Surprising Moves in Overlooked Economies
By EHS E-Board Member
Over the last few months, as global markets have experienced increased turmoil due to concerns regarding declines in oil prices, China’s economic climate, and overvalued companies across sectors, several national banks have reconsidered their stances on interest rates. The most noteworthy decisions were made by the Bank of Japan, which has instituted negative interest rates, and the Federal Reserve Bank in America, which has officially postponed its much anticipated “rate hike.”
While these decisions have received much analysis, it is important to note that several other banks are also expected to take nonconventional steps in response to the current economic climate. One country that is expected to respond strongly to what is going on is the Bank of Israel. At the moment, forward rates, which are a good representation of where traders believe interest rates will be in the near future, are pricing in a rate decline in Israel from 1% to at most .5%. In the longer-term, it is expected that the Bank of Israel will also resort to negative rates if the global economic climate does not see improvement.
The main reason an interest rate decline in Israel may happen is that exports currently make up one third of Israel’s GDP. However, recently, only the Israeli Shekel and the Swiss Franc have experienced currency deflation compared to other major currencies. This has caused Israel’s exports to be rendered more expensive internationally, which is obviously not great for a country that relies so heavily on exporting its goods.
Moving forward, it will be very interesting to see how various issues currently affecting the global economic landscape will be either resolved or exacerbated. In volatile times like these, it is important to keep a close eye on the views of various national banks, as they can help provide some insight into how economic issues are affecting several countries.
Over the last few months, as global markets have experienced increased turmoil due to concerns regarding declines in oil prices, China’s economic climate, and overvalued companies across sectors, several national banks have reconsidered their stances on interest rates. The most noteworthy decisions were made by the Bank of Japan, which has instituted negative interest rates, and the Federal Reserve Bank in America, which has officially postponed its much anticipated “rate hike.”
While these decisions have received much analysis, it is important to note that several other banks are also expected to take nonconventional steps in response to the current economic climate. One country that is expected to respond strongly to what is going on is the Bank of Israel. At the moment, forward rates, which are a good representation of where traders believe interest rates will be in the near future, are pricing in a rate decline in Israel from 1% to at most .5%. In the longer-term, it is expected that the Bank of Israel will also resort to negative rates if the global economic climate does not see improvement.
The main reason an interest rate decline in Israel may happen is that exports currently make up one third of Israel’s GDP. However, recently, only the Israeli Shekel and the Swiss Franc have experienced currency deflation compared to other major currencies. This has caused Israel’s exports to be rendered more expensive internationally, which is obviously not great for a country that relies so heavily on exporting its goods.
Moving forward, it will be very interesting to see how various issues currently affecting the global economic landscape will be either resolved or exacerbated. In volatile times like these, it is important to keep a close eye on the views of various national banks, as they can help provide some insight into how economic issues are affecting several countries.
Japan's Negative Interest Rate Policy
By EHS E-Board Member
On January 29th, 2016, the Bank of Japan surprised the markets by announcing that it will charge banks 0.1% for parking additional reserves with the BoJ. On February 16th, 2016, this controversial policy came into effect, urging banks to lend, savers to spend, and businesses to invest.
Japan has been struggling to cope with both economic and social issues for quite some time now, such as with an aging population and consistently low birth rates, a weak economy, and a more than two decades-long deflationary spiral. In an attempt to alleviate the Japanese economy from these constraints, Japanese Prime Minister Shinzō Abe introduced his well-known Abenomics policies in January 2013, consisting of “three arrows”: fiscal stimulus, monetary easing, and structural reforms. And Abe did not hesitate to implement his policies swiftly. Hoping to impose some upward pressure on the Land of the Rising Sun’s inflation rate, Abe hiked the consumption tax from 5% to 8% in April 2014, 17 years after the last time that tax was increased. Yet, similar to the BoJ’s extensive quantitative easing program [which even includes Japan’s $1.1 trillion government pension fund] and an introduction of a flexible budget deficit, the increase in consumption taxes did not have the intended and much-needed outcome of higher price levels. In September 2015, Japan fell back into deflation for the first time since 2013, and the same year also saw the Japanese economy’s real GDP contract, both in Q2 and Q4.
It will be fascinating to see how the BoJ’s latest and arguably most unconventional attempt to kick-start its economy plays out. One major problem with monetary easing is that it often has diminishing marginal effects; surprise central bank announcements can initially be quite impactful, yet a constant revision and extension of such policies – which the BoJ has been doing since the early 2000s – often turns the policies meaningless.
Then again, this is the first time that Japan’s interest rates enter negative territory, and the market’s reaction seems to effectively be confirming the radical nature of that policy. In the eleven days since the BoJ’s announcement, the Japanese benchmark Nikkei index has fallen by 8.5% and the yen is up 6.5% against the dollar. Moreover, Japanese banks’ shares have plummeted by as much as 30% over the same period. This is partly due to the timing, given that global markets were already in a tailspin over China's economic slowdown, U.S.’ rates hike and tumbling oil prices. Nonetheless, the Japanese market’s reaction highlights a certain degree of pessimism – or at least the presence of uncertainty – over the recent monetary policy’s effectiveness.
Analysts’ estimates, however, paint a less dramatic picture. Their analyses estimate that Japanese companies will gain 0.2 trillion yen from lower borrowing costs, which is merely 0.3% of corporate operating profits. Moreover, Japanese households have about half their assets in deposits while their debt is much smaller, meaning that they have little to gain from negative rates either. Estimates predict the Japanese government to be the major beneficiary from this policy; being the country’s biggest borrower, negative rates would translate to savings of 1.2 trillion yen.
Finally, one should note that the BoJ’s negative interest rate policy adds to the already significant divergence in the advanced economies’ central bank policies. While the Fed hiked its federal funds rate in December 2015 and the Bank of England’s rhetoric is turning more and more hawkish, the ECB and BoJ have done quite the opposite by implementing radical easy money policies to buoy their sluggish economies. The implications of that divergence in central bank policies for the developed world’s markets and economies, as well as for numerous [commodity-rout-] weakened emerging markets – many of which have also implemented expansionary monetary policies in 2015 – is difficult to foresee. At this stage, all that the Economics Honors Society can predict is that its members will be busy analyzing the near term effects of the BoJ’s most recent policy.
On January 29th, 2016, the Bank of Japan surprised the markets by announcing that it will charge banks 0.1% for parking additional reserves with the BoJ. On February 16th, 2016, this controversial policy came into effect, urging banks to lend, savers to spend, and businesses to invest.
Japan has been struggling to cope with both economic and social issues for quite some time now, such as with an aging population and consistently low birth rates, a weak economy, and a more than two decades-long deflationary spiral. In an attempt to alleviate the Japanese economy from these constraints, Japanese Prime Minister Shinzō Abe introduced his well-known Abenomics policies in January 2013, consisting of “three arrows”: fiscal stimulus, monetary easing, and structural reforms. And Abe did not hesitate to implement his policies swiftly. Hoping to impose some upward pressure on the Land of the Rising Sun’s inflation rate, Abe hiked the consumption tax from 5% to 8% in April 2014, 17 years after the last time that tax was increased. Yet, similar to the BoJ’s extensive quantitative easing program [which even includes Japan’s $1.1 trillion government pension fund] and an introduction of a flexible budget deficit, the increase in consumption taxes did not have the intended and much-needed outcome of higher price levels. In September 2015, Japan fell back into deflation for the first time since 2013, and the same year also saw the Japanese economy’s real GDP contract, both in Q2 and Q4.
It will be fascinating to see how the BoJ’s latest and arguably most unconventional attempt to kick-start its economy plays out. One major problem with monetary easing is that it often has diminishing marginal effects; surprise central bank announcements can initially be quite impactful, yet a constant revision and extension of such policies – which the BoJ has been doing since the early 2000s – often turns the policies meaningless.
Then again, this is the first time that Japan’s interest rates enter negative territory, and the market’s reaction seems to effectively be confirming the radical nature of that policy. In the eleven days since the BoJ’s announcement, the Japanese benchmark Nikkei index has fallen by 8.5% and the yen is up 6.5% against the dollar. Moreover, Japanese banks’ shares have plummeted by as much as 30% over the same period. This is partly due to the timing, given that global markets were already in a tailspin over China's economic slowdown, U.S.’ rates hike and tumbling oil prices. Nonetheless, the Japanese market’s reaction highlights a certain degree of pessimism – or at least the presence of uncertainty – over the recent monetary policy’s effectiveness.
Analysts’ estimates, however, paint a less dramatic picture. Their analyses estimate that Japanese companies will gain 0.2 trillion yen from lower borrowing costs, which is merely 0.3% of corporate operating profits. Moreover, Japanese households have about half their assets in deposits while their debt is much smaller, meaning that they have little to gain from negative rates either. Estimates predict the Japanese government to be the major beneficiary from this policy; being the country’s biggest borrower, negative rates would translate to savings of 1.2 trillion yen.
Finally, one should note that the BoJ’s negative interest rate policy adds to the already significant divergence in the advanced economies’ central bank policies. While the Fed hiked its federal funds rate in December 2015 and the Bank of England’s rhetoric is turning more and more hawkish, the ECB and BoJ have done quite the opposite by implementing radical easy money policies to buoy their sluggish economies. The implications of that divergence in central bank policies for the developed world’s markets and economies, as well as for numerous [commodity-rout-] weakened emerging markets – many of which have also implemented expansionary monetary policies in 2015 – is difficult to foresee. At this stage, all that the Economics Honors Society can predict is that its members will be busy analyzing the near term effects of the BoJ’s most recent policy.
Latin America’s ‘Pink Tide’ Continues to Recede
By EHS E-Board Member
This past Sunday, February 21st, Bolivian President Evo Morales was defeated in an electoral referendum as he tried to amend the constitution to allow him to run for a fourth straight term in office. Morales’ loss in the polls represents only the latest installment of a clear trend in Latin American politics. Over the last few months, countries across the region have shifted support away from the “pink tide” of left-leaning governments that have ruled them for over a decade, bringing new hope for the political and economic development of the region.
The term “pink tide” refers to the expansion of left-wing ideology and policy throughout Latin America since the turn of the 20th century (pink being a lighter version of red—a color often associated with communism). The election of Hugo Chavez as president of Venezuela in 1998 and the implementation of his “Bolivarian Socialism of the 21st Century” ignited a trend that rapidly influenced other countries in the region. Chavez in Venezuela, Lula DaSilva (followed by Dilma Rouseff) in Brazil, Evo Morales in Bolivia, and Cristina Fernandez de Kirchner in Argentina have been the central figures of the movement, instituting anti-free-market policies in their countries, as well as eroding the democratic institution of their governments. Pink tide governments had intended to empower the previously marginalized working-class of their countries through populist reforms, but their misguided economic policy only worsened their nation’s socioeconomic woes.
Over the past two years, the slowdown of the Chinese economy and the global collapse of commodity prices have hit Latin America’s mostly export-oriented economies extremely hard. Economic growth in the Latin America and the Caribbean slowed down for the fifth year in a row, dipping below 1%. Projections for 2016 do not look much better. Countries like Brazil and Venezuela—who’s GDP is almost 99% based in oil exports—have been hit particularly hard. Citizens of this countries have shifted the blame for the economic hardship to their governments, demanding change.
On November 23rd 2015, conservative candidate Mauricio Macri’s was elected president of Argentina, following almost a decade of populist rule under Cristina Kirschner. Macri did not waste any time implementing his market-oriented political reforms, allowing the Argentine peso to float more freely, amending the tax code, and opening the country modernizing the country’s international trade policy. A month latter, at the other end of the South American cone, Venezuela’s opposition party won a decisive victory in National Assembly elections, undermining Nicolas Maduro’s (Chavez’s hand picked successor after his death) strong grip over the country. In Brazil, President Dilma Rousseff's approval ratings are barely above 10%, as she faces possible impeachment for corruption charges. After Sunday’s defeat, Evo Morales will have to surrender power to a new regime when his term ends in 2020. The improved relationship between the U.S. and Cuba can also be seen as part of the same trend.
The economic outlook for Latin America as a region still looks extremely bleak in the short term. The economies of Brazil and Venezuela will shrink by 4% an 7% respectively over the next year, with most other countries posting only marginally better results (with a few noticeable exceptions). Yet the recent political changes provide us with new hope for the future long term economic development of the region. The imminent shift towards free-market policies will allow for the institutional changes necessary to take advantage of export-derived income if commodity prices rebound, as well creating additional revenue streams through the development of local industries and innovation. Latin America has the potential of being a leader of global growth over the next century, and moving past this era of a “pink tide” is the first step in achieving this vision.
This past Sunday, February 21st, Bolivian President Evo Morales was defeated in an electoral referendum as he tried to amend the constitution to allow him to run for a fourth straight term in office. Morales’ loss in the polls represents only the latest installment of a clear trend in Latin American politics. Over the last few months, countries across the region have shifted support away from the “pink tide” of left-leaning governments that have ruled them for over a decade, bringing new hope for the political and economic development of the region.
The term “pink tide” refers to the expansion of left-wing ideology and policy throughout Latin America since the turn of the 20th century (pink being a lighter version of red—a color often associated with communism). The election of Hugo Chavez as president of Venezuela in 1998 and the implementation of his “Bolivarian Socialism of the 21st Century” ignited a trend that rapidly influenced other countries in the region. Chavez in Venezuela, Lula DaSilva (followed by Dilma Rouseff) in Brazil, Evo Morales in Bolivia, and Cristina Fernandez de Kirchner in Argentina have been the central figures of the movement, instituting anti-free-market policies in their countries, as well as eroding the democratic institution of their governments. Pink tide governments had intended to empower the previously marginalized working-class of their countries through populist reforms, but their misguided economic policy only worsened their nation’s socioeconomic woes.
Over the past two years, the slowdown of the Chinese economy and the global collapse of commodity prices have hit Latin America’s mostly export-oriented economies extremely hard. Economic growth in the Latin America and the Caribbean slowed down for the fifth year in a row, dipping below 1%. Projections for 2016 do not look much better. Countries like Brazil and Venezuela—who’s GDP is almost 99% based in oil exports—have been hit particularly hard. Citizens of this countries have shifted the blame for the economic hardship to their governments, demanding change.
On November 23rd 2015, conservative candidate Mauricio Macri’s was elected president of Argentina, following almost a decade of populist rule under Cristina Kirschner. Macri did not waste any time implementing his market-oriented political reforms, allowing the Argentine peso to float more freely, amending the tax code, and opening the country modernizing the country’s international trade policy. A month latter, at the other end of the South American cone, Venezuela’s opposition party won a decisive victory in National Assembly elections, undermining Nicolas Maduro’s (Chavez’s hand picked successor after his death) strong grip over the country. In Brazil, President Dilma Rousseff's approval ratings are barely above 10%, as she faces possible impeachment for corruption charges. After Sunday’s defeat, Evo Morales will have to surrender power to a new regime when his term ends in 2020. The improved relationship between the U.S. and Cuba can also be seen as part of the same trend.
The economic outlook for Latin America as a region still looks extremely bleak in the short term. The economies of Brazil and Venezuela will shrink by 4% an 7% respectively over the next year, with most other countries posting only marginally better results (with a few noticeable exceptions). Yet the recent political changes provide us with new hope for the future long term economic development of the region. The imminent shift towards free-market policies will allow for the institutional changes necessary to take advantage of export-derived income if commodity prices rebound, as well creating additional revenue streams through the development of local industries and innovation. Latin America has the potential of being a leader of global growth over the next century, and moving past this era of a “pink tide” is the first step in achieving this vision.
Privacy or Protection?
By EHS E-Board Member
With the large technological advancements that are constantly occurring in this day and age, one major question continues to plunge itself into the court of public opinion: where to draw the line between government regulation and freedom of privacy. One can view this debate through the lens of a supply and demand cure for privacy. We, as consumers want to be safe and ensure that our country is doing whatever it can to prevent terrorist attacks, but we also do not want to be constantly watched and monitored due to fear of our personal privacy being violated. Finding the equilibrium between our demand for privacy and the right amount of government regulation is the line that becomes more shaded as technology improves.
One recent example of the fight between consumer privacy and public safety was discussed in a recent meeting between Tim Cook, CEO of Apple, and James Comey, the Federal Bureau of Investigation Director. The Wall Street Journal recently reported that in the meeting Tim Cook argued that the government should “publicly acknowledge the benefits of encryption” while government officials said that large companies should work with the government to devise a way to get court-ordered access to data sought in investigations. The underlining focus here, although not mentioned directly in the meeting, was fact that Syed Rizwan Farook, who was one of the shooters in the San Bernardino shooting on December 2nd, had an IPhone.
The tension that existed between these two figures became salient when they took to the internet to lash out at the opinions of each other. Mr. Comey argued that it is immoral to not share private information about consumers with the government if it can prevent terrorist attacks from happening; However, the Cook said that what the government is trying to do sets a dangerous precedent that could lead to an infringement on civil liberties.
The issue is not unique to Apple. Many cases have been filed against Google trying to force the global search engine giant to open some of its servers to government circumspection. In a world where companies like Google and Apple contain more information about individuals than even one’s own spouse would want to know, the question over how much privacy we want at the expense of increased safety is one that will only become more prevalent as time progresses.
With the large technological advancements that are constantly occurring in this day and age, one major question continues to plunge itself into the court of public opinion: where to draw the line between government regulation and freedom of privacy. One can view this debate through the lens of a supply and demand cure for privacy. We, as consumers want to be safe and ensure that our country is doing whatever it can to prevent terrorist attacks, but we also do not want to be constantly watched and monitored due to fear of our personal privacy being violated. Finding the equilibrium between our demand for privacy and the right amount of government regulation is the line that becomes more shaded as technology improves.
One recent example of the fight between consumer privacy and public safety was discussed in a recent meeting between Tim Cook, CEO of Apple, and James Comey, the Federal Bureau of Investigation Director. The Wall Street Journal recently reported that in the meeting Tim Cook argued that the government should “publicly acknowledge the benefits of encryption” while government officials said that large companies should work with the government to devise a way to get court-ordered access to data sought in investigations. The underlining focus here, although not mentioned directly in the meeting, was fact that Syed Rizwan Farook, who was one of the shooters in the San Bernardino shooting on December 2nd, had an IPhone.
The tension that existed between these two figures became salient when they took to the internet to lash out at the opinions of each other. Mr. Comey argued that it is immoral to not share private information about consumers with the government if it can prevent terrorist attacks from happening; However, the Cook said that what the government is trying to do sets a dangerous precedent that could lead to an infringement on civil liberties.
The issue is not unique to Apple. Many cases have been filed against Google trying to force the global search engine giant to open some of its servers to government circumspection. In a world where companies like Google and Apple contain more information about individuals than even one’s own spouse would want to know, the question over how much privacy we want at the expense of increased safety is one that will only become more prevalent as time progresses.
The Politics of Economic Posturing
(This is an opinion piece discussing how presidential candidates position themselves depending on other candidate's stances on the nation’s economic outlook)
By EHS E-Board Member
Its not easy to both completely and concisely reflect on the state of the US economy. For example, on the one hand, job growth has been consistently strong in this country. But on the other hand, the labor-force participation rate is at its lowest in 38 years. Inflation has been weaker than hoped and payroll gains have been very spotty. With such a breadth and depth of data points available, those in the business of offering their opinions on the matter are forced to nitpick. For politicians, however, ‘forced’ would not be the right word. This is their opportunity - and their duty, if they want a chance to win - to stand out on virtually every presidential election’s most important issue. As Lynn Vavreck, a political scientist from UCLA, points out, if “you don’t have the economy at your back, its really hard to steal the election away”.
Mr. Vavreck’s words set the stage for the consensus viewpoint leading up to the election: the economy has been recovering nicely under Democratic leadership. With this in mind, we can better understand the reasoning behind the relative differences between the economic agendas each candidate is setting forth. This race is particularly divisive regarding economic policy because what we have are essentially four different factions, not yet two.
By February in an election year, we tend to see either the presence or at least an expectation of both parties converging on a relative centrist. But this year features two economic extremists, namely the populist poster-boys Bernie Sanders and Donald Trump. Sanders and Trump are the most economically radical, but on opposite ends of the spectrum; Bernie’s tax hikes and government expenditure plans are farthest left, while Trump’s tax cuts and free trade intervention are farthest to the right.
These candidates are challenging the tendency for centrist viewpoints to eventually rise and their persistence has us all wondering whether this assumption needs to be reexamined.
Other Republican candidates Marco Rubio, Ted Cruz, Ben Carson and John Kasich all argue for some combination of reducing government spending and lowering taxes, the traditional Republican dogma (Cruz at the South Carolina debate: "Everyone pays the same simple flat 10% income rate. It’s flat and fair.”) This group has been more likely to avoid speaking too much about the economy and rather latch on to other issues. They find a tough time arguing with the progress and relative stability we’ve seen in this country, and they observe that the economic issue that has caught the most fire – income inequality – has been co-opted by the left.
The leader of the left, Hillary Clinton is particularly hard to pin down. The political theory that candidates appease their parties more during primary season and then the center afterwards applies to her perfectly. She has a long history championing reforms, but she has also been under fire for accepting large Wall Street speaking fees (maybe the most bi-partisan foul is looking pro-Wall Street). And she has no interest in letting economic issues pin her down, just like her Republican counterparts. If your name isn’t Bernie or Donald, you better throw another issue out there because the biggest one belongs to the populists. In Nevada, Clinton rhetorically asked, “If we broke up the big banks tomorrow, and I will, if they deserve it, if they pose a systemic risk, I will. Will that end racism? Will that end sexism? Will that end discrimination against the LGBT community? Will that make people feel more welcoming to immigrants overnight?”. Read: If Bernie can stir up fear, so can I.
The wildcard in this race is of course Bernie Sanders. Bernie is one of the main reasons the right veers away from economic talk. Two simple facts about Bernie and his campaign: 1. it is by rooted in far-left (for this country’s standards) and sometimes Socialist economic policy - increased taxes on the nation’s top-earning individuals (to 48% and 52% on the top two income brackets) and corporations, stricter Wall Street regulation, single-payer healthcare and free higher-level education. And 2. he’s quite popular. Bernie’s popularity leaves the right better off focusing on other issues for now, and fighting that battle only if Bernie proves to finish as the Democratic nominee. Until recently, as Hillary re-establishes clear-cut front-runner status, the relative centrists didn’t know what to do because it made no sense for campaigns built on radical economic change to win in the polls.
So Is it fear that’s selling? Or is it radical change? Maybe fear does sell, but to many, the idea of voting for another insider politician seems to be striking a chord as the scariest thing of all.
I've been operating on the assumption that the US economy is generally in good shape (however crudely that conclusion was reached). However, if global threats persist and even exacerbate, such as sinking commodity prices and middle eastern tensions, slowed growth in China and emerging market recessions, the Republican candidates will start to pull some punches. At the end of the day, such a scenario would really hurt Clinton the most and be a boon for Sanders and Trump. When turmoil hits the markets, voters may feel that their likeness for the populist candidates is further validated. If their campaigns hope to capitalize on this potential opportunity, Trump and Sanders better hope for more market turmoil and ultimately shed the vagueness and sell their plans.
By EHS E-Board Member
Its not easy to both completely and concisely reflect on the state of the US economy. For example, on the one hand, job growth has been consistently strong in this country. But on the other hand, the labor-force participation rate is at its lowest in 38 years. Inflation has been weaker than hoped and payroll gains have been very spotty. With such a breadth and depth of data points available, those in the business of offering their opinions on the matter are forced to nitpick. For politicians, however, ‘forced’ would not be the right word. This is their opportunity - and their duty, if they want a chance to win - to stand out on virtually every presidential election’s most important issue. As Lynn Vavreck, a political scientist from UCLA, points out, if “you don’t have the economy at your back, its really hard to steal the election away”.
Mr. Vavreck’s words set the stage for the consensus viewpoint leading up to the election: the economy has been recovering nicely under Democratic leadership. With this in mind, we can better understand the reasoning behind the relative differences between the economic agendas each candidate is setting forth. This race is particularly divisive regarding economic policy because what we have are essentially four different factions, not yet two.
By February in an election year, we tend to see either the presence or at least an expectation of both parties converging on a relative centrist. But this year features two economic extremists, namely the populist poster-boys Bernie Sanders and Donald Trump. Sanders and Trump are the most economically radical, but on opposite ends of the spectrum; Bernie’s tax hikes and government expenditure plans are farthest left, while Trump’s tax cuts and free trade intervention are farthest to the right.
These candidates are challenging the tendency for centrist viewpoints to eventually rise and their persistence has us all wondering whether this assumption needs to be reexamined.
Other Republican candidates Marco Rubio, Ted Cruz, Ben Carson and John Kasich all argue for some combination of reducing government spending and lowering taxes, the traditional Republican dogma (Cruz at the South Carolina debate: "Everyone pays the same simple flat 10% income rate. It’s flat and fair.”) This group has been more likely to avoid speaking too much about the economy and rather latch on to other issues. They find a tough time arguing with the progress and relative stability we’ve seen in this country, and they observe that the economic issue that has caught the most fire – income inequality – has been co-opted by the left.
The leader of the left, Hillary Clinton is particularly hard to pin down. The political theory that candidates appease their parties more during primary season and then the center afterwards applies to her perfectly. She has a long history championing reforms, but she has also been under fire for accepting large Wall Street speaking fees (maybe the most bi-partisan foul is looking pro-Wall Street). And she has no interest in letting economic issues pin her down, just like her Republican counterparts. If your name isn’t Bernie or Donald, you better throw another issue out there because the biggest one belongs to the populists. In Nevada, Clinton rhetorically asked, “If we broke up the big banks tomorrow, and I will, if they deserve it, if they pose a systemic risk, I will. Will that end racism? Will that end sexism? Will that end discrimination against the LGBT community? Will that make people feel more welcoming to immigrants overnight?”. Read: If Bernie can stir up fear, so can I.
The wildcard in this race is of course Bernie Sanders. Bernie is one of the main reasons the right veers away from economic talk. Two simple facts about Bernie and his campaign: 1. it is by rooted in far-left (for this country’s standards) and sometimes Socialist economic policy - increased taxes on the nation’s top-earning individuals (to 48% and 52% on the top two income brackets) and corporations, stricter Wall Street regulation, single-payer healthcare and free higher-level education. And 2. he’s quite popular. Bernie’s popularity leaves the right better off focusing on other issues for now, and fighting that battle only if Bernie proves to finish as the Democratic nominee. Until recently, as Hillary re-establishes clear-cut front-runner status, the relative centrists didn’t know what to do because it made no sense for campaigns built on radical economic change to win in the polls.
So Is it fear that’s selling? Or is it radical change? Maybe fear does sell, but to many, the idea of voting for another insider politician seems to be striking a chord as the scariest thing of all.
I've been operating on the assumption that the US economy is generally in good shape (however crudely that conclusion was reached). However, if global threats persist and even exacerbate, such as sinking commodity prices and middle eastern tensions, slowed growth in China and emerging market recessions, the Republican candidates will start to pull some punches. At the end of the day, such a scenario would really hurt Clinton the most and be a boon for Sanders and Trump. When turmoil hits the markets, voters may feel that their likeness for the populist candidates is further validated. If their campaigns hope to capitalize on this potential opportunity, Trump and Sanders better hope for more market turmoil and ultimately shed the vagueness and sell their plans.
Why is the Global Economy Suffering?
By EHS E-Board Member
This year started with global stock market and commodities problems over concerns about China’s economy and the overall global outlook. Investors are abandoning riskier stocks in favor of safer securities like gold and government bonds, while oil prices continue to fall. Some analysts believe the root of these problems is quantitative easing which has swamped the market with easy money. These analysts also believe that China’s government has made little progress in reorganizing their economies towards sources of jobs and growth. While everything around us is falling, some ask the question of whether or not this is a repeat of the 2008 financial crisis. Billionaire speculator George Soros said: “There is a financial crisis and a bear market … The source of the disequilibrium is different. In 2008 it was US sub-prime housing. Today it is China, where a hard landing is practically unavoidable.”
Worries about China’s economic strength are at the heart of these issues. In the past, China had extreme growth, during which it overtook Japan to become the world’s second largest economy. Currently, China is having a major slowdown. Last year China’s GDP expanded by 6.9%, which is the slowest pace it has had for 25 years. China’s problems are being felt in economies around the world because it is one of the biggest consumers of oil and other commodities. Because China is having such a slowdown, they are decreasing the amount of commodities they are using, which is weighing hard on oil prices. There have also been big swings on China’s stock market. The CSI300 index of the largest listed companies in Shanghai and Shenzhen is down 16% since the start of this year and 42% since a peak last June.
Another big issue is China’s currency. Last August, Beijing shocked the market by devaluing the Yuan. This is an issue because a weaker Yuan means cheaper Chinese exports shoring up its manufacturing sector. A cheaper Yuan also hurts imports because the imports will be more expensive compared to home goods. IMF chief Christine Lagarde has urged China to communicate better with financial markets.
Finally, there is little confidence in China’s policymaker’s ability to manage economic transitions. There have been six interest rate cuts since November 2014, which have all failed to halt the economic slowdown. This past month, Xiao Gang, chairman of the China Securities Regulatory Commission, introduced a mechanism to curb stock exchange volatility. This mechanism called the circuit breaker was taken away after 4 days because it furthered the trouble in the market. While China is definitely a big issue it cannot carry the blame alone. As of 2014, the US, the Eurozone and Japan together accounted for nearly half of the world economy. Despite rapid growth, China only makes up 13% of the world economy. Currently, the global economy is suffering from a number of different problems, of which China is a major, but not the only one.
This year started with global stock market and commodities problems over concerns about China’s economy and the overall global outlook. Investors are abandoning riskier stocks in favor of safer securities like gold and government bonds, while oil prices continue to fall. Some analysts believe the root of these problems is quantitative easing which has swamped the market with easy money. These analysts also believe that China’s government has made little progress in reorganizing their economies towards sources of jobs and growth. While everything around us is falling, some ask the question of whether or not this is a repeat of the 2008 financial crisis. Billionaire speculator George Soros said: “There is a financial crisis and a bear market … The source of the disequilibrium is different. In 2008 it was US sub-prime housing. Today it is China, where a hard landing is practically unavoidable.”
Worries about China’s economic strength are at the heart of these issues. In the past, China had extreme growth, during which it overtook Japan to become the world’s second largest economy. Currently, China is having a major slowdown. Last year China’s GDP expanded by 6.9%, which is the slowest pace it has had for 25 years. China’s problems are being felt in economies around the world because it is one of the biggest consumers of oil and other commodities. Because China is having such a slowdown, they are decreasing the amount of commodities they are using, which is weighing hard on oil prices. There have also been big swings on China’s stock market. The CSI300 index of the largest listed companies in Shanghai and Shenzhen is down 16% since the start of this year and 42% since a peak last June.
Another big issue is China’s currency. Last August, Beijing shocked the market by devaluing the Yuan. This is an issue because a weaker Yuan means cheaper Chinese exports shoring up its manufacturing sector. A cheaper Yuan also hurts imports because the imports will be more expensive compared to home goods. IMF chief Christine Lagarde has urged China to communicate better with financial markets.
Finally, there is little confidence in China’s policymaker’s ability to manage economic transitions. There have been six interest rate cuts since November 2014, which have all failed to halt the economic slowdown. This past month, Xiao Gang, chairman of the China Securities Regulatory Commission, introduced a mechanism to curb stock exchange volatility. This mechanism called the circuit breaker was taken away after 4 days because it furthered the trouble in the market. While China is definitely a big issue it cannot carry the blame alone. As of 2014, the US, the Eurozone and Japan together accounted for nearly half of the world economy. Despite rapid growth, China only makes up 13% of the world economy. Currently, the global economy is suffering from a number of different problems, of which China is a major, but not the only one.
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