The Fed Is Failing in Four Ways
Global economy watchers and market participants will be paying a lot of attention next week to how the Federal Reserve describes the US economic outlook, to the magnitude of its interest rate increase and whether it changes the pace of its balance-sheet contraction.
The Problem with the Current Russia Sanctions Regime
There is much debate about the effectiveness of Western sanctions, the Ukraine war’s implications for markets and the global economy, and what the West’s next steps should be. While there are few good options, some are clearly worse than others.
The Inflation Catch-Up Game
As price increases accelerate, policymakers at leading central banks are slowly starting to move away from the narrative of “transitory” inflation that has already cost them the policy initiative. But the needed pivot is far from complete and not nearly quick enough, particularly at the US Federal Reserve.
The US Recovery’s Promising Moment
Recent macroeconomic figures and the accelerating pace of COVID-19 vaccination suggest that optimism about the US economy's prospects is justified. But to avoid snatching defeat from the jaws of victory, policymakers must press ahead with measures to lock in robust, sustainable, and inclusive long-term growth.
No One Is Safe Until Everyone Is Safe
Minimizing the risk of yet more destabilizing COVID-19 variants is crucial if countries are to turn the corner on a shock that has wrecked lives and livelihoods. The alternative is to adopt a bunker-like approach and sharply curtail the inward and outward flow of citizens, residents, and visitors.
England’s Lockdown Lessons
Although some remain inclined to point the finger at the UK government’s missteps in tackling the COVID-19 pandemic, the explanation for its evolving approach is more complex. It also holds important lessons for managing future crises.
The Big Bounce-Back?
Following the 2008 financial crisis, many policymakers failed to focus sufficiently on securing robust, inclusive, and sustainable long-term growth. To avoid repeating this mistake in 2021 as the world emerges from the COVID-19 pandemic, governments must act early and decisively in three areas.
Avoiding America’s Vicious COVID Cycle
The United States has the means not only to arrest current negative public-health and economic dynamics but also to transform them into a virtuous cycle. But this will require sustained and simultaneous efforts in four areas.
The Pandemic’s Complex Cocktail
Over the past few years, investors have tended to be richly rewarded for setting aside traditional determinants of market value and focusing on just one thing: plentiful and predictable liquidity injections into the marketplace. But this dynamic cannot last forever, and it may confront a moment of truth in the fourth quarter of 2020.
The COVID Silver Linings Playbook
The old adage that every crisis represents an opportunity is certainly true in the case of COVID-19. Now that the pandemic has lasted longer and wrought more destruction than many initially anticipated, it is all the more important that policymakers seize on the positive trends it has incidentally set in motion.
Reading the Dollar Doldrums
A sharp decline in the relative value of the dollar this year has been met with cheers from those hoping for a short-term boost to the US economy, and with hand-wringing by those worried about the currency's global standing. But while both views reflect underlying truths, neither tells the whole story.
Is a China-US “Rivalry Partnership” Possible?
One must hope that China and the United States will eventually arrive at an understanding that great-power competition does not preclude cooperation to resolve major global challenges. The main challenge will be to avoid a damaging derailment during what is likely to be a long and bumpy journey toward this destination.
Post-Pandemic Economic Leadership Begins in America
No matter how big an economy is, it is heavily influenced by US economic growth, financial stability, and policy spillovers. With the COVID-19 crisis, the evolution of the global economic-policy paradigm has become an urgent matter, and the rest of the world must not suffer the consequences of a US that does too little, too late.
Appeals to recommit to globalization are highly unlikely to gain traction in the wake of the COVID-19 pandemic. Those keen to preserve globalization would instead be better advised to focus on minimizing the disruption caused by the coming period of deglobalization and laying the groundwork for a more sustainable process thereafter.
Saving the Developing World from COVID-19
The COVID-19 pandemic could devastate parts of the developing world. But with a concerted, cooperative, and holistic approach, the international community can avoid a large-scale humanitarian tragedy in vulnerable regions – and protect the rest of the world from destabilizing blowback.
The Race Between Economics and COVID-19
For years, the economics profession has suffered from a stubborn reluctance to adopt a more multidisciplinary approach. But now that the COVID-19 pandemic is transforming economic life the world over, the profession has no choice but to leave its comfort zone.
Is Trump’s Iran Strategy Working?
The Trump administration's unilateral approach to trade and foreign adversaries like Iran is reminiscent of the Reagan administration's strategy against the Soviet Union. Both game theory and the historical record show that aggressive "non-cooperation" can be effective, but only if it is used carefully.
Central Banks Face a Year of Mounting Challenges
After committing to monetary-policy normalization in 2018, the US Federal Reserve and the European Central Bank spent the past year reversing course with further interest-rate cuts and liquidity injections. Yet, given mounting medium-term uncertainties, central bankers cannot assume calm conditions in 2020.
Lagarde’s Edge Is Europe’s Opportunity
The eurozone economy urgently needs a more comprehensive pro-growth policy approach at both the national and regional levels, or else a second lost decade will be all but assured. Hope for the continent now rests squarely on the shoulders of Christine Lagarde, the highly accomplished incoming president of the European Central Bank.
Who Lost Argentina, Again?
With a presidential election approaching next month, Argentina is once again on the cusp of a crisis that could end in depression and default, owing to mistakes made by everyone involved. Should President Mauricio Macri secure another term, he must waste no time in reversing the country's economic deterioration.
Trade Disruption Is a Symptom of a Deeper Malaise
Trade tensions are a symptom rather than a cause of the world’s underlying economic and financial malaise. Moreover, an excessive focus on trade could deflect policymakers’ attention from other measures needed to ensure faster and more inclusive growth in a genuinely stable financial environment.
Are Central Banks Losing Their Big Bet?
Following the 2008 global financial crisis, central banks bet that greater activism on the part of other policymakers would be their salvation, helping them to normalize their operations. But that activism never came, and central bankers are now facing a lose-lose proposition.
America’s Unusual Recovery is Now Also its Longest
After overcoming significant political and economic headwinds during the past decade, the US economy now appears to have undergone its longest sustained expansion in history. Yet, behind the data showing historically low unemployment and long-awaited wage growth lie vulnerabilities that cannot be ignored.
How Inflation Could Return
After years of low inflation, investors and policymakers have settled into a cyclical mindset that assumes advanced economies are simply suffering from insufficient aggregate demand. But they are ignoring structural factors at their peril.
How Western Economies Can Avoid the Japan Trap
With the return of Europe's economic doldrums and signs of a coming growth slowdown in the United States, advanced economies could be at risk of falling into the same kind of long-term rut that has captured Japan. To avoid that outcome, policymakers must recognize and address the deeper structural forces at work.
Why Economics Must Get Broader Before It Gets Better
Even as the public's skepticism toward their profession has grown, economists have continued to ignore increasingly obvious flaws in their analytical frameworks. A discipline long dominated by “high priests” must now adopt a more open mindset, or risk becoming irrelevant.
Overestimating the EU Economy
If the EU were a soccer team, it would not lose games for lack of a game plan or due to inadequate capacity. The problem is that the team as a whole is not playing cohesively, and all of the top players are struggling individually, owing to messy problems at home.
Brexit and the Global Economy
The United Kingdom’s divorce negotiations with the European Union have dragged on through multiple déjà vu moments, and the consensus among experts is that the economic fallout will be felt far more acutely in Britain than in the EU. But policymakers worldwide would benefit from watching the process closely.
Why Italy is the Latest to Question Policy Orthodoxy
The budget standoff between Italy's anti-establishment government and the European Commission has rattled markets and brought back memories of the eurozone sovereign debt crisis. EU officials should remain open to unconventional economic-policy approaches, and the Italians should show that they are serious about long-term reforms.
Managing the Global Factor Better
The IMF is the body best suited to serve as a trusted adviser and an effective conductor of the global policy orchestra. If it is to fulfill that role, however, it must strengthen its credibility as a responsive and effective leader. That means listening to its members, then guiding them toward more harmonious policies.
Can Turkey Rewrite the Crisis-Management Rules?
Rather than sticking with the approach taken by numerous other countries – including Argentina earlier this year – by raising interest rates and seeking some form of IMF support, Turkey has shunned both in a very public manner. Unless it changes course, the government risks much wider damage – and not just in Turkey.
A “Reagan Moment” for International Trade?
In the 1980s, US President Ronald Reagan initiated a military spending race with the Soviet Union that ended up altering the global balance of power in ways that affected many countries worldwide. Could Donald Trump's tariff race with China lead to a similar outcome?
Four Lessons from Egypt’s World Cup Experience
Egypt’s qualification for the World Cup showed that the country is capable of competing at the highest international level. Rather than treating its loss as a failure, Egyptians should view it as a learning experience, one that can guide the country as it seeks to achieve its full potential.
Managing the Risks of a Rising Dollar
Some may view the US dollar’s appreciation as consistent with a longer-term rebalancing of the global economy. But, as Argentina’s recent request for IMF financing starkly demonstrates, a sharp and sudden dollar appreciation risks unbalancing things elsewhere.
The Global Trade Game
History is less likely than game theory to provide useful insights into where the latest trade dispute between the US and China may be heading. The question, ultimately, is whether new tariffs will eventually lead to a more cooperative game, or to a competitive one in which everyone loses.
Saving the Shrinking Middle
From the anchoring role in society of the middle class to the agility and resilience of mid-size firms, the middle has long been regarded as consistent with both individual and collective wellbeing. Yet, in recent years, the middle has become less stable, less predictable, and more elusive.
Working Toward the Next Economic Paradigm
Building support for a new unifying economic paradigm to replace the discredited Washington Consensus will be an analytically challenging, politically demanding, and time-consuming process. In the meantime, both economists and policymakers must ensure that the existing paradigm doesn't cause more damage than it already has.
Financial Investors’ Wish List for 2018
Given how well investors have been doing lately, many are probably hoping for more of the same in the coming year. But what they should really be wishing for is that economic and policy fundamentals improve to the point that they validate existing asset prices, while laying a foundation for greater gains.
Big Tech Meets Big Government
In an ideal world, major tech companies would recognize and adjust to their growing systemic importance in step with external actors, including governments and consumers, thereby striking the right balance between innovation, consumer benefits and protection, and national security. But this is not an ideal world.
Dealing with Damaging Institutional Inertia
Institutions matter, especially in a period of economic, political, and social fluidity, when they shield countries from frequent volatility and reduce the risk of costly shocks. The longer it takes to restore confidence in them, the greater the impediments to our wellbeing and that of our children.
The Risk of a New Economic Non-Order
The upcoming IMF and World Bank annual meetings offer a critical opportunity to start a serious discussion on how to arrest the lose-lose dynamics that have been gaining traction in the global economy. The longer it takes for the seeds of reform to be sown, the less likely they will be to take root.
The Lost Lesson of the Financial Crisis
When the global financial crisis began ten years ago this month, policymakers in advanced economies treated it as a cyclical shock rather than an epochal event. Because they misdiagnosed the sickness, they administered the wrong medicine, and advanced economies have struggled to achieve strong, inclusive growth ever since.
How Healthy is the Global Financial System?
In recent weeks, policymakers on both sides of the Atlantic have affirmed the financial system’s soundness and stability. And yet, it would be premature to declare victory: while some financial risks have been eliminated, others have migrated into less regulated non-bank activities.
An IMF Bridge to Somewhere for Greece?
The IMF has resurrected an old technique – commonly used in the 1980s during the Latin American debt crisis – that will allow Greece to avoid a payment default next month on debt owed to European creditors. But the Fund’s elegant compromise still leaves Greece under the shadow of an enormous debt overhang.
New Life for the SDR?
The rise of anti-globalization political movements and the threat of trade protectionism have led some people to wonder whether a stronger multilateral core for the world economy would reduce the risk of damaging fragmentation. If so, enhancing the role of the IMF's incipient global currency may be the best option.
America’s Confidence Economy
While financial markets seem convinced that the recent surge in business and consumer confidence in the US economy will soon be reflected in hard data, such as GDP growth, economists and policymakers remain unsure. Whether their doubts are vindicated will matter for both the US and the world economy.