Posts Tagged ‘barack obama’


The Indian government has just made a rather interesting new appointment. It concerns the man who is to head the country’s central bank. The man is… well, he is rather clever and well regarded across the world. But what makes this one so very interesting, is that talk is that Barack Obama’s choice for the next boss of the Fed is rather controversial. And what is really really interesting is that amongst the critics of Obama’s choice is the man who is set to take over at India’s central bank.

Okay let’s name some names. The man who is to take over at India’s central banks is Raghuram Rajan – former chief economist of the IMF and the author of ‘Fault Lines’. In his book, Mr Rajan postulated the theory that surging house prices were used by western governments as a way to kind of compensate for the fact that real wages were rising only very slowly. So, during the boom years, the gap between the super-rich and everyone else grew, profits to GDP rose while wages to GDP fell, and median workers in many countries found that over a period of many years – years of boom that is – their real disposable income didn’t grow at all. These were not good developments. We should have had recession when demand was suffocated from the economy. Instead, the money that companies were not spending sloshed around the system, eventually leading to lower interest rates, more credit, more mortgages, higher house prices, more household debt, and a consumer boom based on leverage.

Mr Rajan was one of the most prescient of the world’s economists and his theories to explain what was charging the boom and then the crash are probably spot on.

Now to change the mood a little: consider the Fed. The Fed’s deputy chair is Janet Yellen, and she is the person many want to see take over from Ben Bernanke next year. Talk is that Barack Obama wants Larry Summers to have the job. Now Summers was US treasury secretary under Bill Clinton – a massive critic of QE – and was the man whom many hold responsible for loosening the stranglehold of the Glass–Steagall Act, which separated investment and retail banking. Summers is not liked by Republicans and quite a lot of Democrats have their doubts about him, but he is a heavy weight in the world of international finance and politics – there is no doubt about that.

Many of the world’s top economists are critics of Summers, including the likes of Paul Krugman and Joseph Stiglitz, and Raghuram Rajan of course. Let’s say it happens and next year Summers and Rajan are both central bankers. For once when India’s central bank meets up with the Fed, many will see it as a meeting of equals – that will come as quite a shock for a US that is used to having things its way.

As for India, the appointment of Rajan may yet prove to be a key moment as the country attempts to re-establish itself as one of the world fastest growing economies.

© Investment & Business News 2013

It is one of those Victor Meldrew theories. In other words, it is easy to say: “I don’t believe it.”

Economic theory, at least some of it, says government spending does not lead to more growth in an economy. The theory says that households spot that the government is spending more, and say to themselves, “aye aye, tax will rise,” and start spending less as a result, which cancels out the effect of the government stimulus.

At least that is what the “Lucas Critique” developed by Robert Lucas, for which he won a Nobel Prize in 1995, says. Some go further and say Barack Obama caused the global financial meltdown. They say even though the US recession began before Obama was President, the US electorate anticipated his victory, and thus cut back on their expenditure.

So there you have it. The Multiplier from a fiscal stimulus is zero. It is odd, because the IMF recently said that right now the multiplier is between 0.9 and 1.7.

The Lucas Critique is famous for its elegant maths. But just because something is elegant it does not mean it is right. And if it is the case that as the government spends more, we spend less, explain this: Gillian Tett pointed out in the ‘FT’ that US consumers seem to be varying their monthly spend around pay day far more often these days.

She quoted the boss of one of the US’s largest food and drinks companies as saying: “Since 2007, spending patterns have become extremely volatile. More and more consumers appear to be living hand-to-mouth, buying goods only when their pay checks, food stamps or benefit money arrive. And this change has not simply occurred in the poorest areas: even middle-class districts are prone to these swings. Hence the need to study local pay and benefit cycles.” See: The cost of hand-to-mouth living

So if that is so, how can they at the same time be so willing to save more if governments start spending more?

© Investment & Business News 2013

As the earthquakes became worse, the ancient Minoans demanded blood. Clearly the gods weren’t happy, so it was time to make more human sacrifices. Of course, there were occasions when a blood sacrifice was followed by less seismic activity, which was cited as proof positive that the policy worked.

Except of course, from our enlightened position in the 21st century we get causation. Any fall in natural disasters following a religious ritual was a coincidence. There may have been a time when a leader of a country was also a priest, charged with appeasing angry gods, and such people were held responsible when the gods wreaked havoc, but these days we are a touch more sophisticated.

Perhaps you could, at a pinch, blame hurricane Sandy on manmade global warming, but it would be stretching credibility to blame any individual for the storms hitting the US East Coast. Some people across the pond are very anti-Barack Obama, but it seems not even they blame him for hurricane Sandy.  Although Obama they say can do his election prospects some good by looking presidential.

Yet the logic that says Obama was responsible for the poor US economic performance of the last few years is not much different from blaming a Pharaoh for lack of rain.

Two economists who have led the charges against Obama are Professor John Taylor and Glen Hubbard.

The argument runs like this. In the past the US has seen much more rapid recovery from a recession. This time recovery has been slower, ergo, Obama is to blame. Some go further, and say ergo Obama is the Devil, meaning maybe he was responsible for hurricane Sandy after all.

Martin Wolf, the ‘FT’s’ economic guru, has been crossing swords with Professor Taylor. The prof says that even in the 1930s, the US saw sharper recovery than it is now. ‘Duh’, replies Wolf, ‘that was because after 1929, when US authorities messed up, failed to support banks, and made cutbacks, the resulting contraction in the economy was enormous. Of course growth was higher in the aftermath because it had further to grow from’. See: You can’t measure an economy’s performance on recovery alone

Professor Taylor then compared the US performance today with its recovery in the late 1800s. Wolf countered with the argument that surely it is more realistic to compare the US today with other economies across the world, such as Japan, the UK, the Eurozone, or even China.

It takes an extraordinary level of arrogance about the superiority of your country to think the fact that the rest of the world is suffering a very severe economic shock bears little or no relevance to your country.

Over at the ‘New York Times’, it’s been a case of daggers at dawn between Nobel Laureate Paul Krugman and Glen Hubbard.  According to Hubbard, the US recovery should have been V shaped.  In the UK – where the debate is over whether the economy will be W, An elongated L, or even a letter than hasn’t been invented yet – the idea of a V shaped recovery feels like a pipe dream. Krugman says the Romney team is ‘waving’ little things like facts away, because it is politically convenient to do so. See: More Financial Crisis Denialism

The fact is, of course, that the US economy has been posting figures that we in the UK envy. It may well be that the US recovery has been stronger because it has had less austerity. It is certainly absurd to say that if Obama had been Austerian in his approach, the US recovery would have been stronger.

But where both Krugman and Wolf may have it wrong is not conceding that there is any benefit to creative destruction at all. Recession can correct bad habits, remove poor practice, and ensure only the very fittest companies with truly strong business models can survive.

The snag is that right now the debate between economists is black and white. Either we need to let the economy correct via allowing failure, or we have a really massive Keynesian push. There seems to be no middle group. Maybe what we really need is both, and economists are so blind to their adversaries’ opinions that they are forcing us to make a choice, when what we really need is the best of both worlds.

©2012 Investment and Business News.

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When Vladimir Putin isn’t shooting tigers, saving Siberian cranes, catching whales or just looking all round tough, he is being nice about BP.

Let’s face it, during the last few years things have been a tad troubled for BP. Cast your mind back to 2003. In that year the company agreed a joint venture called TNK-BP with a group of Russian billionaires. The British company invested $8 billion in the venture, and it all seemed rather promising. The joint venture appointed a BP man, a certain Bob Dudley, as CEO.

But while BP was busy laying the foundations for an environmental disaster in the Gulf of Mexico on a scale to make even its loyal shareholders shudder in disbelief, its relationships in Russia deteriorated. Eventually, things had got so bad that Mr Dudley was forced to leave Russia in something of a hurry, with questions about his visa. And ever since, BP and its partners in TNK-BP could barely look each other in the eyes without making evils at each other.

The bucks still came flooding in, however, and BP has enjoyed no less than $19 billion in dividends from its shareholding in TNK-BP.

So while Barack Obama was being all horrible to the company, and its CEO Tony Hayward, who (in typical British understatement) said: “I want to get my life back”, BP found itself promoted to the role of public enemy number one in the US. In the meantime, Vlad took time off from teaching Nicholas Sarkozy some Judo holds, to say how much he liked BP, and how very upset he was about the way in which Tsar Barack the First of the USA was treating  the company.

By then BP had a new boss, none other than Bob Dudley. His American accent helped to alleviate some of the bad PR Stateside, but how would Bob be able to manage the lucrative relationship with TNK-BP when he had personally suffered such a falling out?

Mr Putin said he wanted BP to work with Russia in developing oil resources in the Arctic. “Err, no to that,” said TNK-BP, “We have the exclusive on all dealings between BP and Russia.”

So that left BP in a difficult spot; its reputation in America was in tatters (and that might be kind to tatters), but its dealings in Russia seemed to remind one ever so slightly of wading in treacle.

Now things have changed. The huge Russia state owned energy company Rosneft– the one that picked up a lot of business from Yukos, the energy giant that went down after its boss Mikhail Khodorkovsky found himself in trouble over taxes/after moving into politics – has bought BP’s stake in TNK-BP. At least it has, subject to the normal legality issues.

BP is getting $12.3 billion plus shares in Rosneft worth 12.84 per cent of the company. Actually BP is getting more cash than that, but it is using some of the money to buy the Rosneft shares, so the $12.3 billion is a net figure. BP will also have two seats on the Rosneft board. Meanwhile, according to this morning’s ‘FT’, Rosneft is also going to buy the rest of TNK-BP.

All of a sudden BP finds it is in a pretty powerful position in Russia. Rosneft’s CEO, Igor Sechin, is a former deputy Prime Minister of Russia, and said to be one of Putin’s favourites.

For BP this is a pretty unique opportunity. Tsar Vladimir likes the company and the potential riches in the Arctic are great indeed.

BP’s rivals may well find they are squeezed out of Russia.

Not sure how the US will react. Many have said the last thing BP wants is too much cash from the deal, because Uncle Sam may then decide that actually BP needs to fork out more money in damages for the 2010 Deepwater Horizon disaster.

There is one thing BP has going for it, and that is superb skills in exploiting oil in those hard to reach places of the Earth.

The Russian deal may prove to be most lucrative for BP – that is for as long as the company has the confidence of Mr Putin.

Here is some advice for Mr Dudley: don’t suddenly decide you like that Russian punk group called Pussy Riot.

©2012 Investment and Business News.

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Suppose you gave me a fiver (yes please – ed). I would be five pounds better off, and you would be five pounds poorer. But the greater economy which is you and me would be no different.

Suppose the government gave me $500 billion (err, yes please– ed), you would be $500 billion worse off, because the government would have to take that money from you. At least it would if you and I were the only people in the world.

Economists like to assume there are only two people in the world. That famous economist from the music scene Dean Martin, applied that way of thinking to romance, and he created a model based on the assumptions that ‘you were the only girl,’ and he ‘the only boy’.

Martin’s conclusion was much the same as that drawn by many economists. Martin sang: “We would go on lovin’ in the same old way.” Economists say things would be no different for the economy either.

Take Robert Barro. One assumes he is a bright spark because he is an economics professor at Harvard. He says that if a government spends more, the rest of us must spend less. So if a government goes out and spends in an attempt to stimulate the economy, the effect will be round, fat and look this: 0. Yes that’s right, nothing.

Economists talk about it in terms of a multiplier. They ask: what effect government spending will have on the economy?  Barro says this multiplier effect is zero.

Some, on the somewhat extreme end of the economic thought spectrum, go a tad further. They say we have perfect expectations, and we know that if the government is going to spend more, we will realise that taxes will have to rise, so in preparation for that sad day, we start to save more.  Some go even further and say ergo Barack Obama caused the finance crisis of 2008, even though he wasn’t president at the time. The thinking goes like this: US households realised he would win, guessed he would implement economic policies of extreme irresponsibility, so they changed behaviour and thus we had the credit meltdown. Others says that those who hold that particular set of views about Obama are not so much letting their biases influence their behaviour, as setting up some pretty convincing credentials for suggesting they are mad.

But there is another point of view. This says that government spending does have a multiplier. They say that right now companies and households (especially companies) are sitting on cash. Normally, the interest rate moves up and down to assure that this cash is lent out and invested. But right now, real interest rates (that’s after taking into account inflation) are negative. And despite this, companies and households (especially companies) are saving, but investment is not rising. They call it a liquidity trap: rates are zero, or near zero, but still savings are too high and borrowing too low. Some economists – for example Nobel Laureate Paul Krugman, and Richard Koo, the top economist at Nomura in Japan – say that in such circumstances governments need to spend more.

They say that at the moment not only is this multiplier effect above zero, it is actually quite high.

Last week, the IMF seemed to side with Krugman and Koo. It had previously said this multiplier effect is 0.5. Now it is saying it is somewhere between 0.9 and 1.7.

So what does that mean? It means that if a government spends, say $1 billion, GDP will be boosted by between $900 million and $1.7 billion. It means that if a government imposes austerity, GDP will shrink too. (Thanks for that information say the Greeks and Portuguese.)

But that is all very well. But then what? Critics say governments can’t stimulate indefinitely. They say that sooner or later they will need to re-pay debt, and the more they try to boost the economy via spending, the worse it will be. Krugman and Koo have an answer. They say that for as long as savings are too high, interest rates will remain low and governments will have no problem borrowing money. They will only need to worry about repaying debt when savings start to fall, at which point the fall in savings will mean more demand, meaning more growth, and less need for governments to spend.

This is what Koo has to say on the matter: “In a democracy, however, where most people see only the trees and not the forest, even those few political leaders who understand the need for stimulus end up arguing endlessly about which projects the money should be spent on. In the meantime, the economy continues to shrink… Only during wartime, when it is obvious where the money should be spent, can democracies implement and sustain the kind of fiscal stimulus needed to overcome a balance sheet recession in the shortest possible time.” The world in balance sheet recession: causes, cure, and politics Richard C. Koo (Nomura Research Institute, Tokyo)

Frank Sinatra may have had a better idea. He sang: “I did it my way.” Right now the austerians are determined to do their way, and the Keynesians theirs.

©2012 Investment and Business News.

Investment and Business News is a succinct, sometimes amusing often thought provoking and always informative email newsletter. Our readers say they look forward to receiving it, and so will you. Sign-up here

Barack Obama has told tales. So fed up is he with China and its trade policies that he has told teacher, or the World Trade Organisation.
He said: “Today, my administration is launching new action against China – this one against illegal subsidies that encourage companies to ship auto-parts manufacturing jobs overseas….Those subsidies directly harm working men and women on the assembly line in Ohio and Michigan and across the Midwest. It’s not right; it’s against the rules; and we will not let it stand.”

And then he stuck his tongue out.

But sitting next to him in class was a jeering Mitt Romney.

“President Obama has spent 43 months failing to confront China’s unfair trade practices,” said the man who hopes to be the next US president. He added: “I will not wait until the last months of my presidency to stand up to China, or do so only when votes are at stake. From Day One, I will pursue a comprehensive strategy to confront China’s unfair trade practices and ensure a level playing field where our businesses can compete and win.”

And he then stuck his tongue out at Obama.

China is used to it. When election season comes round, it knows that the boys and girls who want to live in the White House can gain lots of playground support through China bashing. And boasting about how they are going to do it.

It is just that the US is being a tad hypocritical; after all its own trade policies are not exactly the paragon of fairness.

A reaction against free trade remains one of the single biggest risks to the global economy. After all, the last Depression led to protectionism, followed by something else. What was that now? Oh yes, that’s right, World War 2.

For as long as it’s just talk, the anti-China rhetoric may not matter, but one of these days the US will have a president who actually carries out his pre-election promises. That will be a great day for democracy, and an awful day for world peace.