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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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G7 finance ministers meeting leads to setting up joint principles such as ensuring customer deposits are safe, buying bank equity stakes with capital injection, and doing nothing that would harm the interests of other countries in the global economy, but policy actions were left to the individual countries to decide based on the unique circumstances in their country.

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Constraints to future Argentine growth would be from the lack of access to credit from the banking sector for private sector businesses. Bank lending to the private sector is only 13% of GDp compared to 36% in Brazil. It is a result of the deep financial crisis Argentina suffered in 2003.

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Japan's prime minister Abe calls a snap election for Dec. 2014.

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An assessment of Brazil compared to the other leading emergig market countries Russia, China and India, shows that Brazil has a lot going for it. Compared to Russia and China, Brazil has a stable multiparty democracy. And the differences between the countryside and the urban areas is not quite as large as it is in China and India. Surprising as it may appear about 83% of Brazilians now live in cities. And the process of urbanization that is taking place in China and India took place much earlier in Brazil. Between 1940 to 1980 industrialization and a growth rate that averaged 7% for most of that period brough large numbers of people from rural to urban areas. And the problem of inflation which wracked the economy from 1986 to 1994 before being brought under control is now well under control at about 4.7%. Debt problems from the Asian crisis contagion effects are now behind it as Brazil is a big exporter of commodities from coffee, soyabeans, orange juice to iron ore, with the real strengthening from 68 as measured in the currencies of its trading partners in 2001 to 100 today. Brazil's growth rate has reached 5.4%. and has been at an average of 4.5% since 2004. Between 1980 and 2000 Brazil's growth was in a slump so this has been a period of great changes in Brazil. Brazil is importing more plant and equipment with a stronger currency and booming exports. Brazil invests 19% of GDP according to Vale of MB Associados and that number should reach 25% of GDP at which point it would be easier to maintain a growth rate of 5% a year. With consumer credit growing at 25% each year for the last 2 years consumption is growing. And Brazilian companies were the second largest source of foreign direct investment in developing countries after China, according to the Fundacao Dom Cabral, a business school, and Columbia University, with the stronger real helping the balance sheets of Brazilian companies. The big change is that under the Lula government Brazil has done much better for the working classes and the rural poor. The Bolsa Familias is a program of cash transfers to poor people under the poverty line but which has strings attached so that they are required to send their children to school and have them vaccinated. It reaches 11 million families and is considered a major success in reducing poverty and in helping to see that poverty is not passed on from generation to generation. A program that may be copied in India. Acccording to the Observador Brasil/ Ipsos survey 23 million Brazilians have left social classes D and E and joined class C which means that they can have a rented apartment, a car and some gadgets. This give more confidence in Brazilian democracy and capitalism as more of society's diverse groups have a stake in the future....

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Another useful piece giving insights to the way China has approached the economic development tasks and what this means for the future. China's development is very capital intensive because the cost of capital is really low. Inputs like land and energy costs are also kept low by the government. Cost of labor is low and this has resulted in the share of wages as a percentage of GDP to drop from 53% in 1998 to 41% in 2005 and it is dropping further. In America wages to GDP is 56% and includes investment income which in China is lessthan 2% but much larger in the USA. The pool of surplus labor in China does work to depress wages. The percentage of consumption to GDP in China has fallen from 47% in early 1990's to 36% in 2006, the lowest of the large economies. But this does not reflect a higher savings rate. In fact the household savings rate also has fallen as a percentage of GDP. According to World Bank's Beijing office this has fallen from 21% in mid 1990's to 15% in 2006, relative to personal disposable income it has fallen from 30% to 25%. This is lower than India's household savings rate. So what is going on. The Economist points to the lower share of wages as a percentage of GDP because the large pool of surplus labor has depressed wages from where they might otherwise be so that consumption is not where it could or should be for China to move away from manufacturing led export driven economy to one that depends on the domestic market for growth. Higher consumption and a bigger domestic market would make it easier to sustain strengthening of its currency, a key demand of western countries. This would also provide a fair deal to millions of migrant workers and reduce labor unrest. It would also reduce pollution as the economy would not be focussed on production at all costs. It appears that the existing model has worked well for China in bringing millions of people from the villages into cities and growing manufacturing industries, and in urbanizing China. But China is so large that there are millions another 200 million who would migrate from villages and rural areas into cities as migrant labor to 2020 according to what the Government envisions ( see article in this issue of the Economist "Barefoot Doctors"). But this model needs fixing or changing as the pollution costs are already severe and can prove catastrophic if continued, and the western countries are demanding strengthening of the yuan to correct imbalances in the trade deficits as a result of this model of development focussed on manufacturing and export industries and short on consumption in the domestic market enough to drive the economy. ...

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Rauhala cites an email from Apple CEO, Tim Cook, saying updates he gets about performance in China every morning show strong growth for Apple's business for July and August. China's retail sales are up 10.4% for the first 7 months of 2015, according to the National Bureau of Statistics. The services sector as a whole showed growth of 8.4% in the first half of 2015, and it now makes up 49.5% of GDP, according to government statistics. Overall economic growth is about 4-5%, as the 7% official figure is considered overstated. Zhao Longkai, the executive director of the Beijing Univerisity Guanghua School of Management, says the retail sector should not be affected that much because losses are largely limited to a small number of wealthy investors, though some ordinary retail investors are affected, with overall stock market participation quite low compared to the U.S. and Europe. This and other expert opinion points to a situation of slower growth and debt overhang from the last stimulus, but not a strong connection between the stock market and the economy. The government's credibilty is affected by the failed intervention in July and this time during the sharp declines on August 24-25 the government is letting the market finds its own level, believing it will be better for markets and let them stabilize. ...

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Public opinion in Germany now senses that politicians including Angela Merkel are reluctant to tell Germans that debt reduction has to be part of the solution for Greece, that some of the billions are lost and never coming back. They sense that Merkel and the Christian Democrats are waiting till after the elections in 2013 to bring this up directly. Even people on the street in Berlin know that Greece can never get back on its feet on the basis of spending cuts without debt reduction. The loan instalment approved in Nov. 2012 reflects the new approach of debt reduction but the German government is reluctant to talk about it. Opposition parliamentary leader Frank-Walter Steinmeier of the Social Democrats told ZDF German television: "The debt cut has not been avoided, it has been postponed to a time after the parliamentary elections. We are realistic and try to tell the people honestly and sincerely whats going on. Schauble and the present government try once more to finagle their way around the truth." Greece's debt has already reached 170% of GDP and can only go up as the economy shrinks further in year after year of recession. Norbert Barthle, a senior Christian Democrat, says if the debt reduction takes place today it sends the wrong signal to all the program countries, reducing the pressure for reforms and changes....

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The authors of the book Red Capitalism, two bankers, Walter and Howie, describe the evolution of China's banking system from the early days of 1974 to the present day. The account shows a sophisticated system of markets and companies, but behind the facade, is a more primitive system with its good side and problem areas. Risk is hard to define or capture in this system as the system is for the most part closed, trading entirely with itself. State controlled banks deal with stae entities in ways that are not so transparent. This distorts external perception of China's solvency. state debt for example is low, about 20% of GDP by one measure, but when all government obligations are added together, the authors say it is 76%. The whole business of providing, receiving and regulating money involves different state entities. As the system trades with itself, critical information about liabilities and pricing is concealed or difficult to figure out. The lack of outside entities setting prices disrupts efficient capital allocation and lets excesses grow within the system, making for concern about the future of this system.This is especially true considering that with the Asian crisis of 1997, then the US banking crisis of 2008, and the current crisis in the Euro-zone countries banking systems, excesses eventually take root....

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The small segment of society in Pakistan that controls business, has large agricultural holdings, and the politicians in parliament, all benefit from a system in which they pay very little in taxes. These groups draw the maximum benefit from their privileged position. According to a transparency promotion organization in Pakistan, the average member of parliament in Pakistan has net worth of over $900,000 and pays little in taxes. A senior tax offical says the tax revenues in 2009 were the lowest in the country's history. According to Pakistan's tax rules income taxes are owed by anyone making more than $3,488 a year. Analysts estimate that of the 10 million who should be paying taxes only 2.5 million are actually paying taxes. And the tax collection is extremely poor, so that less than 2% of the population of 170 million pay taxes, with tax collection as a percent of GDP among the lowest in the world. Pakistan's laws do not allow questioning of money transferred from abroad, so a lot of money can be channeled to Dubai and brought back into Pakistan. This is important becuase the burden of this falls on the poor, in the appalling quality of infrastructure and public services, and the widening gap in the quality of life of most people in the country compared to the affluent few. ...

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The Netherlands government of prime minister Mark Rutte collapsed on April 22, 2012, after the Freedom party of Geert Wilders said it would not support futher budget cuts. Mr. Wilders said: "We don't want our pensioners to bleed just to meet the dictates coming from Brussels." Government forecasts had predicted the Netherlands deficit at 4.6% of GDP in 2012, above the 3% goal set by the European Union. And negotiations that collapsed were about making $18 billion in budget cuts to help meet the deficit goal. Rutte will now lead a caretaker government till elections in September or October 2012. Credit agencies may lower the Netherlands credit ratings from AAA and this would raise Netherlands borrowing costs in coming months. The result would be to increase the deficit even further. The Netherlands government was a strong supporter of Germany to introduce strict austerity measures and budget cuts in the eurozone during the debt crisis in EU countries in 2010-2011. With the elections in France and the defeat of French president Sarkozy in the first phase of elections by Socialist candidate Francois Hollande, the austerity programs in Europe appear to be unravelling. The deeper Europe goes into a recession in 2012-2013, the more likely new measures will be needed to address competitiveness, growth, interest rates and overvalued currencies as opposed to largely fiscal and budget measures alone....

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Indonesia continues to experience surging growth in consumer spending as more people enter the middle class and buy everything from motorbikes, consumer appliances, mobile phones and other products. It is similiar to the growth in China and India. GDP increased by 6.5%in 2011, and most of the growth comes from consumer spending. Mr. Riady of the Lippo Group says spending is growing to unprecedented levels. About 50 million people in Indonesia are in the middle class out of a population of 250 million- when measured at the level of $3000 per year incomes- and this will grow to 150 million by 2014, according to PT Nomura Indonesia. Another important demographic fact is that the average age of the population is 28.2. Motorcycle sales doubled to 8 million in 2011, twice that of 2006. Mr. Riady of the Lippos Group says its home sales are expected increase to $450 million in 2012, up from $100 million in 2010. Sales at Lippo Groups hypermarkets are expected to go up by 40% in 2012 and sales at its department stores increase by 25%. Lippo Group plans to add 10 new hospitals each year, to the 14 it plans for yearend 2012. Philips Electronics NV says healthcare equipment sales in Indonesia will quadruple in by 2015. This pace exceeds that in India and China for Phillips Healtcare....

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The Bank of Japan's Governor Haruhiko Kuroda announces a massive monetary stimulus in November 2014, with a 33% increase in asset purchases, including government bonds and also stocks and real estate funds. The move was intended to get the maximum possible impact with the Nikkei Averages up 5% and boosting global stock markets. It is designed to make an affort to achieve the target of 2% inflation in 2 years announced earlier by Governor Kuroda. Slowing consumer spending with the increase in the sales tax to 8% was expected to lower growth in GDP for fiscal 2014 ending in March to 0.5%. At the same time inflation which had reached 1.5% was decelerating to the 1% level in September 2014. Faced with this problem and confidence levels in Abenomics dropping below 50% in polls, the BOJ and the Welfare Ministry acted jointly to support the economy. BOJ move is supported by a shift in the portfolio of the Government Pension Investment Fund, which will reduce purchases of government bonds and shift to higher investment in Japanese and foreign stock markets. The Welfare Ministry said it would increase its share of assets in the $1.2 trillion Government Pension Investment Fund for Japanese and foreign stocks each by 10 percentage points. Kuroda has insisted he will act strongly to fight Japan's "deflationary mindset." The vote to take the action was 5 to 4....

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Problems facing Saudi Arabia in 2015 as King Salman, 79, takes over are an aging leadership, and lack of new solutions to problems facing the economy overly dependent on oil revenues and social spending. Like other Persian Gulf economies the oil sector makes up a large part of GDP- 44% for Saudi Arabia, and 59% for Kuwait. Under King Salman policies will remain the same as under King Abdullah. Social spending was boosted after the protests and political change in the Middle East in 2012-2013. Even with a drop in oil prices to below $50 a barrel high social spending and reliance on public sector jobs to meet the employment needs of young Saudis will continue. Young people under 25 years make up 47% of the Saudi population of 29 million. No new income streams are being pursued and taxation is not even considered as an option. The private sector is led by non-Saudis and is under financed with most employment generated in the public sector. Growing oil consumption inside the kingdom with its growing population is also likely to reduce the quantity of oil available for export in the long term. Reserves of $750 billion provide a buffer for now, but long term Saudi Arabia faces a structural deficit, says Steffen Hertog, an expert on Persian Gulf political economics, at the London School of Economics. ...

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Peter Coy, Economics editor of Business Week, agrees with Paul Krugman's point made in a recent NYT op-ed column favoring staying on the course the Bernanke Fed has set, which is to continue its policy of monetary expansion as long as credit is tight and the economy is weak. The Fed has expanded monetary reserves Coy says by 114% over this year through May. The biggest increase since 1960 has been 16%. Coy says there is good reason for this. As other experts have pointed out, see links, most of the extra money the Fed has introduced into the economy has piled up in the reserves of banks. Consumers who who have debt at about 100% of USA GDP are not borrowing, businesses are not borrowing to invest, banks are not lending as before, and consumers are in a long period of debt reduction that will take years. This is why it is not inflationary. Consumer frugality, see links, is another factor that makes this situation a long term change in consumer behaviour, and a force for deflation. All this is happening in the background of a huge slack in the system as manufacturing capacity utilization is low at 68% and unemployment is increasing. Which is why informed experts looking at the situation on the ground see staying the course as the right action plan....

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Brooks says no to the current health reform bill as most experts say it does little to control the bulging healthcare cost curve which will take it from 17% of GDP to 22% and beyond. He goes over the pros and cons. Passing this gets little done for health care reform in a fundamental way that is so badly needed today. Says Brooks the system today is rotten to the bone with opaque pricing and insane incentives, with consumers insulated from the costs of their decisions, this won't change with the current health care bill. In fact he says according to the chief actuary for Medicare it will cause health care spending to grow faster. At this rate we will be giving more money to insurance companies and programs that have great social value like expanded preschool and other needs that America has will be shoved aside. In coming years as the population of America ages there will be growing needs for health care. With no increase in supply, and the perverse incentives still in place, prices will continue to grow rapidly without the focus on efficiencies that is badly needed. Brooks points out that its not the politics is the chief obstacle to reform as most people say, but the reverse is the truth, unless one gets the fundamental incentives right politics will be terrible forever. ...