In Monday’s print edition of the Wall Street Journal was an Opinion piece by Mr Irwin, professor of economics and co-director of the Political Economy Project at Dartmouth College, titled, “The Ultimate Global Antipoverty Program“. In it Mr Irwin highlights the progress felt around the globe in the drive to reduce extreme poverty. According to data from the World Bank, the share of the world’s population living in that condition has fallen from 36% in 1990 to 15% in 2010. In a nutshell this was driven by the desire of poorer less developed countries to improve their lot by adopting, on the whole, capitalist processes and constructs within their economies. This was not achieved by government redistributing to the poor (since those government’s didn’t initially have much surplus funds to redistribute).
This won’t sit well with the politically correct who want to highlight the apparent anomaly that looks at poverty within a country, and specifically the USA. It is statistically possible for the poverty gap to widen within a country, when between counties that gap between the poorest and the richest actually closes. That is because the lowest level of poverty for all nations measured is rising, even if the much better well-off are even better off. But ignoring the politics of this argument, one should not ignore the positive influence capitalism has had on places like China, India, and Africa. Of course these are not silver bullets nor Crown Jewels in the fight against cronyism- that is a flaw in man whatever the political system, not a flaw in the ‘system’ per se. The article looks at how the politically correct and socialists will avoid agreeing with the data Mr Irwin presents. All in all its a warm little article.
The Missing Deleveraging Debt
In the same newspaper there was another Opinion piece (Missing the Prime Suspect in the Global Slowdown) by Mr Melloan, former columnist and deputy editor of the Journal editorial page and author, who calls out the alarming data explaining how debt deleveraging is not actually taking place. Remember that word, “deleveraging”? It was all the rage a few years as American’s were told to deleverage, or reduce debt, in order to become more responsible and financially viable. Well it turns out that some personal debt deleveraging has taken place, especially in the US but less so in other developed nations, but public debt, owed by sovereign nations, is soaring.
Low interest rates, Mr Melloan affirms, is motivating us – governments all – to save less and borrow more. Saving is a critical element of capital formation and one of the so called “lift off” vectors of the industrial revolution. A growing economy needs savers since that helps funnel excess profits back into re-investment. Today’s governments are afraid to raise interest rates for fear of slowing down even more their sluggish economic growth. Yet it is the low rates that prevent saving. And make borrowing so easy (for some).
It seems to me that we are caught between a rock and hard place. Even Japan blew the doors off their quantitative easing initiative last Friday by announcing a massive expansion. This program is meant to fight deflation. Remember Milton Friedman’s, “inflation is each and every time a monetary phenomena“? Such flooding of the markets with money is supposed to drive inflation, to spur consumers to spend ahead of price increases. So far, that hasn’t happened. All in all its a conundrum. And the twist is that higher interest rates would increase the debt burden on sovereign states. The interest due on all those loans would soar as rates increase, so it is a real pickle.
Eurozone on the Italian Hook
And a third article, Italy is Big Test for Success of Bolder Bond Buying, explores my favorite issue of the day, the euro. Specifically the challenge the EU,and ECB have in deploying their own monetary guns in terms of bond purchases to “do” quantitative easing. Italy, according to the article, is the weak link and possible catalyst for ongoing stress. It has toxic growth and a very high public sector debt burden (near 135% of GDP). The country could be back in recession shortly. The article states, “If QE can’t rescue Italy, then it cant rescue the Eurozone.”
And the cards seem stacked against success. Additional data reported in the article suggest that bank lending in Italy is already 53% of GDP, higher than in France and Germany, and yet it is through the banking system that the extra cash has to be utilized. Worse, the ECB’s recent comprehensive assessment of the eurozone’s banks suggest that the Italian banking sector is one of the weakest in the eurozone (i.e. understated bad debts and capital shortfalls). Finally the article concludes that bank capital (from QE) is not what Italy actually needs, but that it needs more corporate capital. And that this is not likely to occur with QE. So the conundrum keeps on spinning.
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