Janet Yellen’s Use of One Word Shows Some­thing has Gone Wrong

The Economic Times - - Commodities Plus -

Re­ces­sion and seven years into the most rad­i­cal eas­ing of mon­e­tary pol­icy in recorded his­tory.

It begs the ques­tion: what has gone wrong?

Well, the ob­vi­ous an­swer is that mon­e­tary pol­icy sim­ply is a weak an­ti­dote to the fun­da­men­tal and struc­tural im­ped­i­ments to global growth.

The world is still grap­pling with a prob­lem of over-in­debt­ed­ness. This is par­tic­u­larly acute in China as the country si­mul­ta­ne­ously re­bal­ances from over­in­vest­ment in the in­dus­trial sec­tor to consumer ser­vices.

Ger­many is fol­low­ing a pol­icy of aus­ter­ity to the detri­ment of its Eu­ro­zone al­lies (in part due to trust is­sues with its part­ners or pos­si­bly just a per­va­sive cul­ture of fru­gal­ity) –– run­ning a bud­get sur­plus, and a cur­rent ac­count sur­plus-to-GDP ra­tio of over 8%.

So yes, there are lin­ger­ing debt and com­pet­i­tive hur­dles in the way of Euro­pean growth, but Ger­many’s re­fusal to share its eco­nomic en­gine with its neigh­bours has been a hin­drance. In Ja­pan, Abe­nomics has hit a wall as the country con­tin­ues to weave in and out of a re­ces­sion with consumer spend­ing and in­comes stag­nant. The ex­per­i­ment with neg­a­tive rates has failed so far, seen by the firm­ing yen and re­newed stran­gle­hold placed on the country’s ex­port.

The Brexit vote on June 23 is a clas­sic fork in the road for the Euro­pean Union, and the 64% vote (non-bind­ing) in the Nether­lands against the treaty with Ukraine (for greater eco­nomic ties) un­der­scores the con­tempt that many in the re­gion have to­wards the union. All the more so with the refugee and ter­ror­ism files, partly the prod­uct of open (por­ous more like it) borders.

Spain’s coali­tion govern­ment is about to fall. Italy’s banks are in dis­ar­ray. Prime Min­is­ter Hol­lande has backed down on French re­forms. Greece is at risk of de­fault­ing again this sum­mer.

So it is clear the Euro­pean Union is splin­ter­ing.

That said, the soft global back­ground only goes so far in ex­plain­ing why the US econ­omy has been on such soft ground this cy­cle.

Af­ter all, nearly 90% of US GDP is au­ton­o­mous. The US econ­omy does not re­side on an is­land, that is true, but the global econ­omy re­ally is a two-bit player — a truly dec­i­mal place im­pact. Where it mat­ters is whether global mar­ket anx­i­ety leads to an un­de­sired tight­en­ing in do­mes­tic fi­nan­cial con­di­tions or if the US dol­lar rises too far too fast.

To be sure, both of th­ese have been in play at dif­fer­ent times since last sum­mer, but over time, US growth is much more a lo­cal story. — Busi­ness In­sider

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