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The weaker dollar has given a boost to U.S. exports. The dollar has dropped by 9.1% compared to the prior year against a broad basket of currencies. U.S. exports have provided 1.4 percentage points of the 3.0% annualized growth since the 3rd quarter of 2009. The U.S. dollar is now 5% away from its all time low in March 2008, when tracked using the dollar index. Before the 2008 crisis the dollar had over a six year period lost about 40% of its value. Low interest rates in the U.S. and concerns about the deficit have contributed to the dollar's decline in value. While the decline helps boost exports, it also increases the price of oil in dollar terms and increases inflation. A Gallup poll in April showed 42% of Americans had no confidence in the Fed's policies for the economy, and 43% had no faith in Treasury Secretary Geithner. The decline is taking place even as Japan is recovering from the earthquake, and Greece is likely to have to restructure its debt obligations with European banks taking losses....

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Krugman points out that some depreciation in the value of the dollar is welcome because it would make US exports more competitive and reduce our trade deficit. He says China's policy of keeping the yuan pegged to the dollar actually devalues the Chinese currency and makes it possible for China to siphon off growth from other countries. So what should America do. By putting pressure on China to revalue the yuan upward would America be risking China responding by selling some f its $2.1 trillion in dollar assets. This would not be such abad thing if the Chinese sold some of their dollar assets says Krugman, as lowering the value of the dollar at this time is not such abad thing. Malpass and Alan Meltzer of Carnegie Mellon, point out the importance of maintaining the value of the dollar in a separate piece. There the idea is not to have sharp fall in the value of the dollar that could economic disruption because of loss of confidence in the currency as opposed to a gradual decline.

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The U.S. Federal Reserve announced on Dec. 13, 2016, that it would increase its benchmark short term interest rate by 0.25 percentage point, to between 0.50% and 0.75%. The increase will also be reflected in business and household borrowing costs. The Fed also announced its intention to make 0.75% percentage point increase in 2017, possibly in 3 quarter percentage point moves. The Fed's forecast is for the fed-funds rate to reach 2.1% at the end of 2018, and 2.9% at the end of 2019. The Fed's policy is based on a sense of strong labor market with unemployment falling, and says it is based on discussion at a 2 day meeting, and "in view of realized and expected labor-market conditions and inflation." This reflects a view that there is now not that much slack in the labor market, that further improvements could trigger higher inflation. Fed forecasts for inflation are for it to increase from 1.5% in 2016 to 1.9% in 2017 and to the target of 2% in 2018. The unemployment rate of 4.6% in 2016 is forecast to go to 4.5% in 2017 and remain at that level till 2019. Economic growth is forecast at a median annual rate of 1.9% in 2016, 2.1% in 2017, only a slight improvement from last forecast in Sept. 2016. Support for chairwoman Yellen's policy decision was unanimous. See the link on views of NYT's Binyamin Applebaum and Neil Irwin on how Fed rate policy and economic growth under the Trump administration is likely to play out, and Ian Talley's report on impact on exports with a stronger dollar in WSJ. These views also are in line with the Fed's forecasts and policy decision as they reflect the concerns of the Fed about inflation, and also reflect the Fed's view that growth will be close to 2% in 2017-2019, and not the 3-4% stated by Trump and Treasury Secretary Mnuchin. Fed rate policies to keep inflation at about 2% tend to counter stimulus spending by the Trump administration and effect of tax cuts. The size of the stimulus and the tax cuts are also likely to be much smaller than stated because of Republican concerns about the deficit in the U.S. Congress, according to these views. The stronger dollar also has the paradoxical effect of making trade gains more difficult while increasing trade friction in tougher bargaining supported by Trump, making the higher growth targets harder to reach.   ...

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Bernanke's plan to address the deep downturn is very aggressive and he is pulling out all the stops. This includes the purchase of mortgage backed securities, Fannie Mae and Freddie Mac corporate debt and other assets, Since it stated its intention in late November to buy such securities, the 30 year mortgage rates have fallen to 5.2% from 6%, and refinance applications have tripled. Now the purchases will be greatly expanded. See the related link to this in Hubbard and Mayer article based on their research paper, in the WSJ, that shows that at a mortgage rate of 4.5% the housing market prices could stabilize. Next step the Fed will, starting early 2009, pump money into markets for student, auto, credit card ansd small business loans in hoping to bring life to those markets. How much money is involved? Quite a bit. All told the Fed's assets could add up to $5 trillion says Ed Yardeni of Yardeni Research, up from $2.2 trillion now. Its these sweeping moves and decisions that have overshadowed the December 16 announcement cutting the target federal funds rate to a range from zero to 0.25%, the lowest in its history. Whats the thinking behind this? Coy of BW points to Bernanke's research on the depression years and the lost decade years in Japan. In 1999, in a book he contributed to, Bernanke referred to Japan's monetary policy and passive approach as a self induced paralysis, including all the zombie loans that were allowed to continue on company books and no effort to clear up the bad assets quickly. He always thought highly of the aggressive approach taken by Franklin Delano Roosevelt, and felt that more tools available and a better understanding of the market system since FDR's day enabled a lot more actions to be taken to reverse the kind of steep global downturn that might occur. Yardeni's view is that even though this huge asset buildup could lead to inflation down the road, the economy in the medium term faces a deflationary environment, and the only way to cope with this series of bubbles bursting is to create another bubble, rather than risk anything going seriously wrong. Basically Bernanke is making an assessment of the current situation, and he sees bad credit situation getting worse, bad unemployment situation getting worse, consumer spending falling off and getting worse, continued home foreclosures and falling prices, the transition between administrations and lack of policy direction for a few critical months complicating things, and he sees the economies of all trading partners in Asia and Europe weakening in great speed, and sees very tough years for 2009 and 2010 no matter what the administration and the Fed do. Not enough aggressive actions to forestall the worst is as bad as inaction in Bernanke's view. And with all the aggressive moves, including the $1 trillion stimulus and infrastructure spending to create 2.5 million jobs that Obama administration plans, the US and global picture for the next 24 months will still be a long uphill climb. So the risks for Bernanke are all in the region of not doing enough and not doing it vigorously and speedily to get the best results. ...

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Six cities have rejected the Olympics, with Calgary in Canada being the last one. The problem with hosting the Olympics is how much it costs. Cost overruns are common. 20141 Sochi WInter Olympics estimated budget was $10 billion, in the end it cost $51 billion. 

Brazil is the latest example of the problem. With huge needs in sanitation, epidemic prevention, infrastructure and public services, the country did badly by spending money on new soccer stadiums in the northeast which were not used after the World Cup soccer championship, and in the summer Olympics. 

Learning from these lessons voters in Calgary, Canada, rejected hosting  the Winter Olympics. Voters or local councils in Innsbruck, Austria, Rome, Italy, Bern, Switzerland, Hamburg, Germany, Oslo and Stockholm have rejected the idea of hosting the Olympics. Other problems are the environmental impact with deforestation to create Olympic sites.

 

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Uki Goni writes from Buenos Aires, Argentina, describing the chaos and poverty of the years 2001-2003 following Argentina's default on its debt. At one point half of the population was below the poverty line. Argentina eventually recovered in 2004 under a new government of Nestor Kirchner, but had already incurred a terrible cost. This was especially hard on the lower middle class who had only their savings to live on and could not access their accounts at banks which were closed. Barter stores were common in those days as the barter currency gained wide usage for exchange of services. It is not clear whether this was due to badly implemented economic policy or defaulting on the debt. Goni says Greeks should seriously consider the cost of such a steep decline in the economy as they consider exit from the eurozone, and carefully evaluate the policies of Syriza politicians who risk a break with the EU.

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Xi Jinping's experience as Communist Party secretary in eastern Zhejiang province, and in running Shanghai, gave him insights on how the private sector had changed the province and the weakness of state run companies; as well as how state run companies operating efficiently such as SAIC in the automobile industry in Shanghai had achieved success by diversified ownership through listing on the Shanghai Stock Exchange. Studying how Singapore's Temasek has provided efficient management of state owned enterprises, which are run like private companies and have private investors and compete in markets; has reinforced the idea in the Communist Party that state ownership in key sectors can be maintained. The idea being adopted is retaining a majority controlling interest for the state at the same time as transformation of state run enterprises to operate similar to private enterprises takes place. The new plan put out by the Communist Party and the State Council, China's cabinet, takes up reform of the large state owned enterprises in China along these lines. The enterprises will take on private investors, list on stock exchanges, and operate like private companies hiring managers at the market rate. The energy, resources and telecom sector state enterprises will be reorganized as asset investment firms, and these enterprises will be required to operate like private companies to maximize profits, hire managers, and list on stock exchanges. ...

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Former U.S. Federal Reserve chairpersons Volcker, Greenspan, Bernanke and Yellen, are together at the International House, on the campus of Columbia University, in April 2016, in a forum hosted by journalist Fareed Zakaria. The discussion covers topics related to the financial crisis of 2008 and its aftermath, with quantitative easing, Fed communication as policy tool, and the gradual increase in interest rates.

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U.S. Fed chairwoman Yellen moves cautiously to raise rates in December 2015. The Fed raises the benchmark federal funds rate-its overnight lending rate- from near zero to between 0.25% and 0.5%. Yellen emphasized her cautious approach by saying "we have very low rates and we have made a very small move." This follows seven years of near zero rates after the QE program for monetary easing under Ben Bernanke, the previous chairman, following the 2008 financial crisis. The Fed plans to raise rates gradually and slowly over 3 years. With oil prices falling below $35 the prospect that inflation may fall well below the 2% target could put off further plans to raise rates. Yellen said the Fed would "monitor inflation very carefully," and if it remained at unexpectedly low levels the Fed would reconsider its outlook and respond with "appropriate policy."

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Criticism of the US Federal Reserve's $600 billion quantitative easing decision and Bernanke's defense of the Fed's decision. Bernanke says this is no different than other moves in monetary policy made by the Fed, and the aim is to address deflationary trends and unemployment.

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Fed chairman, Ben Bernanke's writings as a professor at Princeton on the banking crisis in Japan after the real estate bubble, a crisis similiar to what the U.S. is experiencing.

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When asked what projects they wanted to see in Helmand province, ordinary Afghans said they wanted the repair of the main sluice gates that lead to the irrigation canals off the Helmand River. These were built with American aid in the 1950's, and its been 30 years since anyone did any work on that canal. See the link to India and irrigation, only 50% of the land is estimated by experts to be irrigated in India. WIthout irrigation, as the uncertain monsoon rains this year showed, India's agricultural heartland in the Punjab and Haryana would collapse. When other Afghans were asked they mentioned security, they did not want to see the Americans in tents, but in some sort of permanent presence. BUt considering the vast and undeveloped landscape of Afghanistan, one sees several differences from Iraq's insurgent dominated priovince near Baghdad. It has mountainous terrain, with no electricity, no roads, no water, totally desolate in most parts of Helmand and other provinces, and it is a vast country with illiterate people tired of war. Would America's 40,000 troops be enough, or would you need more and more. If McChrystal's strategy shown here is to occupy civilan areas and fight the Taliban, and the Taliban with the help of Pakistan's ISI dissident elements are getting more and more sophisticated with roadside bombs, there will be growing casualties. The Americans could hold their own if there was no outpouring of support because of unpopularity of the Afghan government, but throw that into the equation- something McChrystal has not thought through according to Dexter Filkins of the NYT- and things get muddied. And from his training as a Special Operations commander this is a problem McChrystal is not as well prepared to understand or tackle. Consider the implications if Afghanistan is not Iraq- where Shiites and Aytollah Sistani their spiritual leader formed a core of support that the US always had on its side once it supported a democratically elected government- and no core of support here in Afghanistan except an unpopular government. McChrystal may also not have factored in a key factor of the "allergy" of Afghans to foreign boots on the ground. With a largely illiterate police recruits and army recruits, would the idea of transferring the job become delayed and the American boots end up in an untenable position? See the link to Commander Adams and Khost province, where Adams points out its all about visible evidence of progress. For his 250 paratroopers of the 82nd Airborne this meant delivering on roads built in Khost province, and a spring water system for 12,000 villagers. Here Filkins starts with Afghan villagers asking for the repair of the canal leading to the Helmand river which has not been repaired since the 1950's. McChrystal could only say "it takes time." But the US has been in Afghistan for 8 years and as commader Adams says only fighting "one year wars." The other point Adams says is that an effort in Afghanistan only works by befriending the tribes, because its the tribes who will see that IED's are reported and any insurgents in the area are reported, and only they have the capabilities to do it, which no number of American troops can do. These are serious questions that need answers. See the groups for- Commander Adams, and for Dexter Filkins (the article on McChrystal's Long War), which touch on similiar development issues....

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During the election campaign Obama talked about sending at least 2 more combat brigades to Afghanistan. The Defense Department is already planning to send 20,000 additional troops in response to a request of General David McKiernan, top commander in Afghanistan,including 4 combat brigades and an aviation brigade with helicopters, increasing the American troop levels to 58,000, with an additional 30,000 NATO troops already there from other countries. The timeline for this is 12-18 months but with the escalating insurgent attacks in Afghanistan this will probably be done more quickly. Obama and some Democrats talked about Afghanistan as somehow being the good war and he vowed to defeat the Taliban and militants in Afghanistan. But Afghanistan is a different place and most military experts are suggesting that a good strategy will be needed, for example winning over the tribals and some of the militants, and not trying to win militarily. However with the deteriorating situation there the only way to win over tribals and militants may be to get the situation to where the NATO and US forces are in a strong situation. The two big handicaps in this are first history, where the terrain and rural distribution of the people make it difficult to exercize any control over the vast region of mountains and deserts. So throughout history no one has controlled this region and there is no history of centralized government, with different tribes controlling their regions. The other is the problem created by the corruption and lack of any popular support for the Karzai government, which is made worse by the involvement of its officials in the opium trade with opium growing booming in the southern part of Afghanistan. How does the US and NATO create an effective Afghan army and police under a state that does not enjoy any popular support. And yet the strategy that Gates. Petraeus and McKiernan are pursuing involves preparing the Afghan army and police for the task of controlling the vast mountainous region against a rural insurgency that knows its way in the mountains enjoys rural support because of the independent spirit of the Afghan people who find it easy to see the NATO forces as white foreigners in their country. The Afghan army is small for such a vast mountainous region, only 70,000 in a nation of 32 million people, and the police forces of 80,000 mostly corrupt and ineffectual. The present plan is to build the Afgan army to 134,000 still small for such a large region. The other problems stem from the Pushtun population in Pakistan that supports the rural insurgency in Afghanistan and the support of tribal people in the border areas of Pakistan. The picture tells the story, a small number of NATO soldiers in a remote ridge in Afghanistan. And the problems actually are across the whole of the far northern region of what was once British India, of Afghanistan and Pakistan, as the Pakistan government is quite fragile, having an army that operates as a power center of its own with little accountability to the central government. And years of war during the previous military government of Pakistan under Zia Ul Haq, in which Zia with the support of the Reagan administration supported another rural insurgency in Afghanistan that drove the soviets out of Afghanistan, and the subsequent sponsorship of the Taliban movement by the Pakistan military in Afghanistan, has created a situation in Pakistan where militants now operate freely and with impunity in Pakistan itself, disregarding both the Pakistan military and the Pakistan elected government's power structures....

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Apartment rents went up by 5% in the 12 months through April 2011, according to Axiometrics. Senior economists at Capital Economics say rental yields (the rent divided by the property price) is expected to go up in 2011 to the highest level in more than 20 years.

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ECB president Draghi tells the European parliament on Jan. 16, 2012: "I cannot underline these points enough. Only a well-coordinated, coherent and properly timed strategy will yield the desired results." He made his comments as head of the European Systemic Board, which oversees systemic risks to the banking system in Europe. Speaking after a series of downgrades by S&P, Draghi said there should be "much less mechanical reliance" on ratings agencies. On Greece's debt burden and servicing costs he pointed out that the evaluation of Greek debt made in October 2011 "needs to be clarified whether its realistic," given the deteriorating economic situation in Greece. On Greece's talks with bondholder Draghi wants to see new servicing of debt conditions make it possible for Greece to bring down its current debt level of 190% of GDP to 120% by 2020.

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According to a senior defense industry official Defense Secretary Robert Gates worries that counterinsurgency may not work in Afghanistan. According to the official even 40,000 troops would not give enough troop on the ground to protect the Afghns if the north and west continue to deteriorate. Gates is concerned about sending large amounts of additional US troops to Afghnistan. This is acountry with people very sensitive to occupying powers. A veteran of the soviet intervention there says they have an allergy to foreigners and attributes the soviet defeat to this. See the links in Intelilinks He is aware of the the dangers of this, if the expanded military footprint is seen as that of an occupying power especially when the government in Kabul is hugely unpopular, then this would galvanize new armed opposition to the US and draw US forces and NATO forces into aguerilla war of the type the soviet union faced there. It may do much worse if it galvanizes opposition in side Pakistan. The question Obama is focussing on is whether there is athreat to the US homeland security if other options than expanding troop strength are explored....

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A whole range of issues can be seen in the debt crises in developing countries. The margin for error shrinks with poor governance, lack of honest assessment and transparency for finances, wars and conflicts within or outside the countries, living beyond their means, lack of focus on development, infrastructure that is unproductive or unaffordable including some Belt and Road Initiative infrastructure at higher interest rates. Countries that are dependent on overseas remittances, tourism, that were hit hard by the pandemic have seen their finances further weakened reducing the margin for error even more to the point that the smallest tipping point can lead to huge crises. Once the finances are weak all it takes is an external tipping point that creates serious crisis. The war in Ukraine with shortages of wheat, fertilizer and skyrocketing oil prices acted as that tipping point. Because this was a major blow the crises have a level of magnitude that is more than a payments crisis. One sees this in South Asia in Sri Lanka and Pakistan, and in the Middle East for countries such as Egypt and Tunisia shown in this WSJ report. It is now not simply a crisis but a crisis of great magnitude because in the case of Sri Lanka and Pakistan this WSJ report says that both countries foreign exchange reserves have dwindled to the point where they can pay for only one or two months of imports according to central bank data, analysts and IMF. This crisis has affected countries that were seeing steady foreign investment such as Turkey for decades, then a sharp falloff in foreign investment with a change in the climate for foreign investment. The crisis has taken the form of high inflation, significant depreciation of currency that makes imports costlier so that shrinking revenues from loss of remittances, tourism, or other sources will now have less value in supporting import needs. Lack of a credible path can delay setting a path out of the crisis. The $1.5 billion fuel and electricity subsidy made by the prime minister of Pakistan in late February was done without IMF approval leading to the IMF program having to be renegotiated. Lack of national political and cultural consensus on a solution simply makes it that much more difficult to find the way through it. In this regard South Korea was able to tackle the 1997 financial payments crisis effectively because of a national consensus. The situation in Egypt- Egypt has borrowed $20 billion from the IMF since 2016., placing it second to Argentina in aid from IMF since 1980's.  In 2020 and 2021 Egypt' government spent more than 40% of its revenue servicing its debt, and is forecast to do the same in 2022. The situation in Tunisia- A shortage of sugar, flour, and other critical supplies, and government delaying wage payments to civil servants. The government got $400 million in financing last month from the World Bank and hopes to secure a lifeline from the IMF. Compared to the period between the 2 World Wars the two bright spots are China and India where lessons of the past of civil wars, religious or political conflict, and poor governance, lack of knowledge of how the western countries industrialized and modernized, was replaced with the conviction that drives patient effort, courage in the face of adversity, honesty, and humility to learn including from western countries that have forged their own path through the same difficult road. The most difficult experiences have offered lessons which were learned- for South Korea the Korean War and invasion from the north, China the civil war and Japanese invasion, for India the partition of India and million of refugees. Stagnation from stumbled efforts also taught lessons, the Great Leap Forward in China, the License Raj with corruption in India.       ...

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The WSJ looks at Elizabeth Warren's Medicare for All plan that marks a major shift for the U.S. economy.  Households would see their costs go down by $11 trillion, boosting their ability to spend on other goods and services. Because income and wealth was highly skewed in the past three decades in one direction, the spending capacity of lower and middle income households was pushed down. This and other similar plans would help restore a higher level of spending and with it an essential element of inflation of 2-3% to the U.S. economy which was missing in the last decade. This sets the tone for the kind of broad based recovery that happened after 1950 that strengthened America's middle class and made it the core of the economy, the core of the post World War II recovery in America and Europe. The plan would be paid for by higher taxes on corporations, tax rate of 21% for corporations going back up to 35%, and reverse depreciation schedules in the 2017 Republican tax law. The argument that this would reduce business investment does not hold that much says the WSJ because amid new trade tensions business investment has declined over the last 2 quarters, and has been sluggish overall. The other source for the estimated $13 to $20 trillion cost of Medicare for All plan of Elizabeth Warren is a 6% annual wealth tax on billionaires, in an attempt to have all pay their fair share and reduce wide disparities in wealth. Mark Zandl, chief economist of Moody's Analytics, says his sense is at the end of the day from a macroeconomic view- because $11 trillion in the hands of 80% of households who could boost spending after lagging behind in the last decade- the negative effect on business investment will be cancelled out by the higher consumer spending. The overall effect and today's context is infused in this analysis. Private insurance, premiums for insurance, and out of pocket cost that the public pays would disappear in this new system where all health payments pass through the government. Health insurance premiums paid by employers would convert into a new employer Medicare contribution to the government starting at an amount employers pay now and adjusting gradually toward national averages over time. Smallest businesses are exempted. Mr. Zandl says the most important aspect of this now is that Mrs Warren has shown that her plan's revenue sources match the cost so that the plan would not lead to deficits increasing and pushing interest rates higher, leading to negative effects on the economy. Republicans under Mr. Trump have paid little attention to expanded deficits caused by their tax law, and economists across the landscape have also shown less concern. Still attacks are made if the plans don't add up. For this reason a sound assessment in today's context of depressed consumers and an overall impact becomes essential. The WSJ quotes from a pre- assessment of Warren's plan by Simon Johnson, a Massachusetts Institute of Technology economist who co-wrote it with Mr. Zandl and Betsey Stevenson of the University of Michigan. What they point out is that putting cash in the pockets of the lower and middle class for spending makes a lot of sense today, and taking money out of the pockets at the way upper wealthy end,  does not contract the economy at all. Other effects they say are constructive by letting all workers get health coverage from the government instead of employers, this makes it easier to change jobs increasing labor mobility and productivity. A worker getting a better job and better utilization of skills could then shift without looking at the employer health care plan. Warren says there would be a five year transition so that workers in health care insurance industry can work in other insurance fields and in Medicare, no one would be left behind. The important thing being to build America's middle class again. ...

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Consumers are taking on new loans for cars and purchases such as refrigerators, but at the same time businesses and consumers are paying off debt at a faster rate. The sharp decline in the Euribor rate in 2015 is good news for Spanish consumers and business as most loans are tied to the Euribor rate. Yet memories of the severe downturn in the Spanish economy are leading to consumers reducing debt with reluctance to take on new loans. The result is that even though Spain's economy is expected to show 3% growth in GDP in 2015, the loan levels at Spanish banks are expected to remain flat in 2015 over 2014. The IMF says GDP will not reach precrisis levels till 2017, reflecting how deep this downturn has been in Spain. IMF forecasts show that debt held by Spain's businesses and households will be double economic output till about 2020.