Economist's View: Stiglitz: Economic Risks in 2007

リンク: Economist's View: Stiglitz: Economic Risks in 2007.

Joseph Stiglitz looks at the lessons to be learned from 2006, and the risks the U.S. and world economies face in 2007. He, along with many others (e.g. Larry Summers) believes that the risks are higher than currently reflected in financial markets and that the "prospect of risk premiums returning to more normal levels is itself one of the major risks the world faces today":

Will the Dam Break in 2007?, by Joseph E. Stiglitz, Project Syndicate: The world survived 2006 without a major economic catastrophe, despite sky-high oil prices and a Middle East spiraling out of control. But the year produced abundant lessons for the global economy, as well as warning signs concerning its future performance.

Unsurprisingly, 2006 brought another resounding rejection of fundamentalist neo-liberal policies, this time by voters in Nicaragua and Ecuador. Meanwhile, in neighboring Venezuela, Hugo Chávez won an overwhelming electoral: at least he had brought some education and healthcare to the poor barrios, which previously had received little of the benefits of the country’s enormous oil wealth.

Perhaps most importantly for the world, voters in the United States gave a vote of no confidence to President George W. Bush, who will now be held in check by a Democratic Congress.

When Bush assumed the presidency in 2001, many hoped that he would govern competently from the center. More pessimistic critics consoled themselves by questioning how much harm a president can do in a few years. We now know the answer: a great deal.

Never has America’s standing in the world’s eyes been lower. Basic values that Americans regard as central to their identity have been subverted. The unthinkable has occurred: an American president defending the use of torture, using technicalities in interpreting the Geneva Conventions... Likewise, ... corruption and incompetence have reigned under his administration, from the botched response to Hurricane Katrina to its conduct of the wars in Afghanistan and Iraq.

In fact, we should be careful not to read too much into the 2006 vote: Americans do not like being on the losing side of any war. It was this failure ... that led voters to reject Bush. But the Middle East chaos wrought by the Bush years also represents a central risk to the global economy. Since the Iraq war began in the 2003, oil output from the Middle East, the world’s lowest-cost producer, has not grown as expected... Although most forecasts suggest that oil prices will remain at or slightly below their current level, this is largely due to a perceived moderation of growth in demand, led by a slowing US economy.

Of course, a slowing US economy constitutes another major global risk. At the root of America’s economic problem are measures adopted early in Bush’s first term. In particular, ... a tax cut that largely failed to stimulate the economy, because it was designed to benefit mainly the wealthiest taxpayers. The burden of stimulation was placed on the Fed, which lowered interest rates to unprecedented levels. While cheap money had little impact on business investment, it fueled a real estate bubble, which is now bursting, jeopardizing households that borrowed against rising home values to sustain consumption.

This economic strategy was not sustainable. Household savings became negative for the first time since the Great Depression, with the country borrowing $3 billion a day from foreigners. But households could continue to take money out of their houses only as long as prices continued to rise and interest rates remained low. Thus, higher interest rates and falling house prices does not bode well for the American economy. ...

Making matters worse, unrestrained government spending further buoyed the economy during the Bush years, with fiscal deficits reaching new heights, making it difficult for the government to step in now to shore up economic growth as households curtail consumption. Indeed, many Democrats, having campaigned on a promise to return to fiscal sanity, are likely to demand a reduction in the deficit, which would further dampen growth.

Meanwhile, persistent global imbalances will continue to produce anxiety, especially for those whose lives depend on exchange rates. Though Bush has long sought to blame others, it is clear that America’s unbridled consumption and inability to live within its means is the major cause of these imbalances. Unless that changes, global imbalances will continue to be a source of global instability, regardless of what China or Europe do.

In light of all of these uncertainties, the mystery is how risk premiums can remain as low as they are. Especially with the dramatic reduction in the growth of global liquidity as central banks have successively raised interest rates, the prospect of risk premiums returning to more normal levels is itself one of the major risks the world faces today.

Posted by Mark Thoma on December 27, 2006 at 02:41 PM in Economics | Permalink

TrackBack
TrackBack URL for this entry:
http://www.typepad.com/t/trackback/7298394

Listed below are links to weblogs that reference Stiglitz: Economic Risks in 2007:

Comments
What needs to be addressed is why the international economy has fared so well, and international markets are so vibrant in spite of well-grounded worries. Where has the vibrancy been coming from, for I believe there has been ground for vibrancy and have been saying so for several years?

Posted by: anne | Dec 27, 2006 2:47:45 PM

http://www.latimes.com/news/opinion/la-oe-summers26dec26,0,5738532.story?coll=la-opinion-rightrail

December 26, 2006

The future's so bright? The markets are pricing in tranquillity as far as the eye can see. The commentariat begs to differ.
By Lawrence H. Summers

First, in spite of all the adverse news, the world economy in aggregate grew more during the last five years than in any five-year period since the second world war. The US is enjoying a rare combination of low inflation and 4.5 per cent unemployment and has not suffered a deep recession in a quarter of a century. Given the natural tendency of markets to extrapolate from experience, optimism is to be expected and is to some extent justified....

[That is just what investment markets reflect, and reflect in a curiously conservative way.]

Posted by: anne | Dec 27, 2006 5:04:49 PM

http://flagship2.vanguard.com/VGApp/hnw/FundsByName

Vanguard Fund Returns
12/31/05 to 12/27/06

S&P Index is 16.3
Large Cap Growth Index is 9.6
Large Cap Value Index is 22.9

Mid Cap Index is 14.4

Small Cap Index is 16.9
Small Cap Value Index is 20.3

Europe Index is 33.8
Pacific Index is 12.4
Emerging Markets Index is 29.1

Energy is 20.2
Health Care is 11.3
Precious Metals is 34.1
REIT Index is 34.3

Long Term Bond Index is 3.0
Intermediate Term Bond Index is 4.2

Posted by: anne | Dec 27, 2006 5:06:01 PM

not one of stig's better efforts

blame the trade imbalance
on us over consumption ???

but admit we are pulling the global effective demand wagon ????

what does this imply
that u leave out ???

"persistent global imbalances will continue to produce anxiety, especially for those whose lives depend on exchange rates"

exchange rates matter ???

then where's the rogues gallery
of reval scape grace types ?????

blame the mal distributed tax cut
for not stimualting
household spending
as if this wouldn't effect imports the way household borrowed money does

in fact may be more so eh ??

and the lower rates and standards
for household credit ????

say whats wrong stig

the repubs found a new way to manage effective demand
not uncle's borrowing but joe six packs

and the kicker as a greater debt slave jow will work his job longer and harder too

a win win
for the black hats

kitchen sink time joe ???

then go for it

this has all the terse fire power
of a hubert humphrey stump speech

Posted by: slink | Dec 27, 2006 6:06:01 PM

I think the story behind the negative savings rate is more complicated (and interesting) than this:

"Household savings became negative for the first time since the Great Depression, with the country borrowing $3 billion a day from foreigners. But households could continue to take money out of their houses only as long as prices continued to rise and interest rates remained low."

The savings rate has been falling for a long time, so to attribute its falling below zero to current economic policy (rather than the continuation of whatever trend has driven the fall) is disingenuous.

Many people have floated the "wealth effect" as driving the fall, but there is a difference between theoretical capital gains and realized capital gains, and it looks to me like it's realized gains that have effectively plugged the gap in savings. Whether it's a good idea to sell off your assets and realize the gains instead of saving is another issue altogether, but I think it's uncontroversial that spending realized gains is better than spending theoretical ones.

I don't actually have data for 2005 (let alone 2006), but through 2004 capital gains realized by individuals have increased dramatically as the savings rate (which is computed by subtracting personal consumption expenditures from net income excluding capital gains, then dividing by personal income) has plummetted. Add them to income, and the picture is quite different. That was especially true in 2000-01 when stocks went bonkers, and may also be true when housing prices climb rapidly.

So consumption rising faster than income may not reflect a "wealth effect" per se, but rather a "realized gains effect".

That might actually be a partial answer to Anne's question - the markets think things look bright because things aren't as bad on the individual level as they appear in the aggregate, and the markets reflect individual decisions and circumstances better than statistics do.

Of course, equity markets sometimes fail to predict the future well. They always seem to peak just before they fall (see 1929 and more recent examples).

Posted by: Morgan | Dec 27, 2006 8:12:12 PM

Yes, stocks and flows. The conversion of stocks to flows. But the problem is: what if the ready conversion of stocks into flows, the "realization of capital gains", is not due to or tracible to real increases in value-added production, but to asset inflation through excess liquidity? (And, one might add, an excess of liquidity due not just to loose money to keep things floating above the water line, but related, as well, to increasing concentrations of wealth at the top echelon, pooling "investment" funds for speculative activities, as well as, the financing of the increasing debt obligations of lower orders). And then there's some paradox in overseas "outsourcing", since, on the one hand, it involves the reduction of production costs without necessarily achieving real productivity gains,- (as opposed to shifting the way productivity gains are accounted), while, on the other, the undervaluing of "outsourced" currencies, which return to finance domestic interest rates, prevents those outsource currencies from fully realizing the value-added of their own production.

Posted by: john c. halasz | Dec 27, 2006 8:46:54 PM

Stiglitz - "...with the country borrowing $3 billion a day from foreigners."

Is that figure accurate?

Stiglitz is stating that the U.S. is borrowing $1,095 billion ($1.095 trillion) per year. This is well above the growth in the U.S. National Debt.

What is included in his sky high $3 billion per day?

Posted by: Movie Guy | Dec 27, 2006 10:14:10 PM

Movie Guy:

The reference is obviously to the growing CA deficit, though $2.5 billion would be more accurate for the current figure.

Posted by: john c. halasz | Dec 27, 2006 10:39:37 PM

Setser puts the probable 2006 current account deficit at 900 billion. That would be about 2.46575 billion per day.

Posted by: maria | Dec 27, 2006 11:37:16 PM

I've run into a lot of people that are: underemployed, being laid off because of a take over of their company, or low paid. Meanwhile, a lot of people seem to be making $80k and up. Not much in between.

Those of us at the bottom end, barely get enough income to accumulate or save. So what do you do? If you get into problems (like being sued after a huge hospital bill, then maybe you hit the home equity. I don't know too many borrowing on the home to go on vacation or buy luxury goods.) Most buy on a credit card.

If you do try to save, everything, bank accounts, CDs are taxed. Then again, banks haven't been paying much interest on a savings account or CD for years. IF you can get some money together, where can you go? And what about retirees? You put your money into what? Income stocks? Preferreds? Mutual funds, and maybe a few stocks? But all those are taxed, but not as heavily as they used to be. ALSO, they provide a better return than a traditional bank. But then, OH OH! ....you are suddenly part of the "problem," since the *wealthy* can invest even more. The problem is not that the wealthy buy stocks and invest. The wealthy simply have more money than the average joe trying to hang on, to invest in those. So, how DO YOU FAIRLY TAX?

Every economist laments the low savings rate in the US, but tell me, "WHERE/HOW can you save(here in the USA)?"

As for Foreign investors, where is it really safe to save or invest over "there?" Wars, radicals, et al, sure would seem to make the US pretty attractive, and we have even more stuff to invest in. If foreign investors pull their money out where would they go?

Posted by: Real Person from the Real World | Dec 28, 2006 5:22:26 AM

key ratio

gdp to foreign debt

could it be
vs
should be

on a ten trillion dollar economy
issuing debt in its own currency
whats too high??

without a clear notion
of the danger zone
here
you are sky hooking the problem

just like fed deficit to gdp ratio

now a fast bulid might by itself seem
troubling

say a low ratio like we had in 2000

and CAD rate twice the nominal gdp growth rate
that will build up the debt ratio quick

so if you folks are scared ...why?

foreign debt service burdens ???

what nominal interests rate ??

lots of numbers to plug in here
lots of moving parts
and besides
like bw's ss system "legacy problem "
hard to forecast too

Posted by: slink | Dec 28, 2006 6:56:48 AM

Again, we need to ask what has made these last 5 years the strongest such period for international economic growth since 1945. We are ignoring what investors are not ignoring, these last 5 years have been important growth years almost everywhere. Why? Also, why are we not crediting investors for recognizing this remarkable period? Proceeding through these years of warranted worry and dislocation, there has nonetheless been remarkable economic gains as I have repeatedly argued that are unlike any I know of.

[Nouriel Roubini was not harmed in the making of this comment.]

Posted by: anne | Dec 28, 2006 8:06:10 AM

When international energy prices began a sharp steady increase, analysts were continually calling attention to the economic havoc that would follow, but I noticed early on that where there should have early havoc in the developing countries the increase in energy prices was adjusted to and growth continued. Why? Why have so many analysts missed what has happened in the way of growth through economic dislocation for so long?

Where others worry about an inverted yield curve, investors could not be more pleased about low long term interest rates. Who is right? Investors have been right so far, and dramatically right.

Posted by: anne | Dec 28, 2006 8:15:23 AM

anne

the us
has without intention
run a fine global macro policy
these past 5 years
by
outside borrowing and over spending
at a rate that forces global output
growth to new highs

but this is also
the crisis
because our allegedly
unsustainable borrowing
is world macro needed

our
over spending is the source of earthly prosperity

Posted by: slink | Dec 28, 2006 9:17:58 AM

Anne's lack of critical assessment reminds me of observers watching the performance of the "Janus 20" Fund during 1998-9 moving from 30 to 90 (paying $15 of cap gains in the process (before cratering to $25 in '02. They couldn't figure it out - the astounding performance, that is. TV ads trumpeted "the better research" (Janus managers rifle the garbage bins at tech companies; count the cars after 2100hrs in the parking lot at HQ, interview the jilted ex-lovers of CTOs - Aren't they the clever ones - Why didn't I think of that!!). Money poured in but few saw it for what it was: any time anyone attempts to shove multi-billions into a line of stock with market caps not much greater than that, over shorter periodsl, the price will go up!! Real rocket science.

So here we are. Yes there are some wonderful economic things happening in the world: An unlevered Eastern Europe grows and modernizes; India catches self-perpetuating growth; China modernizes; Russia rises; GCC countries invest domestically in infrastructure instead of pissing it all away on superflous yachts & luxury for a few, and London casinos; Better terms of trade and end of cold war and [temporary?] reduction of tribal rivalries & to a lesser extent, corruption benefits Africa; all real and meaningful to people.

BUT massive USA deficits and global credit creation generally - and in the carry enablers and PRC - have been - like the billions of inflows into Janus20 Fund - the root cause and engine. And for this there is - or will be a price for America and Americans.

The joys and potential longer-term enabling benefits of credit are evident. But the darker side here, economically, is that the USA stumbled into this one alone, and not altruistically, but selfishly, and piggishly, partly due to the nature of Corporatist influence & lack of public interest, and the political expediency of growth vs. recession- irrespective of the longer term cost v. benefit equation. During the late 90s, Soros called for a massive creation of SDRs by wealthy nations to be sprinkled (or heaped) about like pixie dust to achieve precisely what the unilateral US credit binge has contributed to global growth. THAT would have shared the consequences and imbalances of the obligations created more equally amongst wealthy surplus nations, whilst allowing for and encouraging more balanced consumption, rather than the consumptive orgy and energy wastefulness that present reality has spawned in the USA.

Now de facto, the costs will split amongst surplus and enabling nations as they accumulate USDs and/or watch the value of their reserves combust before their eyes. But at the end of it - and make no mistake it will end - while the elixir whether US-driven credit bubble or Managed SDR Expansion - may have produced the same global economic joyousness (the very joyousness that Anne admires so, finds difficulty in explaining, and chides others for trying to see what's behind the smoke and mirrors), the end result between the two paths will be dramatically different. For the one the USA has unaltruistically and unilaterally taken has lead to an annihilation of the international monetary system, an encouragement of unsustainable practices amongst nations that ostensibly should be cooperating with one another, energy consumption and policy that is no more virtuous - perhaps even less so than it was 5 years ago, and an industrial sector that has been hollowed beyond competitive recognition from the resulting overvalued exchange rate, and a massive and tragic misallocation of resources to repugnantly oversized and wasteful American housing infrastructure coincidental to a world where disease remains rife, drinking water often scarce, economic opportunity limited.

Admittedly, I am pointing this out with the benefit hindsight here. But it was obvious - certainly to Soros, and certainly to anyone (economist or not) watching the growing unsustainability of fiscal policy, trade imbalances, energy usage, consumption patterns, that the unilateral route would end in a brick wall saddling future generations with massive deficits, a hollowed infrastructure, a real loss of soverign political and economic flexibility, devaluation of savings (unless one swore-off faith in one's government to protect the value of one's savings), and acquired debt to purchase any and all assets.

The cost, dear Anne, is that in five short years, the USA has squandered generations of hard work, and saddled future generations with unimaginably large obligations, that it is no wonder things appear to have a Panglossian shimmer. But one would be a fool not to question what lies beneath, and assess whether the foundations are reasonable firm and secured...

Posted by: Cassandra | Dec 28, 2006 9:21:23 AM

Ah, but the international economy is more than America and international markets include more, lots more. And, what is interesting is that the more cautious the portfolio, the better the returns for years and years. So, the bears keep bearing and somehow all is remarkably well and somehow the idea that possibly the international economy has changed significantly is dismissed.

Janus???? Please.... Remember, the more cautious the portfolio, the better the performance has been for 10 years; especially so internationally.

Posted by: anne | Dec 28, 2006 9:42:48 AM

There is another point to investing that bearish bears never ever seem to understand, or, if they understand never show those who are afraid of bears, through generations of experience. There are portfolio alternatives for bears, not nutty alternatives but fine cautious alternatives. Robert Shiller or Stephen Roach or Nouriel Roubini simply to rail against investing offers no sense of an alternative and I consider this false. Louis Rukeyser once simply dropped a forever bear from Wall Street Week after the panelist refused to suggest even protective investments.

Posted by: anne | Dec 28, 2006 10:18:41 AM

Also, what is happening in China and India and Brazil and South Africa is profound. Through a summer, I was stunned by the economic bustle in China 10 years ago. Development economistis simply could not allow for a blooming China, but there she was, and I understood that when a country of 1.3 billion blooms all sorts of development stereotypes and pessimisms must be examined anew.

Brad DeLong wrote a year or more after, that China was changing a century of development pessimisms. South Africa is 40 million, but China 1.3 billion. China and India are 2.3 billion, and India is blossoming. Now, there are all sorts of problems that need discussion, but, these last 5 to 15 years have been more economically promising than any since 1945 internationally.

Heck, talk about a poverty program that has "worked." Look to the integration of East Germany in West Germany.

Posted by: anne | Dec 28, 2006 10:34:30 AM

Of course, the ricks are higher than currently reflected in the markets. The primary function of the market is to lay off risk.

The essential nature of the underlying problems, and risk, can clearly be seen in this administration's (and rich folks') clearly stated preference for laying the risk off on to the backs of the poor, those within our society that are least able to assume risk.

This preference results in a complete perversion of the fundamentals of capitalism, i.e., risk should be assumed by those best able to assume it and withstand it with as little economic damage as possible. It is, however, an excellent basis for conducting a clandestine class war - which the conservatives (as personified by the likes of Reagan, Bush, Friedman, et al.) have been waging since they failed to prevent the New Deal.

Posted by: fiskhus jim | Dec 28, 2006 10:46:45 AM

"...a complete perversion of the fundamentals of capitalism..." - Do I detect some excessively normative assumptions here? Though the concept of "ricks" is an interesting one. As calmo would say, we B bringin' in the sheaves...

Posted by: john c. halasz | Dec 28, 2006 11:31:41 AM

"Heck, talk about a poverty program that has "worked." Look to the integration of East Germany in West Germany."

anne, that "integration" destroyed East Germany's manufacturing capacity (the monetary union appreciated the former East currency by a factor of 10) and resulted in high unemployment, which Germany still has not recovered from. It brought the East Germans more consumption, sustained mainly by transfer payments, and more poverty too.

Posted by: piglet | Dec 28, 2006 11:47:22 AM

Interesting, but once the Germanys were politically joined I do not know how currency separation could have worked without creating a problem similar to that which the east experienced in west Germany. I will consider carefully again, but my reading of Germany is the economy is integrated and continually strengthening. Finally, there is a real estate and housing surge which I have been looking for these several years.

Posted by: anne | Dec 28, 2006 12:05:22 PM

Anne said - "Finally, there is a real estate and housing surge which I have been looking for these several years."

Do you believe, Anne, that [housing surge] you've been looking for is because of:
(1) relative value (Berlin, the "cheapest" market still yields under the [already diminished] Euro long bond equiv;
(2)"Absolute or Intrinsic Value": a 220sqm apt on a leafy street in Berlin just shouldn't trade at 30% of the same in Paris no matter how lame the yields, weather and food are; (Hint: one can go to Dresden, Leipzig & elsewhere in Ost and pay 10-15% of Paris for same;
(3) Inflation expectations - It just HAS to go up since in a world awash with liquidity, rents MUST go up!;
(4) Optimism - Things are getting better, must buy now irrepsective of whether it still makes more sense to rent;
(5) Me Too-ing: "Good golly there's a property bubble everywhere else, why are we not so blessed?"
(6) Trading Rationale: "Well stocks have gone up, Croatian Islands have gone up, art has gone up, and Franz Beckenbauer autographed jerseys have skyrocketed, it's about time that real estates started appreciating too."

Just curious...

Posted by: Cassandra | Dec 28, 2006 12:30:38 PM

I certainly side with Piglet. East Germany is a mess. I'll wait for Anne to report back after doing the promised research but my unresearched quick guess is the decision to convert the East and West Deutche Mark at parity hopelessly over-valued the East. Our friend, Save the Rustbelt would feel at home in East Germany.

On the broader discussion, the nuance seems to have escaped many that optimists like Anne and pessimists like Cassandra might both be right. The World Economy has boomed as economic risks have mounted. Risky situations don't have to end in disaster. The Bears among us (me included) worry so much about the risks that we begin to think disaster is inevitable. It rarely is.

If Anne is right, and if she is profiting from her optimism, perhaps she can set up a trust fund for her pessimistic but well meaning blogging friends.

Posted by: Bupa | Dec 28, 2006 12:44:30 PM

Important comments; which I am thinking through. By the way, I really do want to be realistic in assessing the German integration which is important both for Germans and as a "model" whether successful or not. Will east Germany have become in time Ireland? Is the analogy proper?

Posted by: anne | Dec 28, 2006 1:15:00 PM

Oh, come on, now...

1) No normative assumptions - capitalism has always specified that the investors also take the risks. The corporate form is nothing but a shell to limit those risks - and constitutes a substantial legal and economic privilege, which the investors should (and NOT in the normative sense, but in the legal, moral and economic senses of the word) be willing to pay more for, not less; a privilege that could (except for the moral will of the Congress and the state legislatures) be revoked or limited at any time, since nothing in the Constitution (of the US or the 50 states, except for perhaps Delaware) requires the People to extend that protection.

and

2) "ricks" was a typo - and you know it!

Posted by: fiskhus jim | Dec 28, 2006 1:24:18 PM

All,

Some folks calculate the CA deficit in billions per business day. Stephen Roach of Morgan Stanley is an example. Not criticizing anyone's math. Just trying to explain (guess) how Stiglitz came up with his number.

Posted by: Peter Schaeffer | Dec 28, 2006 2:22:48 PM

i'm with anne. the world is embracing commerce and growing. now we add to this via consumption but the whole sky is about to fall reminds me of meg ryan in when harry met sally

"i'm going to be forty" "when?" "someday!"

as the other economies of the wolrd grow they will have messes like every country in history- big and small booms and busts- but trying to guess when is a fools game.

east germany may be a mess but why is that? outdated production methods is the likely answer.

Posted by: adam | Dec 28, 2006 2:38:05 PM

anne you still miss the macro point

who will replace the yankee effective demand last resort ????
the ec ????
japan ???
china ????
the oilers ????
uncle pulls back and this whole flat earth
piles up short on itself
the faster its going now
maybe the faster it accordians

Posted by: slink | Dec 28, 2006 5:50:54 PM