When going through different ideas for this week’s blog post, I stumbled upon this photo which I thought related really well to last class’s discussion on Globalization, Peace, And War. A realist’s view is that trade relations can actually foster war and conflict, whereas liberals have a different view and believe trade relations can actually foster peace and prevent conflict. As we’ve discussed, we are currently at the most peaceful we have ever been. There is still war, but there is certainly less war than there used to be. At the same time, this isn’t the only time within history where we have been highly globalized overall, but this is the first time in history where our globalization has been at its highest efficiency, especially with communication. I believe this high efficiency in globalization fosters well connected relationships between countries and I believe this to be a link in why we are in less wars and conflict than we used to be.
When the stakes of having a trading partner are high, most countries will not go to war. The issues between India and Pakistan being resolved due to both not wanting to lose each other as a trading partner was a perfect example of this. Countries being interdependent on one another can be a good thing when it comes to preventing war. Then again, it could be a really bad thing if the countries do end up going to war and then affect the whole global economic system, but the countries who want to act in their own economic interests most likely won’t take that step. This idea of trade and wanting to keep trading partners also encourages countries to find other methods to resolving conflict compared to just going to war.
I thought this picture was good because it kind of related to, “The Golden Arch Theory,” which theorizes that no two countries with McDonald's will go to war with each other. Countries that are this globalized with one another don’t usually go to war because they are economically dependent on one another, not to mention the trade fosters for strong relationships and communication between countries, which also prevents war. This picture is basically trying to say that we should be encouraging strong trade relations compared to war because these trade relations will help to prevent war.
This article identifies 3 potential threats to the global economy. The author, Ian Talley, has covered the G-20, the International Monetary Fund, and topics like exchange rate policies, among others. In this piece he warns that global fiscal health on unsteady ground. A recent IMF survey of over 280 Banks found that even with an economic recovery most European would be unable to sustain "long-term profitability." Recently, global growth has been "anemic", Global financial health has been further hurt by non-performing loans which make up around $8.5 trillion in assets. Another challenge which is threatening to destabilize global finance is debt which is "dangerously high" in India, Brazil, the United Arab Emirates and China.
I enjoyed reading this article and was reminded of our class discussion of the IMF and its functions. It was neat to read about the survey it recently published. I also liked that this article included informative graphs. The graph about Euro Bank Losses was of particular interest to me. I was shocked to see that the number of non-performing loans was so high. With the election approaching it seems that politicians are focusing on promoting the idea that financial health-at least within the US-has improved recently. However, when thinking about the economy it is important to consider the global financial system. Which, according to the article, is threatened by "high debt levels" which could "leave emerging markets sensitive to downside risks." Overall, thought it was an interesting piece; hope you guys enjoy reading it!
But there’s no reason to be complacent, the International Monetary Fund warns in its latest reports on global financial stability and the fiscal health of economies around the world.
“The passing of these near-term risks has seen volatility fall and equity prices in advanced economies rise,” says Peter Dattels, deputy director of the fund’s monetary and capital markets department. “But medium-term risks are building because we are entering a new era of challenges.”
An unprecedented era of ultralow interest rates and feeble growth has led to a record buildup in global debt levels.
Anemic global growth is “setting the stage for a vicious feedback loop in which lower growth hampers deleveraging and the debt overhang exacerbates the slowdown,” the emergency lender warned.
The IMF lays out three major risks to the financial system.
First, European banks are facing a chronic profitability crisis. Many haven’t been able to clear the legacy debt off their balance sheets and investors are increasingly skeptical they’ll remain profitable based on their current structures.
But it’s not just market perceptions. The IMF estimates that the recent plunge in bank equity price could curb lending until 2018. It also conducted a survey of more than 280 banks covering most of the banking systems in the U.S. and Europe to see if an economic recovery would be enough to propel them into long-term profitability. While a large majority of U.S. banks passed, nearly one-third of Europe’s banking system flunked.
“A cyclical recovery helps but is not enough,” Mr. Dattels says. Those banking duds—representing $8.5 trillion in assets—remain weak and unable to generate sustainable profits even if growth picks up in the fund’s stress test. “Banks and policy makers need to tackle substantial structural challenges to survive in this new era.”
Banks need to first resolve the massive stock of nonperforming loans. That requires banking authorities to fix their insolvency rules, a problem the IMF has been bugging Europe about for years. If officials could finally resolve that problem, it could turn a net capital cost to European banks of EUR85 billion to a net gain of EUR60 billion, the fund estimates.
European banks also need to restructure to become more efficient. The fund estimates that since so many bank branches pull in only a tiny percent of total deposits, closing down one-third of the branches across the region and moving more clients to digital telling would cut operating expenses by $18 billion.
The front line for emerging-market risk is corporate debt. The combined shock of the commodity-price plunge and China’s surprise slowdown has made the surge in private debt a major threat to lenders and emerging-market economies more broadly.
Although low interest rates in rich countries have bought many emerging market firms time to restructure their balance sheets, default rates are likely to rise, the IMF says. Many emerging markets need their financial systems to bolster their capital buffers to handle those losses, it warns.
The amount of debt at risk is already dangerously high in many countries, notably India, Brazil, the United Arab Emirates and China. But that could rise perilously fast if things sour unexpectedly, such as a further commodity-price fall, a faster deceleration in China or U.S. interest rates picking up faster than forecast.
In the meanwhile, “high debt levels leave emerging markets sensitive to downside risks and exposed to a reversal of capital flows,” Mr. Dattels says.
China’s debt levels make most emerging markets look like pocket change. Many economists, including at the IMF, say the government’s balance sheet is clean enough it could handle a shift of those liabilities from the financial sector in a crisis situation. But, even if that’s true, it doesn’t mean it won’t create havoc in the economy, causing a much steeper deceleration that could hit global growth.
The fund warns that the current credit overhang—a key cross-country indicator of potential crisis—“is very high by international comparison.”
Authorities in Beijing say they are working gradually to bolster their financial system.
“But more is needed, especially to curb excess credit growth, reduce the opacity of credit products, and ensure sound interbank funding structures,” Mr. Dattels says.
OPEC (Organization of Petroleum Exporting Countries) just reached an agreement the previous week that would cut production down of oil. This will cut the pump at will policy to only 32-33 million barrels a day. As we know, gas and oil prices have been really low lately. This is due to the flood of oil in the market creating an oversupply making countries incapable of raising the prices on their oil. The free oil market is hurting their economies, including oil rich economies. This is why within this agreement Saudi Arabia agreed to cut a deal with Iran, who will be exempt from the cap on production.This is interesting because these countries are actually asking for a market management. This of course will raise the price on gas for us, but it will boost the economies for these countries and widen the markets for energy industries such as, Exxon Mobil, as well as smaller U.S. shale firms. This is one instant in which there was some backlash for having a free flowing market because the supply can exceed the demand for the market which takes a toll on the profit these countries make from these specific markets.
I believe this is one instant in where a organization like OPEC is needed to make sure and oversee that the markets are still profitable for these countries and businesses. The IMF is of course not the same thing, as they try to regulate through liberalizing and balancing budgets to help the certain countries’s markets. There is more to OPEC than this issue of course as well, but I believe this type of regulatory organization is a little bit more effective because it’s looking at one specific type of market and how to effectively (hopefully) regulate it. This is of course different from the IMF, which is used to lend money to certain countries with failing markets, but they do not look at the specific types of markets within these countries and sort of just impose a one size fits all solution. This becomes problematic when not all countries can sustain the policies the IMF puts into place. OPEC is more market specific, which could be more effective.
This article discusses the decisions that will be
made by the Federal Reserve in the next few months regarding interest rates in
the United States. Although there was no raise in the month of September, there
is expected to be a raise in the interest rates by the end of this year. This
is because there is a small increase in inflation. The author, David Payne, points out that
the rates are unlikely to change in November because it is so close to the
election. If interest rates were increased in December, interest rates would
likely still stay low unless “inflation started to show a stronger upward
trend.” Payne also states that since the dollar is rising in value, things
are slightly more expensive for foreigners, so the exchange rate is higher.
According to Payne, an increase in pressure to raise wages will cause
inflation to rise a little, which will also make the Federal Reserve more
likely to slightly higher interest rates. The Fed also wants to have the option
to lower interest rates to support the economy in the case of a recession; in
order to have this option; interest rates should be a littler further away from
zero. This relates to what we discussed in class
regarding the relationship between interest rates and inflation. The Federal Revere
can increase interest rates in order to work against inflation. But the federal
bank may be hesitant to do this. If inflation is not rising enough to impact
the economy substantially, they may want to not raise interest rates, because lower
interest rates can lead to more economic growth. We can also connect the Fed’s
decisions on interest rates to Friedman’s idea of Monetarism, which states the
use of interest rates as the chief way to control the economy. It will be
interesting to see if the Federal Reserve will increase interest rates this
December, and to examine different factors that lead to their decision.
Tuesday, September 27, 2016
"The Case for Free Trade Is Weaker Than You Think" - Grep IP, Wall Street Journal
This article brings up the point that free trade may not be better then protectionism in all cases. The Chief Economics Commentor of the Wall Street Journal, Greg IP, talks about a paper written by Larry Summers (former secretary of state) and two others authors. Their paper explains conditions under which it might be more beneficial for a country to keep imports out. One condition being that there is a weak demand. If there is too little demand, a country might have a trade surplus, and workers will loose their jobs. Summers and his co-authors argue that this can create secular stagnation (no ability for economic growth).
Greg IP uses China as an example of this. He says that if China consumes less and saves more, then it will need to import less from the U.S. This will result in a decreased domestic output and lower employment rates in the United Sates. Normally, the central bank could lower interest rates. But if China is saving, it will have excess savings which would make interest rates close to zero (which would drive down the U.S. currency). The central bank would not be able to boost demand enough to employ these workers somewhere else.
The contents of this article relates to different readings from class such as, “Theories of International Political Economy”. The reading on Mercantilism and the Realist Perspective on page 54 says that mercantilism explains that states try to “reduce its imports to a minimum; and it seeks to promote its exports in order to clear a trade surplus.” (Paquin, 54) Because all states can’t have a trade surplus, conflicts will arise. This relates to the article, which is talking about how a trade deficit with the U.S. and China can lead to conflict and affect policies choices regarding free trade and protectionism. If China imports less from the U.S. and the U.S. can’t make up for this loss in demand, it may put us at an economic disadvantage and cause us to change some of our trade policies. This can also be related to the concept of Economic Nationalism. Alexander Hamilton was one of the first who helped develop the ideas of protectionism. He believed that strengthening the American economy was a key to independence and security as a nation. (Paquin, 55) Hamilton thought it was best for the U.S. to limit American dependence on other nations. We can see that Donald Trump believes in similar concepts. The beginning of the article mentions how Donald Trump threatens to increase tariffs on Mexico and China and have more protectionist policies. If we look at this through a nationalist lens, these policies may help to protect the United States' power by decreasing our dependency on other nations.
Ip, Greg. "The Case for Free Trade Is Weaker Than You Think." Wsj.com, 11 Apr. 2016. Web. 18 Sept. 2016. <http://blogs.wsj.com/economics/2016/04/11/the-case-for-free-trade-is-weaker-than-you-think/>.
Hi everyone! Sorry this post is so late. This is my first time This article by Jeffery Sparshott highlights the potential economic impact refugees may have on the United States. Sparshott examines evidence from prior “refugee surges” to assert that, “they worsen prospects for one segment of the population while bettering the lot of another.” He notes that people with lower-wage skillsets have benefited the least from refugee immigration in the past. However, Borjas’ assessment was challenged by Berkley economist David Card. Card believes Mr. Borjas’ argument presents a “one sided view of immigration.” Sparshott acknowledges that the number of refugees entering the United States is relatively small and that they are widely distributed geographically. However, Sparshott maintains that even a small increase in refugee workers can have an effect and concludes his article with Mr. Borjas echoing this thought. Immigration is a hot topic these days due to the ongoing civil war in Syria and the upcoming U.S. election. Mr. Trump tends to favor a nationalist train of thought and does not favor immigration. I thought this article was pertinent to our discussion of how trade creates winners and losers. According to Harvard’s George Borjas and Center for Monetary and Financial Studies’s Joan Monras, “Refugees damaged the prospects of natives with similar skill levels...but benefited natives with complimentary skill sets.” Sparshott seems to agree that refugees’ labor benefits some groups within the U.S. and harms others. Previously, migrations of immigrants, like the Mariel boatlift of 1980, actually benefited high skill workers. Human capital is valuable; the article touched upon the idea of division of labor. The increase in labor allowed higher skilled workers to further specialize or improve their skillsets. One could assert that the absolute advantage of low-wage workers benefited Miami citizens as a whole. The opportunity cost of a high wage worker doing their own yard work became higher as more refugee immigrants offered their services to the community.
Wanted to copy and paste the article here because sometimes it can be tricky to view them online.
All best,
Hattie
What Happens to Wages When Refugees Arrive? More Than You Might Think
An influx of refugees can hurt the economic prospects of natives with similar skills, but benefit other workers
The Mariel boatlift in 1980 brought about 120,000 refugees, mainly to Miami.
PHOTO: EDDIE ADAMS/ASSOCIATED PRESS
By JEFFREY SPARSHOTT, Sep 21, 2016 7:07 am ET
The U.S. is accepting 85,000 refugees this fiscal year and the Obama administration plans to raise that figure to 110,000 next year.
The plan is controversial amid worries that terrorists could slip through a rigorous screening process. But what about the economic implications?
A new study by Harvard University’s George Borjas and the Center for Monetary and Financial Studies’s Joan Monras looks at evidence from four earlier refugee surges and finds they worsen prospects for one segment of the population while bettering the lot of another.
“In short, refugee supply shocks have sizable distributional consequences in the labor markets of receiving countries,” the authors said.
Mr. Borjas is generally considered an immigration skeptic, though his work is careful to avoid political judgement or policy prescriptions. His work is often cited as evidence that immigration erodes wages for lower skilled U.S. natives. His latest work is surprising because it shows clear benefits as well—though not for everyone.
The new study looks at the Mariel boatlift, which brought Cubans to Miami in 1980; an influx of French and Algerians into France as Algeria gained independence in 1962; a surge in Jewish emigres to Israel when the Soviet Union collapsed in the early 1990s; and the tide of Balkan refugees as Yugoslavia splintered through the 1990s.
Refugees damaged the prospects of natives with similar skill levels, the study found, but benefited natives with complimentary skill sets.
For example, the Mariel boatlift brought about 120,000 refugees, mainly to Miami. Messrs. Borjas and Monras write that more than 60% lacked a high school diploma. “Even though the Marielitos increased Miami’s population by only 8%, they increased the number of male workers without a high school diploma by 32%,” the authors wrote.
And that was the group that saw wages fall. By contrast, workers with a high-school or college degree saw wages rise. (That may be because the higher-skilled workers paid less for services filled by low-wage workers, like landscaping or housekeeping, making the wealthier workers more productive.)
In the case of Soviet Jews emigrating to Israel, most were college-educated. The influx, which increased the country’s population by more than 13%, hurt wages
of high- and intermediate skill natives. But the earnings of the lowest education group increased, possibly because demand for the services they provide rose.
Mr. Borjas’ work isn’t without controversy. University of California, Berkley, economist David Card studied the Mariel boatlift and found no impact on wages or employment rates in Miami. In a paper earlier this year, he said Mr. Borjas’ work lacks nuance and offers a “one‐sided view of immigration.”
So perhaps it is striking that Mr. Borjas finds such clear economic benefits from the arrival of refugees.
To be sure, the U.S. is accepting a relatively small number of refugees relative to its population, and they tend to be distributed widely across the country. By comparison, the European Union is struggling to handle more than one million migrants, including many Syrians escaping civil war, who have settled in Germany, Austria and elsewhere.
But even a small number of new entrants in the labor market can have an effect.
“A couple of hundred refugees in a town with a thousand workers can have an effect,” Mr. Borjas said.
