This is what we found interesting from the current issue of the “The Economist” (July 17th - July 23rd 2010).
Preface:
Spoiled by choice
Let me begin this week’s review with a para from book review “Spoiled by choice”, by Renata Salecl.
- “That choice is not a goal in itself.”
- “Dominant ideas, including the welfare state, the classless society and the dictatorship of the proletariat, become so pervasive in their heyday that people often fail to ask what they really mean. Challenging the choices presented by life, and pondering why we make them, is more important than focusing just on what we are offered.”
Page 77 – “Spoiled by Choice”
It is time to evaluate the concept of “growth” and its future consequences. It is based on printed money, low interest rates and consumption. The concept has become so dominant and pervasive that global economy is ignoring the fact of unsustainable consequences of fast depleting real resources. We are spoiled by choice.
- “Britain’s Financial Services Authority put forward proposals to curb what it described as excessive mortgage lending. The FSA wants banks to check that borrowers are not artificially inflating their income. It estimated that between 2005 and 2008, 46% of borrowers had no money or an income shortfall after stripping out mortgage payments and living expenses.”
Page 10 – “The World this Week”
- “The rich world’s central bankers have in the past few years proved to be a flamboyant bunch. Responding aggressively to financial panic, recession and the threat of deflation, they lowered short-term interest rates close to zero and many then plunged into the realm of the unconventional, buying government debt and extending vast new loans to banks.”
- “At one end are those, including the OECD and the Bank for International Settlements, who give warning that a prolonged period of ultra-low interest rates risks inflation and resurgent risk-taking (see article). At the other are those who side with the IMF, which last week prescribed a course of fiscal retrenchment for the world, softened with a commitment by central banks to extended easy monetary policy and perhaps even more expansion of their balance-sheets.”
- “With short-term rates at or near zero, central banks’ scope for conventional action is limited. That leaves unconventional tools such as explicit promises to keep rates down for a long time, buying more government debt, making larger, longer-term loans to banks and buying foreign exchange.”
- “The longer interest rates stay low in the rich world, the more capital will flee to emerging markets where rates have risen to combat inflation. This threatens to create the next batch of bubbles. Another round of quantitative easing is likely to deliver far less of a jolt to private spending than the first effort. For example, nudging German and American government-bond yields down from what are already the lowest in a generation will have at best a marginal benefit. So although the central banks still have plenty of tools, these are less effective than they were. Central banks have their role to play in restoring the world to health, but they cannot do it alone. Governments need to be acutely aware of this as they calibrate their austerity plans.”
Page 16 – “The Central Bankers’ Burden”
- “CHINA’S environment, most obviously the air in its cities, has been deteriorating roughly at the same dizzy pace that its industry has been expanding.”
Page 29 – “Budding Greens”
- “Some Americans want to feel exceptional again. Better not to talk about it.”
- “The last thing the country needs is to be distracted from its practical problems by the quest for an elusive greatness. Put such language away, says Lexington. America is indeed a great and exceptional country. But it isn’t talking about it that makes it so.”
Page – 38 “Where has all the greatness gone?”
- “To accept that progress is an illusion is only one step. To change behaviour is another. Until now, much of Europe has chosen to put its values before growth.”
Page – 49 “Calling time on progress”
- “Raghuram Rajan, a former IMF chief economist and professor at Chicago’s Booth School of Business, is one worrywart. “We need to challenge the view that the central banks produce low interest rates and nobody gets hurt,” he says. The Bank for International Settlements (BIS), the Basel-based bank for central banks, has similar anxieties. A chapter in its recent annual report asks whether the hidden costs of low interest rates might be greater than the visible benefits.”
- “The BIS identifies several dangers from too-low interest rates, including a distorted allocation of capital and workers, excessive risk-taking, lopsided balance-sheets and destabilising surges in capital flows. The bank stops short of calling for tighter monetary policy but it gives warning that “keeping interest rates low comes at a cost—a cost that is growing with time.””
- “Banks may be more of a concern, as they borrow at shorter maturities to lend at longer ones. This is a profitable strategy when, as now, short-term interest rates are close to zero and the yields on longer-term bonds are higher. Indeed, low rates are a semi-deliberate subsidy to help nurse banks back to health. But if money is kept cheap for too long banks may be tempted to borrow excessively to fund long-term bonds, risking capital losses should interest rates suddenly rise.”
- “Cheap money may also delay a cleaning-out of bad debts from the banking system.”
- “Near-zero rich-world rates encourage yield-hungry investors to place their short-term funds in emerging markets. That is a headache for central banks in those countries, which find that raising rates to cool their economies only encourages speculative inflows.”
Page 70 – “Easy-money riders”
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