Saturday, January 25, 2014

World Economic Forum : Davos 2014

This year the WEF has important issues to be concern about. Inequality, the future of capitalism ,and sustainable economic growth will be addressed by the attendants .They are world leaders, politicians, professors ,chief executives offices, all of whom give some time to reflects abut world problems .- Inequality has become a more visible problem. Globalization mean opportunities, but hnot all have the fair chance to take advantage of them. Thus, it is important to take action about it. Otherwise globalization can be seen as the opportunity for just a few. A recent report , (WEF - 2013)has said that inequality ranks in the fourth place, among a list of factors which can potentially leads to social confrontation risks.- However, these actions should go on the line of better public policies. After all, inequality can be considered as a failure of public policies. It follows that the main responsibility for improving equality is on the side of Governments. But, do Governments have interest to solve this issue?. Somehow it is a matter of votes. The more self reliance and independent people becomes , the less likely they will depend from government´s policies. Concerning the future of capitalism, it is well know that it fit itself to new situations. Global warming is a constraint for growth, but that does not mean that it will melt away the foundations of capitalism. Instead, Capitalism should be more focused on a value added approach .This is the so called “Conscious capitalism” or “ Inclusive capitalism”. Either denomination, it will depend more on knowledge as a source of capital ,and quite contrary to some expectations it will improve middle class welfare.- Capitalism need people´s talents to sustain the “creative destruction”. This has been the case in watch industry in the past as it is in the smart phones industry today. The very nature of capitalism is tied to human capital endowments. The money creation machine, usually overcome the foundations of it. Engineers, bankers, entrepreneurs, business man, seeking to get the best from profit opportunities which arise in their path. So, give education a chance to couple with capitalism spirit.- Davos 2014 conclusions ,will certainly be interesting to reflect about.-

Saturday, January 11, 2014

Monetary Policy : The path toward normality

Since the financial crisis started off in 2008, Monetary policy everywhere, has played a key role to get the economy back on track. It has been widely thought ,that in such a cases it is fiscal policy which should take the lead. The multiplier effect of higher expenditures , make a decisive impact on aggregate demand.- However, Fiscal policy in most of the advances economies (the core of the financial recession), could not work this time the way it should. Public debt and deficit above 3% , along the austerity program, placed fiscal policy in a secondary role in Europe to get over the crisis. In the USA, the debt limit constraint, and fiscal deficit worries had a similar effect. Prominent economists, argued for more aggressive fiscal expenditures programs, based on the traditional view of macroeconomic policies,(multiplier effects). However ,the nature of the crisis (huge mismatch between asset and liabilities), did not make clear the advantages of such an option. The core of the problem was in the financial , instead of the good markets. The loses of financial wealth was of such a magnitude, that it constrained the deleveraging process to the disposal of huge amount of cash, coming out only from Central Banks. Thus, fiscal austerity also played its role in the USA economy. In fact, in the year 2013 it represented almost 2,5% of Gdp, well above that one of Europe (1%).(source Edward Harrison, The implications of this change, was to leave a wide room for monetary policy to get more aggressive into the economic scene . The issue deals with complementary macroeconomics policies. When fiscal policy saved rather than spend, boosted the potential of monetary policy, which could display all of its instrument at full to get an impact on aggregate activity. That is what Monetary policy did in 2012, with the QE3,(purchasing of bonds).The outcome is an improvement in the pace of economic activity in the USA economy and with it, all economies with close ties to that economy, and unemployment rate is again at 2008 level. Concerning unemployment rates, it is important to consider two hypothesis: a.- The global economy has more labor mobility than previously thought. Those who retire from labor force, might go to other places to look for jobs.- b.- There is transformation under way on the key abilities required on labor force, for this knowledge based economy, substituting old abilities for new ones , which induce even higher mobility because of its scarcity. It follows that current unemployment rates do not reflect completely this dynamics, and it might not be a reliable signal to track the aggregate demand recovery pace. In a different scenario out of (a) and (b) hypothesis current unemployment ,could be lower. The interesting thing about this policy mix, is that Monetary policy effectiveness, increase significantly when it has a complementary and not competitor fiscal policy.- Now with the new Chairwoman Ms J Yellen, a prestigious economist graduated from Yale University, Monetary Policy is next to begin the path to normalization. First, gradually decreasing the purchasing bonds programs,( markets expectations are for this program to be finished by the second half of this year).- Second. To increase the interest rate level, actually within the range of 0-0,25% . Markets betting are that the increase in the interest rates will start next year (Probability of 51% by March). But, it could also be possible to start this process even before, although still in 2015.