January, 2013 Archives

28
Jan

Safe Assets and the Coordination of Fiscal and Monetary Policy

by Riaan Nel in Global Investments

Here is a link to a thought provoking discussion about the need for coordination between monetary policy and fiscal policy by Tim Duy on his blog, Fedwatch: http://economistsview.typepad.com/timduy/2013/01/safe-assets-and-the-coordination-of-fiscal-and-monetary-policy.html.

He quotes Kansas City Fed president Esther George, and Goerge’s quote really needs pondering.  I’ll repeat it here:

“But, while I agree with keeping rates low to support the economic recovery, I also know that keeping interest rates near zero has its own set of consequences. Specifically, a prolonged period of zero interest rates may substantially increase the risks of future financial imbalances and hamper attainment of the FOMC’s 2 percent inflation goal in the future.

A long period of unusually low interest rates is changing investors’ behavior and is reshaping the products and the asset mix of financial institutions. Investors of all profiles are driven to reach for yield, which can create financial distortions if risk is masked or imperfectly measured, and can encourage risks to concentrate in unexpected corners of the economy and financial system…The push toward increased risk-taking is the intention of such policy, but the longer-term consequences are not well understood.

Read the rest of this entry »

6
Jan

Obama’s Leadership Failure

by Abe Townsend in Politics

 

 In my debut article on World-Political-Economy I will tackle the controversial issue of Obama’s leadership during the “fiscal cliff” negotiations.  I want to start by thanking the editor of this site, Riaan Nel, for allowing me to become a regular writer.  I am aware that I’m slightly more political than Riaan, but he wanted to bring a bit of outspokenness to the site as it relates to political issues.  Well, I’ll try my best!

Recently Robert Samuelson wrote an excellent article for Real Politics with the same title as my article.  I agree with Samuelson that the last minute cliff hanging negotiations (pardon the pun) is a massive failure of presidential leadership.  Let’s face it, at the heart of the issue is the reality that the Federal Government can no longer fulfill all the promises it has made to various constituencies. Samuelson correctly points out that some promises will be reduced or disavowed, and that only the president can submit these questions to the American people to discuss.  A national discussion on these questions is imperative, but Obama doesn’t want to tell people things they don’t want to know.

The current level of Federal spending cannot be sustained, even if we raise all taxes significantly.  This fact casts our crisis as a crisis of spending, not a crisis of revenue.  I’m okay with making higher taxes on the wealthy part of a comprehensive plan to deal with our unsustainable spending; however, Obama’s narrative is that we can fix the problem with a few adjustments to spending here and there, and, with making the rich pay their fair share. 

He is not being honest to the American people.  He should be upfront and explain to the American people that in 2012 Social Security, Medicare and Medicaid accounted for 44 percent of non-interest federal spending.   According to The Heritage Foundation in the coming decades, the cost of these programs will leap from 8.4 percent of gross domestic product (GDP) to 18.6 percent of GDP-an increase of 10.2 percent of GDP.  Without reform, this increased cost would require raising taxes by the current equiva­lent of $12,072 per household or eliminating every other government program. Funding all of the prom­ised benefits with income taxes would require rais­ing the 35 percent income tax bracket to at least 77 percent and raising the 25 percent tax bracket to at least 55 percent.

Although many believe that Americans ages 55 and over should be exempt from any reforms.  However, this is more than an issue of finance.  This is a moral issue.  To quote Brian Riedl from The Heritage Foundation:

“Americans need to decide whether they want a future in which older Americans have an automatic claim on one-fifth of the future income of their grandchildren-who will be raising their own chil­dren and paying off their home mortgages. Under the current system, retirees will spend one-third of their adult lives in taxpayer-funded retirement while national security, education, health research, and antipoverty programs fight for the few remain­ing tax dollars.”