Friday, December 27, 2013

Latin America economies: Some key facts about 2013

Looking back into this “almost done” year 2013,there are some important facts to take into consideration, when it comes to evaluate Latin America economy performance: 1.- Important reforms for its scope and implications, took place in key sectors for Latin America economy . The inter American Development Bank (march 2013),has said that whether all Latin American countries carried out reforms for boosting economic growth by an average of 1,5%, , the spillover effect would allow an additional growth by 2,4% (y/y).- 2.- The boundaries of social tolerance, get narrower concerning to politicians decisions . The experience of Brazil and Argentina, have showed that no matter economic growth, society is demanding more connection with those needs they believe are urgent to fulfill.(inclusiveness ) 3.- Latin América, has become an alternative for investments in infrastructure and the energy resources sector(oil and gas).- 4.- Economic Growth. Even though the forecast were not optimistic for this year, economic growth is still following the trend.- 5.- Lower unemployment .The unemployment rate for this year is expected to be at 6,2%,and it is within the socially acceptable rates. However, there is still the perception that this outcome is not enough, which along with other symptoms ignites higher standard of insecurity. 6.-The expectations gap, get wider between those countries which believe in economic growth to solve poverty, and those who believe in the State to be more involved into the economy . 7.- The Latin America equity market decoupled, from those ones of developed markets.(the Nikkei index has been the highest with 55% economic return for this year) The explanations for this situation go from the expected normalization process of monetary policy by the Federal Reserve, up to a price correction process on some local companies.(30% in the Chilean case, source: El Mercurio ,Friday 27th).- Thus, 2013 was not that much a bad year !.Let expect 2014 to be better

Friday, December 13, 2013

Ben Bernanke and its legacy: The foundation of a new global macroeconomics

Although it is still a matter of research, as time goes by and history says its word, the financial crisis of 2018 will probably be considered a benchmark concerning the relevance of Banks regulations for risk seeking behavior, and the role of Central Banks to save the economy from the worst: a lasting painful economic depression. The Chairman of the Board at the US Central Bank, Mr Ben Bernanke( 2006-2014)and his decisions, were crucial to change the course of the recession. Those decisions will be considered at the core of policy lessons arising from this event . It is quite different to make decisions for keeping inflation within the target, and to make decisions aimed at solving a financial crisis of global scale.. The first decisions back then(2006), was to follow up the underway normalization process increasing the interest rate, which was still well below the range of 4-6% for the 2004-to 2006 period, suggested by the Taylor Rule. Thus, it was necessary to move on adjusting upward the interest rate. Higher interest rate took its toll months later, on mortgage payments and default rates, and the second part of the history began. The worst financial crisis after that one of 1929, started off in the final quarter of 2008. The Federal Reserve had to switch to a recession mode. In December 2008, the interest rate was set at the range of 0-0,25%.Thus, less than two years after being in office, there was a unprecedented change from moderating inflation, to save the financial system from collapse. Soon became self evident that Conventional Monetary policy, was not enough to solve the liquidity problem , while there was still pending a solvency issue . Too little too late was the sentiment among key analyst at that time. A new path was open to try unconventional monetary policy. This meant a monetary Policy looking beyond inflation rates, and focused on the financial system as a whole, and markets expectations, coupled with a new ability to manage both at the same time (communicational skills). So, it was done with some principles (to select carefully interventions, safety net for controlling panics reactions , keeping a minimum above zero for interest rate) ,and a variety of instruments all based on diversification which included different time span, assets types, institutions, currencies, collaterals alternatives. It was like to implement an strategy designed to attack the systemic risk, step by step dismantling its main sources to a smaller fraction of it, in such a way to improve the chances of controlling the overall situation as a preliminary condition to manage expectations .- The different markets reacted each one favorably at its own time :equity(business value), labor,(unemployment rates) goods(consumer sentiment).They all started to consolidate its initially fragile gains .Economic growth has getting better traction, inflation kept below target, and now it is near the beginning of the exit strategy from unconventional to conventional monetary policy. A new macroeconomic is in place for the global economy. The economy got out of a severe financial recession sooner than expected, and five years later it looks back with a sense of relief for what could have been worse than 1929.-