Roubini: Global economy running on one engine

More bad news from "Dr. Doom."  Doesn't Roubini know that a Republican Congress will solve everything, and that despite its higher growth rate, the U.S. is still inferior to austerity-loving Europe?

Roubini's analysis is going to be so far over the heads of my Tea Party friends who think belt-tightening by the public sector is the answer to everything, the European example be damned. 

Bottom line: Team Keynes was right. Either you're a Keynesian cheerleader and get to sip his milkshake at the victory party, or you're with the losing team sent home to your trailer community in mirthless shame on a quiet bus.

The Single-Engine Global Economy

By Nouriel Roubini

October 31, 2014 | Project Syndicate

The global economy is like a jetliner that needs all of its engines operational to take off and steer clear of clouds and storms. Unfortunately, only one of its four engines is functioning properly: the Anglosphere (the United States and its close cousin, the United Kingdom).

The second engine – the eurozone – has now stalled after an anemic post-2008 restart. Indeed, Europe is one shock away from outright deflation and another bout of recession. Likewise, the third engine, Japan, is running out of fuel after a year of fiscal and monetary stimulus. And emerging markets (the fourth engine) are slowing sharply as decade-long global tailwinds – rapid Chinese growth, zero policy rates and quantitative easing by the US Federal Reserve, and a commodity super-cycle – become headwinds.

So the question is whether and for how long the global economy can remain aloft on a single engine. Weakness in the rest of the world implies a stronger dollar, which will invariably weaken US growth. The deeper the slowdown in other countries and the higher the dollar rises, the less the US will be able to decouple from the funk everywhere else, even if domestic demand seems robust.

Falling oil prices may provide cheaper energy for manufacturers and households, but they hurt energy exporters and their spending. And, while increased supply – particularly from North American shale resources – has put downward pressure on prices, so has weaker demand in the eurozone, Japan, China, and many emerging markets. Moreover, persistently low oil prices induce a fall in investment in new capacity, further undermining global demand.

Meanwhile, market volatility has grown, and a correction is still underway. Bad macro news can be good for markets, because a prompt policy response alone can boost asset prices. But recent bad macro news has been bad for markets, owing to the perception of policy inertia. Indeed, the European Central Bank is dithering about how much to expand its balance sheet with purchases of sovereign bonds, while the Bank of Japan only now decided to increase its rate of quantitative easing, given evidence that this year’s consumption-tax increase is impeding growth and that next year’s planned tax increase will weaken it further.

As for fiscal policy, Germany continues to resist a much-needed stimulus to boost eurozone demand. And Japan seems to be intent on inflicting on itself a second, growth-retarding consumption-tax increase.

Furthermore, the Fed has now exited quantitative easing and is showing a willingness to start raising policy rates sooner than markets expected. If the Fed does not postpone rate increases until the global economic weather clears, it risks an aborted takeoff – the fate of many economies in the last few years.

If the Republican Party takes full control of the US Congress in November’s mid-term election, policy gridlock is likely to worsen, risking a re-run of the damaging fiscal battles that led last year to a government shutdown and almost to a technical debt default. More broadly, the gridlock will prevent the passage of important structural reforms that the US needs to boost growth.

Major emerging countries are also in trouble. Of the five BRICS economies (Brazil, Russia, India, China, and South Africa), three (Brazil, Russia, and South Africa) are close to recession. The biggest, China, is in the midst of a structural slowdown that will push its growth rate closer to 5% in the next two years, from above 7% now. At the same time, much-touted reforms to rebalance growth from fixed investment to consumption are being postponed until President Xi Jinping consolidates his power. China may avoid a hard landing, but a bumpy and rough one appears likely.

The risk of a global crash has been low, because deleveraging has proceeded apace in most advanced economies; the effects of fiscal drag are smaller; monetary policies remain accommodative; and asset reflation has had positive wealth effects. Moreover, many emerging-market countries are still growing robustly, maintain sound macroeconomic policies, and are starting to implement growth-enhancing structural reforms. And US growth, currently exceeding potential output, can provide sufficient global lift – at least for now.

But serious challenges lie ahead. Private and public debts in advanced economies are still high and rising – and are potentially unsustainable, especially in the eurozone and Japan. Rising inequality is redistributing income to those with a high propensity to save (the rich and corporations), and is exacerbated by capital-intensive, labor-saving technological innovation.

This combination of high debt and rising inequality may be the source of the secular stagnation that is making structural reforms more politically difficult to implement. If anything, the rise of nationalistic, populist, and nativist parties in Europe, North America, and Asia is leading to a backlash against free trade and labor migration, which could further weaken global growth.

Rather than boosting credit to the real economy, unconventional monetary policies have mostly lifted the wealth of the very rich – the main beneficiaries of asset reflation. But now reflation may be creating asset-price bubbles, and the hope that macro-prudential policies will prevent them from bursting is so far just that – a leap of faith.

Fortunately, rising geopolitical risks – a Middle East on fire, the Russia-Ukraine conflict, Hong Kong’s turmoil, and China’s territorial disputes with its neighbors – together with geo-economic threats from, say, Ebola and global climate change, have not yet led to financial contagion. Nonetheless, they are slowing down capital spending and consumption, given the option value of waiting during uncertain times.

So the global economy is flying on a single engine, the pilots must navigate menacing storm clouds, and fights are breaking out among the passengers. If only there were emergency crews on the ground.

Bloomberg: U.S. heath system least efficient in the world

Speaker John Boehner and Majority Leader Mitch McConnell both called the U.S. health care system the best in the world.

What were they thinking?!  The U.S. has the most expensive (in absolute terms) and the least efficient health care system (in relative terms) in the world! Check it out.

The Most Efficient Health Care Systems In The World

By Kavitha A. Davidson

August 29, 2013 | Huffington Post

As supporters and opponents of the Affordable Care Act debate the best way to overhaul a clearly broken health care system, it's perhaps helpful to put American medicine in a global perspective.

The infographic below is based on a recent Bloomberg ranking of the most efficient countries for health care, and highlights enormous gap between the soaring cost of treatment in the U.S. and its quality and effectiveness. To paraphrase Ricky Ricardo, the American health care system has a lot of 'splainin' to do.

It's remarkable how low America places in health care efficiency: among the 48 countries included in the Bloomberg study, the U.S. ranks 46th, outpacing just Serbia and Brazil. Once that sinks in, try this one on for size: the U.S. ranks worse than China, Algeria, and Iran.

But the sheer numbers are really what's humbling about this list: the U.S. ranks second in health care cost per capita ($8,608), only to be outspent by Switzerland ($9,121) -- which, for the record, boasts a top-10 health care system in terms of efficiency. Furthermore, the U.S. is tops in terms of health care cost relative to GDP, with 17.2 percent of the country's wealth spent on medical care for every American.

In other words, the world's richest country spends more of its money on health care while getting less than almost every other nation in return.

It's important to note that this data doesn't necessarily reflect the best health care in the world; it is simply a measure of overall quality as a function of cost. Bloomberg explains its methodology as such:

Each country was ranked on three criteria: life expectancy (weighted 60%), relative per capita cost of health care (30%); and absolute per capita cost of health care (10%). Countries were scored on each criterion and the scores were weighted and summed to obtain their efficiency scores. Relative cost is health cost per capita as a percentage of GDP per capita. Absolute cost is total health expenditure, which covers preventive and curative health services, family planning, nutrition activities and emergency aid. Included were countries with populations of at least five million, GDP per capita of at least $5,000 and life expectancy of at least 70 years.

So what can the U.S. learn from the many countries that get more bang for their health care buck? Unsurprisingly, there is no one formula for success when it comes to efficient medical care. The systems that rank highly on Bloomberg's list are as diverse as the nations to which they belong. The unifying factor seems to be tight government control over a universal system, which may take many shapes and forms -- a fact evident in the top-three most efficient health care systems in the world: Hong Kong, Singapore, and Japan.

Ranking third on Bloomberg's list, the Japanese system involves universal health care with mandatory participation funded by payroll taxes paid by both employer and employee, or income-based premiums by the self-employed. Long-term care insurance is also required for those older than 40. As Dr. John W. Traphagan notes in The Diplomat, Japan controls costs by setting flat rates for everything from medications to procedures, thus eliminating competition among insurance providers. While most of the country's hospitals are privately owned and operated, the government implements smart regulations to ensure that the system remains universal and egalitarian.

Meanwhile, Singapore's health care system is largely funded by individual contributions, and is often hailed by conservatives as a beacon of personal responsibility. But as conservative David Frum notes, the system is actually fueled by the invisible hand of the public sector: individuals are required to contribute a percentage of their monthly salary based on age to a personal fund to pay for treatments and hospital expenditures. In addition, the government provides a safety net to cover expenses for which these personal savings are inadequate. Private health care still plays a role in Singapore's system, but takes a backseat to public offerings, which boast the majority of doctors, nurses, and procedures performed.

Despite being considered by some as having the freest economy in the world, Hong Kong's universal health care system involves heavy government participation; its own health secretary calls public medicine the "cornerstone" of the system. Public hospitals account for 90 percent of in-patient procedures, while the numerous private options are mostly used by the wealthy.

All this government care isn't taking much of a bite out of the state's bustling economy: According to Bloomberg, Hong Kong spends just 3.8 percent of GDP on health care per capita, tied for the third-lowest among nations surveyed and good for the most efficient health care system in the world.

Krugman: Milton Friedman too soft for today's GOP

It's really saying something that today's Republican party is to the right of Milton Friedman on monetary policy!

Milton Friedman, Unperson

By Paul Krugman

August 11, 2013 | New York Times

URL: http://www.nytimes.com/2013/08/12/opinion/krugman-milton-friedman-unperson.html?hpw&_r=0

Japan v. Europe / stimulus v. austerity

It's still early, but so far so good for the anti-austerity economic policies of Japan's Prime Minister Shinzo Abe aimed at pulling Japan out of 20 years of economic doldrums.  

He's doing the exact opposite of what the IMF/WSJ/CNBC/Davos talking heads say to do, by spending money and encouraging inflation. 

I know, I know, many old teabaggers are clutching their chests and turning purple upon reading those words, but there are unintended evils attendant with high savings and zero inflation.

So, once again, the rest of the world is doing us a favor, showing us what works and what doesn't, and all we have to do is watch and copy the smart guys.

It's austerity on the right in Europe, and stimulus on the left in Japan.  Who's gonna win?  

Rest assured that your ace blogger will be following this story!....

(This is totally off-topic, but remember that Michael Crichton novel & movie Rising Sun?  Remember how he and others warned us that Japan's economy was going to eat our lunch?  Seems very silly now.  This was the same Michael Crichton, by the way, (may he RIP) who reportedly convinced Dubya that man-made global warming was a scientific hoax.  So that's, uh, two big strikes against the dead guy.)

Japan household spending surges as "Abenomics" gains momentum

By Stanley White and Kaori Kaneko

April 30, 2013 | Reuters

URL: http://www.reuters.com/article/2013/04/30/us-japan-economy-idUSBRE93T03R20130430

'Inconclusive' link between public debt, interest rates

Empirical data refutes the conservative mantra that higher government debt always leads to higher interest rates, thereby "crowding out" private investment:  

In a paper published by the National Bureau of Economic Research in April 2005, Columbia University economist R. Glenn Hubbard and Federal Reserve economist Eric Engen declared as “inconclusive” the link between government debt and interest rates. Hubbard headed George W. Bush’s White House Council of Economic Advisers from 2001 to 2003.

“While analysis of the effects of government debt on interest rates has been ongoing for more than two decades, there is little empirical consensus about the magnitude of the effect, and the difference in views held on this issue can be quite stark,” they wrote.

In fact just the opposite can happen:

“Deficits as a share of the U.S. economy have risen sharply at times with little to no discernible impact on the level of U.S. interest rates. In fact, just a cursory look at periods when the U.S. ran large deficits as a share of (the total economy) – 1983, 1991-92, 2008-2012 – we actually saw declines in nominal long-term (lending) rates,” said [Scott] Anderson [chief economist for Bank of the West in San Francisco].

He noted that the yield, or return on investment for bondholders, has not and did not rise sharply. “So the link between high levels of government spending and borrowing does not appear to raise the cost of money during these periods and therefore would not crowd out private consumption and investment,” Anderson said.

Just to show how fair & balanced I am, here's a recent WSJ op-ed that warns against a "fiscal dominance" scenario in the U.S., where debt-to-GDP consistently exceeds 80 percent, interest rates shoot up, debt increases even more, interest rates shoot up even higher, and a "fiscal death spiral" ensues.  Theoretically this is possible, but since this scenario depends a lot on "investor confidence," that means everything is relative.  Take Japan for example. Its debt-to-GDP ratio has been over 150 percent for years. It's now 225 percent. Yet Japan's borrowing costs remain low because of real deflation and the relative strength of the Japanese yen.  

Is government spending ‘crowding out’ private sector? No

By Kevin G. Hall

March 20, 2013 | McClatchy Newspapers

URL: http://www.mcclatchydc.com/2013/03/20/186450/is-government-spending-crowding.html

Japanese making us look bad again

There goes those darned Japanese making our Christian nation look bad again.

Japan Earthquake: Ethical Residents Return $78 Million From Rubble

August 18, 2011 | Huffington Post

URL: http://www.huffingtonpost.com/2011/08/18/japan-earthquake-ethical-_n_930808.html

Economist: U.S. should spend like Japan did

"In this type of recession, the amount of money the government has to borrow and spend is exactly equal to the excess saving in the private sector," said Prof. Koo.

That's scary. I'd guess that amount must be in the $ trillions. Just getting another $800 billion stimulus (even with 36 percent of it tax cuts, again!) seems impossible in the current political environment. Economists like Paul Krugman unapologetically call for more and bigger stimulus, and cite estimates that the first stimulus created 2.7 million jobs and added $460 billion to U.S. GDP.

Opposing any stimulus at all is Nassim Taleb, whom I really like, at least for his creativity and direct speech. He tells us we're taken on all kinds of hidden risks and we don't know what could happen with so much debt. Certainly, this frightens me. On the other hand, economists like Koo say they can definitely tell us what we'll lose if we don't do more stimulus, in terms of $ trillions in lost GDP. I tend to find their argument more persuasive, since it's not based on what we can't know, (aka "black swan" event), but rather on experience and economic models. Indeed, there is a lot of unused capacity and idle labor sitting out there, wasting, for no good reason. There is nothing inherently wrong with all these industries which are down across the board -- it's simply a lack of demand preventing a business comeback. That's the catch-22 we're in right now: businesses won't recover enough to hire the unemployed until people (or governments) start buying stuff again; and people won't start buying stuff again until they are employed and feel secure about their economic future.

Even without any government action, the economy will get better. The questions ar how much, and how long will it take? Krugman and others argue that the "new normal" will be higher structural unemployment with still growing inflation. And it's totally unnecessary, they say. All it takes is political will to avoid it.

Economist: U.S. Could Learn From Japan's Fiscal Gap

October 9, 2010 | All Things Considered on NPR

GUY RAZ, host: Almost two decades ago, Japan was hit by two potentially catastrophic events. The first was a crash in real estate values. The financial sector responded by hoarding cash and using it to pay down debts rather than spend it on new investments.

It took Richard Koo and other Japanese economists a few years to figure out that this combination was driving Japan's economy into the ground. And so, they advised the Japanese government to start spending money and ignore growing deficits. And Koo argues that it worked. He wrote a book about it and is now trying to convince economic policymakers in this country that we're in the exact same spot.

Mr. RICHARD KOO (Chief Economist, Nomura Research Institute): This disease is actually the same disease hit Japan 15 years earlier.

RAZ: The same exact disease?

Mr. KOO: Exactly the same disease.

RAZ: It's like nobody knew what it was.

Mr. KOO: Those of us in Japan were flabbergasted. The (unintelligible) raced down to zero, lots of quantitative easing, nothing helped.

RAZ: And you can recognize it instantly here in the U.S. now?

Mr. KOO: Yes, because the key feature of this disease is that people - meaning private sector is still leveraging or paying down debt under zero interest rate condition.

RAZ: Instead of spending money making investments.

Mr. KOO: Exactly.

RAZ: And you didn't know why.

Mr. KOO: Well, the reason actually, when you think about it, is quite simple. Those people bought assets with borrowed money during the bubble days. The asset price collapsed after the bubble, liabilities remain and people suddenly realized that their balance sheet's underwater. What do you do? You used the cash flow to pay down debt.

RAZ: Mm-hmm.

Mr. KOO: And that's the right thing to do for people in that circumstances.

But when everybody does it all at the same time, we enter what we call fallacy of composition in that what is right for the individual taken together is bad for the group.

RAZ: Many economists look to Japan's past two decades as a cautionary tale. But you actually see Japan as a success story, an example for the United States. How so?

Mr. KOO: Those people don't realize what happened to asset values. Commercial real estate in Japan - Tokyo, Osaka...

RAZ: Collapsed.

Mr. KOO: ...all cities - fell 87 percent.

RAZ: Eighty-seven percent, the value of a home in some cities fell 87 percent?

Mr. KOO: Eighty-seven percent. What kind of economy do you think you have left in the United States if Manhattan prices are down 87, Washington down 87, San Francisco down 87?

RAZ: There'd be nothing left.

Mr. KOO: There'd be nothing left. We managed to keep our GDP from falling below the peak of the bubble for the entire 20-year period. Our employment rate never went beyond 5.5 percent because government came in and borrow the money that people were all saving.

RAZ: Japan, at certain times, has (unintelligible) huge budget deficits, has a ballooning national debt, that's not a problem?

Mr. KOO: It's a problem, but it's the best of the possible choices in that government budget deficit increased by something like 460 trillion yen. That means about 92 percent of Japan's GDP.

RAZ: Wow.

Mr. KOO: But what's missing in the debate is that this 460 trillion yen deficit saved the GDP at least 2,000 trillion.

RAZ: Richard Koo, how long could the United States, though, run massive budget deficits?

Mr. KOO: In this type of recession, the amount of money the government has to borrow and spend is exactly equal to the excess saving in the private sector.

RAZ: So when the private sector is saving and not spending, the government has to come in and borrow the equivalent amount and spend it?

Mr. KOO: If you want to keep the GDP from collapsing, yes.

RAZ: That's Richard Koo. He's been an adviser to five Japanese prime ministers. He's the chief economist at the Nomura Research Institute and the author of "The Holy Grail of Macroeconomics: Lessons from Japan's Great Recession."

After stimulus, Japan's recession ends

Japan emerges from recession

August 17, 2009 | CNN.com

Japan has joined the growing number of major economies that are back in black.

Japan's economy grew 3.7 percent on an annualized basis from April to June this year, the first time the world's second largest economy has seen positive growth in 15 months.

The announcement of preliminary figures by Japan's Cabinet Office comes after France and Germany surprised economists last week by posting 0.3 percent growth for the second quarter of the year.

The news that Japan has rebounded -- the hardest hit of the major economies because of its reliance on exports -- gives economists cautious optimism that the worst of the global recession is over.

"The economy has seen a bottoming out of global demand, which has pushed out net exports ... especially in high tech industries and basic materials, such as chemical, steel and so on because of Chinese demand," said Hiromichi Shirakawa, chief economist in Japan for Credit Suisse.

Japan's GDP grew just under 1 percent during the three-month period and trade increased 1.6 percent.

The uptick marks the end of the worst recession in Japan since the end of World War II. Japan's GDP fell at a record pace during the January-March quarter, when GDP was 15.4 percent lower than the same time period last year.

The Japanese economy was buoyed by a historic ¥15 trillion ($150 billion) stimulus package in May, which included unemployment benefits, aid to struggling companies, promotion of green industries and a variety of tax breaks.

"There are many times in the past when tax breaks and fiscal stimulus were offered and failed, but this time around, it worked," Shirakawa said.

Economists expect GDP to continue modest growth through the rest of the year, especially with an expected rebound in global auto sales this quarter. But whether the recovery can continue into the new year after the stimulus package runs its course remains a question.

"Japan's economy still is quite sensitive to global demand ... and for consumer demand to grow on a self-sustained basis still seems unlikely," Shirakawa said.

We'll all turn Japanese, I really think so

Japan's energy wisdom
Renée Loth
March 26, 2007 | Boston Globe

An island nation with no domestic oil supply, Japan offers a glimpse into the world's energy future, when oil reserves decline to unsustainable levels and alternatives are the only alternative.

Nearly 10 years after the Kyoto global- warming summit meeting, the country still claims a leadership role in reducing carbon emissions. According to the International Energy Agency, Japan's energy consumption as a percentage of gross domestic product is the lowest in the world.

The national expression of concern for the earth dovetails nicely with the traditional Japanese reverence for nature (Shintoism sees gods in every mountain, rock, and tree), but in fact Japan has no choice: The country imports almost all its oil and 60 percent of its food. It is self-sufficient only in rice.

However, Japan has managed to drive down energy use dramatically without sacrificing the comforts of an affluent society. The per capita consumption of energy in Japan is nearly half that in the United States, but the per capita incomes are roughly the same. So prosperity alone doesn't explain why the United States burns so much more oil.

Japan's economy is still the second largest in the world. Its office towers and shopping malls teem with innovation and commerce. Its prowess in innovation and design keeps the Japanese well-stocked in consumer gadgets: cellphones with GPS maps, high-tech toys, the peculiarly appealing new electric toilet.

How do they do it? Partly, the Japanese have invented their way out of energy abuse. Hybrid cars from Toyota and Honda are just the most obvious examples. Four of the world's five largest producers of solar panels are Japanese, with Sanyo commanding 24 percent of the market. The government's New Energy and Industrial Technology Development Organization (NEDO) is busy testing thin, flexible solar panels that, among many other uses, can be carried along to recharge a cellphone on the go.

"This is a problem of moral dimensions," said Japan's minister of environment, Masatoshi Wakabayashi. With a green feather in his lapel and a copy of Al Gore's book on his desk, Wakabayashi is a bureaucrat with a cause. "I think we are receiving the message that our mother earth is in crisis," he said. "We have a common consciousness of this fact."

Indeed, Japan's famous insularity and conformity, burdens in other settings, work to its advantage here. On a recent tour sponsored by the Japan Foreign Press Center, I saw a society that has fully internalized the wisdom of restricting energy imports. Businessmen diligently separate their lunch box trash for recycling. Residential recycling is even more intense, with at least 10 sorting categories, including small metal items, bulky refuse, used cloth and chopsticks. Neighbors frown if the wrong items are in the bins.

Houses, cars, and appliances here are all much smaller than in the United States, but better designed. Even delivery trucks are hardly bigger than the average suburban Hummer. There is a growing movement called "watashi no hashi" ("my chopsticks") that urges people to carry their own into restaurants so as to cut down on the waste of the disposable kind.

The transportation sector is responsible for 20 percent of Japan's C0² emissions (which overall are the fifth largest in the world). But gasoline is taxed so that a gallon costs roughly $4.50, and the fast, clean, and relatively inexpensive subways (the basic fare is about $1.50) arrive with military precision.

Long-distance travel by the Shinkansen bullet train, though expensive, is almost space age in its efficiency, and easily competes with air travel, especially for business. At the stations, transit workers greet each train like sentries, holding huge bags for the (sorted!) trash.

Government campaigns to urge energy conservation are myriad. There are tax deductions for consumers who buy "green tech" appliances and cars; a "top runner" designation for environmentally friendly companies; a "warm biz" and "cool biz" campaign that sanctioned the removal of suit jackets by Japan's decorous businessmen in order to keep air-conditioned offices no cooler than 68 degrees; and a "minus 6 percent team" for citizens to join to help Japan meet its Kyoto goal of a 6 percent annual reduction in greenhouse gases, on the way toward 20 percent below 1990 levels.

Wakabayashi says that 1.8 million Japanese citizens have pledged to take six steps to achieve the goal, such as turning off the lights.

It doesn't hurt that Japan is in a race for pride of place with the European Union. Earlier this month, the EU committed itself to reduce carbon emissions by 20 percent by 2020, with the added challenge that it would achieve 30 percent if the United States agreed to join. But Takayuki Uedo, manager of the New and Renewable Energy Division of Japan's natural resources agency, is scornful of the EU's effort. "We are 20 years ahead of the EU countries," he said, pointing to a program to help homeowners purchase domestic hydrogen fuel cells.

Can the common consciousness of energy conservation in Japan - a country where commuters form a silent queue on subway platforms and no one jaywalks - ever be translated to the United States? Let's hope so. Sooner or later, we are all Japan.