Sunday, April 20, 2014

More Challenges Are Coming To The Economy. Will It Survive?

Brown Economists: 'Secular Stagnation' May Strangle Economy

Friday, 18 Apr 2014 09:21 AM

By Dan Weil

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The U.S. economy may not mend its woes soon and instead may suffer a bout of "secular stagnation," Brown University economists Gauti Eggertsson and Neil Mehrotra maintain in a recent paper.

A deleveraging shock, a drop in population growth, or an increase in income inequality could shift people from borrowing to savings, the economists say. Essentially, there simply aren't enough promising real-world investments, forcing investors to put their money into stocks, junk bonds, etc. — and not investments that create demand for a product. This weak demand results in economic stagnation.

And with a short-term interest rates already at zero, the Fed will be "unable to generate a sufficient monetary stimulus," they assert. The outcome: a "permanent slump in output,"Eggertsson and Mehrotra write.

"It's not a baseline scenario, but I think people should at least be starting to consider the possibility that this could go on for a while," Eggertsson told CNBC.com.

That could "lead us to be a little bit less optimistic than people have been about re-normalization coming [for the economy] in the next year or two."

GDP expanded 2.6 percent in the fourth quarter and has run at about a 2 percent growth rate since the recession ended in June 2009.

Economic stagnation is commonly defined as a prolonged period of slow economic growth (traditionally measured in terms of the GDP growth), usually accompanied by high unemployment.

The economists base their recent conclusion on the "secular stagnation" hypothesis by Harvard economic professor Alvin Hansen, who contended that inadequate capital investment hindered full deployment of labor and other economic resources. During the Great Depression, private capital investment fell because of excess capacity and lack of good investment opportunities.

Former White House economic adviser Larry Summers is perhaps the most prominent advocate of the secular stagnation theory.

"In its current World Economic Outlook , the IMF essentially endorses the secular stagnation hypothesis, noting that the real interest rate necessary to bring about enough demand for full employment has declined significantly and is likely to remain depressed for a substantial period," Summers writes in The Washington Post.

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Sunday, December 22, 2013

Is Europe Moving Away From Market Economy? Will It End Badly? What Possibility Of It Happening?

Saxo Bank's Jakobsen: Europe Moving Toward Totalitarianism

Friday, 20 Dec 2013 07:36 AM

By Dan Weil

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Europe is shifting away from a market-based economic model and is heading for Soviet-style totalitarianism, says Steen Jakobsen, chief economist of Denmark's Saxo Bank.

In a report obtained by CNBC, Jakobsen provides a series of extreme forecasts, including zero economic growth for the United States and a plunge in oil prices next year.

While Jakobsen acknowledges that the "probability of any one of the predictions coming true is low," he notes they are "based on a feasible — if unlikely — series of market and political events."

As for Europe veering toward communism, Jakobsen says the eurozone will continue to suffer from economic stagnation.

As a result, the European Commission will push for a wealth tax on those with savings of more than $100,000, he predicts.

"We have gone full circle back to a Soviet Union model," Jakobsen writes. "It will be the final move toward a totalitarian European state and the low point for individual and property rights."

Europe is further away from a market economy that at any time since World War II, he says.

So how should investors react to the turmoil? Opt for hard assets and an exchange-traded fund that tracks gold, he says.

Meanwhile, Barry Eichengreen, professor of economics at the University of California, Berkeley, says that Europe's economic crisis appears to be shifting from debt to deflation.

If that's the case, "the European Central Bank has its work cut out for it, and there is nothing to suggest that it is up to the task," he writes in The Guardian.

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