the world hold reserves. They serve a multiplicity of purposes. Historically, reserves were used to back up a country’s currency. Those who held South African rand or Argentinean pesos might feel more confident in the currency knowing that behind the currency the country held dollars or gold, that they might in fact be able to convert the currency into gold or dollars-which in turn can be used to purchase goods and services. Historically, gold was used as “money”-the medium of exchange in which people traded. People would buy and sell food or clothing in exchange for pieces of gold. Then it was discovered that “fiat money”-pieces of paper that could be converted into gold-was far more convenient, and governments and central banks issued this money. At first, it was thought that there had to be full backing-for every dollar of fiat money issued, the government or the central bank had to hold a dollar’s worth of gold. Then it was discovered that his was not necessary; all that was required was confidence in the currency. Confidence meant that other individuals would be willing to accept the money in payment, and confidence could be achieved with only partial backing. At First, it was thought that confidence would only be achieved by using gold as backing; then it was realized that the currency (or debt) of strong economies-initially Britain’s sterling, and for much of the period after World War II the U.S. dollar-could be issued.

Reserves also help countries manage the risks they face, and this bolsters confidence in both the country and its currency. They can be drawn upon in times of need. Reserves from a buffer against unexpected changes in the cost of debt caused by an increase in interest rates. There may be a sudden hardship, such as crop failure, and the country can use reserves to import food. The amount of reserves a country needs varies, but a rule of thumb is that countries should have enough reserves to cover at least a few months of imports. Historically, developing countries held reserves to the value of three to four month’s of imports; more recently, they have held as much as eight months’ imports.

Source : Book : Making Globalization Work by Joseph E. Stiglitz

The cost of the current global reserve system to the developing countries is the most conspicuous, but it is not actually the most important cost to the global economy. The global reserve system depresses the global economy and makes it more unstable. The current reserve system makes it difficult to maintain the world economy at full employment. The money put into reserves is money that could be used to stimulate the global economy. Instead of spending the money on consumption or investing the money, governments simply lock it up.

To see the magnitude of the problem, note that the world’s economies hold more than $4.5 trillion of reserves, increasing at a rate of about 17% a year. In other words, every year some $750 billion of purchasing power is removed from the global economy, money that is effectively buried in the ground. A strong global economy requires that it can meet the world’s capacity to produce. The total demand for goods and services (the sum of the demand by households for consumption, by firms for investment, and by government) around the world is called global aggregate demand.-leading to a weak global economy-this has to be made up somehow. In the old days, many developing countries counteracted this through lax monetary and fiscal policy, leading to spending that was beyond the country’s means. While this spending made a contribution to global aggregate demand, loose fiscal policies gave rise to increasing government debts, which often precipitated costly crisis, as we saw in last chapter. With more than a hundred crises in the last three decades, most developing countries have learned their lesson.

There is one country that can make up for the inadequacy of aggregate demand that comes from burying purchasing power in the ground: the United States has become the consumer of last resort. It is able and, especially since 2000, willing to run huge deficits. There is a seeming unending appetite for reserve country bonds, and it is all too easy for governments of reserve currency countries to get more and more into debt to feed this appetite. The fact that others are willing to lend at a low interest rate creates a situation politicians find hard to resist. It is easy to run fiscal deficits, to spend more than one has. Since the dollar became the major reserve currency, the United States has twice-in 1981 and 2001-financed huge tax cuts through deficits. This helps to explain our peculiar observation earlier-that the United States is the world’s richest country, yet is living beyond its means. In this respect, it is doing the world a service. Without America’s profligacy, the fears of weak global economy, possibly so weak that prices might actually start to fall-the fears of deflation that surfaced in the early years of this century, and which have plagued Japan for a decade-might have been realized. The question is, for how long can America continue to provide this service; that is, can it continue its spending spree? And are there alternative, more equitable ways of avoiding the global downward bias?

Source : Book : Making Globalization Work by Joseph E. Stiglitz

It would be interesting to have a cost benefit analysis of the Beijing Olympics. It seems the Chinese have spared little expense in trying to impress the world with an immaculate Games.

It is estimated that hosting an Olympic games can have a net economic benefit of £5billion. Although research by Price Waterhouse and Coopers find that Olympic games rarely lead to a boost in economic growth rates.

Of course, China is not just thinking about the economic impact; they see the Olympics as a way of impressing the world. Compared to the political impact of the Games, £5billion is relatively insignificant for an economy the size of China.

These are some of the costs and benefits of hosting the Olympics.

Original Link : http://www.economicshelp.org/blog/economics/olympic-economics/