Tag Archives: recession

Quantitative Easing and Global Hyperinflation

Street cleaner sweeps worthless German Marks into the gutter.

Street cleaner sweeps worthless German Marks into the gutter.

Apart from the U.S. elections, the news last week was heavily focused on the decision of the U.S. Federal Reserve to inject some $600 billion into the economy by purchasing treasury bills. The policy, referred to as quantitative easing, is a tool of monetary policy [glossary] intended to address the ongoing economic malaise in the United States. Because interest rates are already near zero, the traditional monetary policy of reducing interest rates is not viable.

The move has provoked considerable discussion, not least because it risks stimulating inflation, as Alex Evans at the Global Dashboard notes. The policy will certainly cause a decline in the value of the U.S. dollar, promoting U.S. exports and encouraging greater investment. The broader challenge, as Robert Reich observes, is that a dual economy system is emerging in the United States. On the one hand, the financial economy is doing well. The Dow has had its ups and downs, but the sharp declines of 2008 appear to be in the rear view mirror. On the other hand, the economy of American workers continues to be in the doldrums. Unemployment appears to be stuck at just under 10 percent, real wages are frozen, and workers continue to be skittish about future employment prospects. Will Bernanke’s efforts to stimulate the economy work? It depends on who you are. Financial markets may worry about the inflationary effects of quantitative easing, but the policy of keeping interest rates near zero has certainly been positive. For workers, however, monetary policy may not be as effective as fiscal policy [glossary]. Sustaining unemployment benefits, for example, may be more effective as an economic stimulus. But such a policy is politically untenable, particularly after the mid-term elections. However imperfect, quantitative easing may be the only policy tool left to address the ongoing economic crisis in the United States.

Is the U.S. Economy Now in Recovery?

On Friday the Bureau of Economic Analysis released its fourth quarter 2009 estimates of economic performance in the United States. The figures were surprisingly positive, with gross domestic product [glossary] growing at an annualized rate of 5.7 percent. According to the BEA, the increase was driven primarily by an expansion in business inventories. Consumer spending increased at a much slower pace (2.0 percent in the fourth quarter, down from 2.8 percent in the third quarter).

Analysts were surprised by the growth in GDP, which had been forecast to increase at a much slower rate. The Obama Administration expressed cautious optimism regarding the figure, with Christine Romer, chair of Obama’s Council of Economic Advisors describing it as the “most positive news to date on the economy” and concluding that, “There will surely be bumps in the road ahead, and we will need to continue to take responsible actions to ensure that the recovery is as smooth and robust as possible. Nonetheless, today’s report is a welcome piece of encouraging news.”

Most observers now agree that we are unlikely to experience a “double-dip” recession. But the nature of the recovery still remains uncertain. Job figures released last week suggest that unemployment remains high and that employers remain hesitant to add jobs—thus Obama’s proposal to offer a $5,000 tax credit to employers who create new jobs. The concern—and one that seems entirely plausible given recent economic reports—is that the recovery of the U.S. economy will resemble the performance of the Japanese economy over the past decade, a “jobless recovery”  in which economic growth continues at a slow pace but unemployment remains high.

Five Stories You Might Have Missed

Economic data out this week suggests that the end of the global recession may be nearing. The most recent jobless numbers out of the United States gave economists reason to celebrate, as the unemployment rate declined by 1/10 of a point, leading to a price rally on Wall Street. Germany, which has seen a sharp decline in gross domestic product (glossary) during the global recession, benefitted from an unexpected expansion of exports—7 percent in June. While other countries continue to struggle, including Russia and Iceland, many economists now believe we are seeing the proverbial light at the end of the tunnel.

In other news from the previous week:

1. The trial of dozens of people, including a French national and two Iranians employed in the British and French embassies began in Iran on Saturday. The defendants are charged with espionage and “acting against national security” by taking part in and reporting on post-election protests to Western embassies. Under Iranian law, a conviction on either charge could be punished by death. Several of the defendants have confessed, but Western governments have dismissed the charges as “baseless” and contend the confessions were made under duress. The government of Iran accuses the United States and Britain of interfering in its internal affairs by “proving financial help to Iran’s opposition.” Meanwhile, the trial of 100 opposition leaders continued last week. The opposition leaders have condemned the trials as a spectacle, but the defendants face charges punishable by death. Opposition leaders continue to assert that the election of President Mahmoud Ahmadi-Nejad in June’s disputed presidential election was the result of electoral fraud. Nevertheless, Ahmadi-Nejad was sworn in on Monday.

2. A power struggle inside Taliban in Pakistan emerged over the weekend after the organization’s top leader, Baitullah Mehsud, was killed in a U.S. drone strike on Friday. Mehsud was a powerful figure in the Waziristan district of Pakistan, and Pakistani officials believe he was responsible for nearly all of the major terrorist attacks in Pakistan over the past two years, including the assassination of former prime minister Benazir Bhutto and the bombing of Marriot Hotel in Islamabad in 2008. Many analysts believe that Mehsud’s death will undermine the ability of the Taliban to operate in Pakistan. Already, political infighting in the Taliban in Pakistan’s leadership has led to the murder of one top leader by another, as Waliur Rehman, a leading contender to lead the organization, killed Hakimullah Mehsud, a rival for the same position. Pakistani intelligence now believes the organization is likely to splinter into several factions, each operating independently, but collectively much weaker than the original organization.

3. Former President Bill Clinton met with North Korean President Kim Jong-il this week, securing the release of two American journalists who had been sentenced to twelve years of hard labor for illegally entering the country. The meeting, which the White House maintains was not part of its official diplomatic efforts to address the challenges posed by the North Korean regime, was the highest level contact between the two countries in more than ten years. The Obama administration also reminded North Korea that, despite Clinton’s trip, that the United States will continue its efforts to increase diplomatic and financial pressure on the North Korean state unless it abandons efforts to secure nuclear weapons.

4. Secretary of State Hillary Clinton began her Africa tour this week, meeting with Kenyan officials on Wednesday. Clinton is hoping to apply pressure on the coalition government to move forward with political reforms intended to bring grater stability to the country and to prevent another flare up of the violence which rocked the country after February’s disputed presidential election.

On Thursday, Clinton met with Sheikh Sharif Ahmed, the embattled president of Somalia. Clinton used the opportunity to reiterate U.S. support for the Ahmed government, pledging to provide more military and economic assistance as the government continues its battle against Islamist insurgents. Meanwhile, in neighboring Eritrea, President Isaias Afewerki, who is believed to be a supporter of rebel groups in Somalia, dismissed U.S. efforts, saying that it is unrealistic to try and “imposing [a government] that doesn’t exist in reality.” Somalia has long topped Foreign Policy’s list of failed states. The lack of an effective central state has also made the country a haven for pirates in the Gulf of Aden.

5. A series of cyber-attacks aimed at social networking sites last week were believed to be directed at one individual—a blogger posting under the name of Cyxymu Livejournal. The denial-of-service attacks targeted several popular sites, including Facebook, Twitter, Google, and the blogging site Livejournal. Cyxymu Livejournal is a critic of Russian policy in the Caucuses, particularly Georgia. According to some sources, the Russian government has used denial-of-service attacks in the past, targeting sites critical of the Russian government in Georgia, Estonia, and Eastern Europe. But if responsible for the most recent round of attacks, this could represent an expansion of the strategy. Leading credence to the theory is the fact that this week marked the one year anniversary of the Russian-Georgian War over the breakaway regions of Abkhazia and South Ossetia.

Five Stories You Might Have Missed

Perhaps the most shocking news from the previous week came in a series of stories and rumors that the U.S. government may move to nationalize some banks in an attempt to address the ongoing global economic crisis.  In an interview on Tuesday, former Federal Reserve Chairman (and ardent free marketeer) commented that, “It may be necessary to temporarily nationalize some banks in order to facilitate a swift and orderly restructuring.” In the same story, Republican Senator Lindsey Graham concurred, noting, “If nationalization is what works, then we should do it.” Speculation that Citibank and Bank of America may be the first banks to be nationalized drove their stock values down and led to both dramatic selloffs on Wall Street and a sharp increase in the price of gold, normally used to hedge against uncertainty. The events forced the Obama administration to attempt to reassure global markets, as White House Press Secretary Robert Ribbs said, “This administration continues to strongly believe that a privately held banking system is the correct way to go, ensuring that they are regulated sufficiently by this government. That’s been our belief for quite some time, and we continue to believe that.” Remember when the Democrats were the ones who wanted greater government control over the economy, and Republicans opposed such intervention? Seems the global financial crisis makes the conventional wisdom less and less relevant.

Here are five stories from the previous week you might have missed if you’ve been trying to keep the players in the nationalization debate straight:

1. On Friday, the government of Mexico confirmed the country was following the general trend in much of the rest of the world, heading into recession. In the final quarter of 2008, the Mexican economy contracted by 1.6 percent. In an attempt to stimulate the economy, the government cut interest rates. But close ties to the ailing U.S. economy have acted as a drag on the Mexican economy, undermining the ability of the Mexican government to develop an effective stimulus program.

2. The United Nations-backed naval taskforce in the Gulf of Aden appears to have been generally successful in addressing the problem of piracy in the region. A number of U.S. and E.U. naval vessels, as well as ships from several other navies, have been operating off the coast of Somalia in an attempt to curtail the piracy which had become endemic to the region. The government of Somalia remains unable to assert control over its territorial waters, and piracy was one of the few ways in which Somalis were able to earn a living.

3. The government of Pakistan and Taliban fighters in the northwestern part of the country agreed to a “permanent ceasefire” on Saturday.  In exchange for agreeing to the ceasefire, the Pakistani government has offered to reinstate Islamic sharia law in the region. Many observers are concerned that the ceasefire may create a safe haven in Pakistan for Taliban and al Qaeda fighters could regroup.

4. Latvia’s Prime Minister, Ivars Godmanis, became the second victim of the global financial crisis on Friday, as he was forced to resign from office amid widespread popular protest. Like the government of Iceland before it, the Latvian government had been forced by the global economic downturn to launch a series of austerity measures imposed by the International Monetary Fund. A number of other countries in Central and Eastern Europe, including Hungary and Ukraine, have already implemented structural adjustment programs. Several others, including Serbia, Romania, Lithuania, and Estonia, are also seen as vulnerable.

5. The conflict in Sri Lanka continues. After the government had made significant advances into rebel territory over the past several weeks, Tamil Tiger rebels responded on Friday night with a surprise air raid on the Sri Lankan capital, Colombo. Initial reports indicated that at least 42 people were injured in the attack. An estimated 70,000 people have been killed since the civil war began in 1983.

Five Stories You Might Have Missed

The meeting of the Group of Seven, or G7, took place in Rome on Saturday.  And while anti-poverty campaigners appealed for the group to address the problem of increasing global inequality and rising poverty, the primary focus of the annual meeting was the global economic crisis.  Following the dispute over the inclusion (and subsequent removal) of buy-American provisions in the U.S. economic stimulus package, the G7 felt the need to include a commitment to use “the full range of policy tools” to address the global downturn while simultaneously renewing commitments to avoid protectionist measures.  This amid news that the Eurozone has now entered its worst slump in fifty years, with the Eurozone GDP falling 1.5 percent in the fourth quarter of 2008, and the German GDP falling by 2.1 percent of the same period.  Amid the poor economic news, the European Central Bank is expected to cut its prime interest rate to 1.5 percent, its lowest rate ever.  The U.S. Federal Reserve’s federal funds rate has already been effectively reduced to 0 percent.

In other news from the previous week:

1.  A U.S. missile strike in the South Waziristan region of Pakistan (along the Afghan border) on Saturday killed at least 25 al Qaeda-linked militants.  The drone-launched missile was the third such strike since President Obama took office.  The Pakistani government has been undercut the influence of militants in the region, believed to be a bastion for al Qaeda.   But the continued strikes by the U.S. also threaten to undermine the legitimacy of the Pakistani government.

2. Israel announced it would not agree to a ceasefire with Hamas unless an Israeli soldier held since he was kidnapped in a cross-border raid in 2006.  The Israeli position appears to complicate efforts to reach a permanent ceasefire.  A series of rocket attacks and retaliatory strikes (or strikes and retaliatory rocket attacks, depending on whose press you read), has made establishing a lasting ceasefire between the combatants more difficult.  Further complicating the situation were Israeli elections held last week.  The elections handed Tzipi Livni’s centrist Kadmina party a narrow one-seat victory over the rival center-right Likud party under Benjamin Netanyahu.  The close victory has left both parties scrambling to line up potential coalition partners, leaving the final outcome of the election uncertain.

3.  The outlook for the ongoing crisis in Zimbabwe appeared to brighten a bit last week, as a unity government took office.  Under the terms of the agreement, Robert Mugabe will remain President of Zimbabwe.  His political rival, Morgan Tsvangirai, will become the country’s prime minister.  The government of national unity appears to have—at least temporarily—brought to a close the country’s ongoing political crisis.  But how long this remains the case is unclear.  By Friday, the arrest of Roy Bennett, Tsvangarai’s nominee for deputy agriculture minister, on charges of treason raised questions about the degree to which the new government represents a real break with the past.    Further, the heavy lifting of addressing a national cholera outbreak and brining the country’s economy back from total collapse remains on the to-do list. 

4. The situation in Afghanistan appears to be deteriorating.   A series of bombings and well-coordinated attacks by gunmen over the last several days has left dozens of people dead.  While such attacks had become increasingly common in the Taliban-dominated areas along the Pakistani border, the most recent attacks occurred in what had historically been viewed as the safest region of the country—its capital, Kabul.  Analysts view the attacks as an indication of the increasing support and sophistication of Taliban-backed forces.  The attacks come amidst indications that the Obama administration is considering a request to increase by 30,000 the number of troops deployed to Afghanistan.

5. Disputes between European Union member states over the structure and nature of efforts to address the global economic crisis have led to tension within the Union.  On Tuesday, the Czech Republic’s prime minister (and current president of the European Union) accused the member state governments of engaging in policies that threaten to “deform” the Eurozone.  On Wednesday, in an indication of how serious the dispute is, the European Union scheduled two emergency summits to address the crisis, suppress protectionism, sustain employment, and prevent the bloc’s political fragmentation into old and new member states.

Five Stories You Might Have Missed

The global economic summit of the G20 countries concluded yesterday.  The meeting, intended to address the global financial crisis, concluded with a promise to take “whatever further actions are necessary” to address the crisis, but offered few concrete steps forward.  The summit was an opportunity to reconsider the international financial architecture, often referred to as the Bretton Woods system.  I’ll have a more detailed assessment of the summit tomorrow.  In the meantime, here are five other studies you might have missed:

1. Remember the timeline for withdrawal from Iraq that would have handed a victory to the terrorists?  Well, now we have one.  The Bush administration concluded a status of forces agreement with the Iraqi government that requires the complete withdrawal of U.S. forces by 2011.  The UN Security Council resolution which authorized the U.S. military presence in Iraq is due to expire in December, and without either a new Security Council authorization or an agreement with the Iraqi government, the status of American troops in Iraq would have been uncertain at best (and illegal at worst).  The timeline for withdrawal was a sticking point for approval of the Iraqi legislature. 

2.  The ceasefire between Israel and Gaza militants continued to come under strain last week.  An Israeli attack early last week resulted in the death of six Hamas militants.  Palestinian militants responded by increasing rocket and mortar attacks against Israeli towns near the Gaza Strip.  The Israeli government then closed Gaza’s borders, shutting down the flow of supplies.  The European Union on Friday called on Israel to permit the importation of food, fuel, and basic humanitarian supplies, but so far, the Israeli government has declined.

3.  The Eurozone has officially entered its first recession ever.  Established in 1999 and comprised of all European Union members which have adopted the Euro as their official currency, the 15-member Eurozone has now experienced two consecutive quarters of declining gross domestic product.  According to an FT editorial, the recession represents the first real challenge for European economic unity.  Already the European Central Bank has taken steps to address the economic downturn, cutting interest rates and increasing liquidity.  The effectiveness of these policies—and the difficulty of managing fifteen national economies through a single monetary policy—remains to be seen.

4.  Faced with oil prices declining below $55 per barrel and the lowest level of growth in demand for oil since 1985, the Organization of Petroleum Exporting Countries (OPEC) scheduled an emergency meeting for the end of the month.  Most forecasters believe OPEC will try to trim global output in an attempt to increase world oil prices.

5.  The fighting in eastern portions of the Democratic Republic of the Congo, which has resulted in the displacement of as many as 250,000 people, continued last week despite UN pressure to establish a ceasefire.  The United Nations is attempting to address the humanitarian crisis, but has so far been unsuccessful. But according to sources within the UN mission in the Congo, known as MONUC, rebel forces are attempting to force the withdrawal of UN peacekeepers from the region.

And a bonus story for this week:

6.  The Mexican Congress passed its annual budget for 2009.  In an environment characterized by the global economic downturn and tight finances, the Mexican government will increase spending by 13.1 percent in real terms in 2009.  The budget—the first in six years in which the government will run a deficit—increases spending on infrastructure, security, and social development. The new budget represents a return to Keynesian-style counter-cyclical spending which the Mexican government hopes will permit the country to avoid the worst of the global economic crisis.

Five Stories You Might Have Missed

Over the past week we’ve seen a lot of news from the domestic U.S. political front: Obama’s speech at the Democratic National Convention, McCain’s pick of Sarah Palin for his Vice Presidential candidate.  What’s been going on in the rest of the world?  Here are five important stories from the past week.

1. The worldwide economic downturn continued last week.  On Friday, the Japanese government announced a new economic stimulus package.  Analysts are holding out little hope that it will make much of a difference.  In the United Kingdom, Chancellor Alistair Darling conceded that the current crisis will likely be “profound and longlasting.”  He forecasted that it might be the worst economic crisis faced by the United Kingdom in the past 60 years.  Similarly, figures released by the Canadian government last week show that the country is on the brink of recession, with gross domestic product growing by  a mere 0.1% in the second quarter.  All of this suggests that the current economic crisis is global in scope and potentially long in duration.

2. Ongoing political violence in Thailand last week culminated in the closure of three major international airports and blockades of the country’s rail, road, and port infrastructure.   Earlier in the week, protestors had laid siege to state buildings.  The protestors—a loose coalition of business, royalists, and activists under the banner of the People’s Alliance for Democracy—are demanding the resignation of Prime Minister Samak Sundaravej and his government.  So far, the military has refused to become involved in the political crisis.

3. In an interview on Tuesday, Zwelinazima Vavi, leader of the Congress of South African Trade Unions, declared that South Africa would need to radically change its economic policies to avoid the “ticking bomb” of poverty, unemployment and crime.  Vavi is a close ally of Jacob Zuma, the leader of the African National Congress and the person mostly likely to become president of South Africa after Thabo Mbeki’s term expires next year.  Many analysts believe Vavi’s views reflect the policies favored by Zuma.  Many South Africans believe the economic policies pursued by Mbeki have not improved the quality of life for ordinary people.  His complete interview is available through the Financial Times website.

4. The North Korean government announced on Tuesday that it would suspend the processing of disabling its nuclear facilities and was considering reactivating the Yongbyon reactor.  The announcement, which North Korea maintains is a response to the failure of the United States to make good on promises made during the six party talks, raises new concerns about the effectiveness of the talks and the progress made there.  On Thursday, South Korea announced that it would drop the label “main enemy” when referring to North Korea in its biannual defense white paper.  According to Major Seo Young-suk, the decision to drop the term “does not mean that we have changed our stance.  North Korea is still a substantial and present threat.”

5. In a report issued Thursday, the World Health Organization (WHO) condemned health inequalities between rich and poor around the world, describing them as “unfair, unjust, and avoidable.”  According to the WHO “a toxic combination of bad policies, economics, and policies [was] killing people on a grand scale.”  The complete report, entitled Social Determinants of Health, is available through the WHO website.