Global economy in "danger zone" - World Bank chief

[Ognir]

http://in.reuters.com/article/2011/09/0 ... 6620110903

 
BEIJING | Sat Sep 3, 2011 7:46am IST

(Reuters) - The world economy is stepping into a "new danger zone," World Bank President Robert Zoellick said on Saturday, as growth slows and investor confidence weakens.

Speaking in Beijing, Zoellick urged Europe and the United States to tackle their debt problems, and noted that near record-high food prices and volatile commodity markets are threatening the most world's vulnerable people.

"The financial crisis in Europe has become a sovereign debt crisis, with serious implications for the Monetary Union, banks, and competitiveness of some countries," he said.

"My country, the United States, must address the issues of debt, spending, tax reform to boost private sector growth, and a stalled trade policy."

Turning to China, where he is leading a World Bank study on how the nation can improve its economic growth model, Zoellick was upbeat.

China is "well positioned" to become a "high-income" nation in the next 15 to 20 years, from its status as an "upper-middle income" country now, he said.

The question is whether China can avoid the "middle income trap", where national productivity and income growth stalls after per capita income hits $3,000 to $6,000, Zoellick said.

"If China were to continue on its current growth path, by 2030 it would have an economy equivalent to 15 of today's South Koreas, using market prices," he said.

"It's hard to see how that expansion could be accommodated with an export and investment-led growth model."

Although China is the world's second-largest economy, its per capita gross national income stands at just $4,260, World Bank data showed, less than a tenth of the $47,140 seen in the United States.

Critics have long said China relies too much on heavy investment and exports to drive its economy, and should encourage domestic consumption.

For Chinese consumption to take off, analysts say China needs to cut income taxes, improve healthcare services and labour mobility, and reduce Beijing's share of national income by raising dividend payouts from state firms, among other measures.

[CrackSmokeRepublican]

The Global Jew Bus with Zoellick and the Global "Scam" J-Crew ...  is "off the cliff" right now...  --CSR

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"A much more nebulous conception"
by Steve Keen on September 4th, 2011 at 11:30 am
Posted In: Debtwatch

The change in debt is thus related to the current level of economic activity—on both commodity and asset markets—which explains the correlations shown earlier between the rate of change of debt, the level of output (and hence of unemployment), and the level of asset prices.

An obvious second-order implication of this—first explored statistically by (Michael Biggs et al., 2010; see http://ssrn.com/paper=1595980)–is that the acceleration of debt is related to the rate of change of output, unemployment, and asset prices. Enter "the nebulous conception" that Chris Joye derided, the "Credit Accelerator": It is a logical consequence of a credit-based view of how capitalism functions.

At more length, Holmes summed up the Monetarist objective of controlling inflation by controlling the growth of Base Money as suffering from "a naive assumption":

that the banking system only expands loans after the [Federal Reserve] System (or market factors) have put reserves in the banking system. In the real world, banks extend credit, creating deposits in the process, and look for the reserves later. The question then becomes one of whether and how the Federal Reserve will accommodate the demand for reserves. In the very short run, the Federal Reserve has little or no choice about accommodating that demand; over time, its influence can obviously be felt"... [and] "the reserves required to be maintained by the banking system are predetermined by the level of deposits existing two weeks earlier." (Holmes 1969, p. 73) (Alan R. Holmes, 1969, p. 73; emphasis added.)

Why did neoclassical economists ignore this perfectly sensible analysis, and the host of empirical evidence supporting it accumulated by Moore and others, including even neoclassical standard-bearers like Kydland and Prescott (Finn E. Kydland and Edward C. Prescott, 1990, p. 4)? I would like to say that "faced with a choice between reality and their assumptions, neoclassical economists chose their assumptions", but strictly speaking that wouldn't be true. The vast majority of neoclassical economists have no idea that this empirical evidence even exists. But if they had heard of it, most of them would have dismissed it anyway because it undermines numerous core beliefs in neoclassical economics, including the belief known as Walras' Law. This is because, once it is acknowledged that the growth in credit can expand aggregate demand, then:

    In place of a necessary equivalence between (notional) aggregate demand and aggregate supply (Robert W. Clower, 1969, Robert W. Clower and Axel Leijonhufvud, 1973), aggregate demand will exceed aggregate supply if debt is rising, and fall below it if debt is falling.
    The nominal amount of money matters, and banking & debt dynamics have to be included in macroeconomic models, while neoclassical economics ignores them.
    The neat separation of macroeconomics from finance can no longer be maintained, since the change in debt finances purchases of assets, as well as purchases of newly produced goods and services.
    Worst of all, the belief that everything happens in equilibrium has to be abandoned. Rising debt is not necessarily bad—in fact it is an essential aspect of a growing economy—but it is necessarily a disequilibrium process, as Schumpeter argued long ago (Joseph Alois Schumpeter, 1934, pp. 95, 101).

The essence of Walras' Law is the proposition that, to be a buyer, one must first be a seller—so that the source of all demand is supply. In an environment of free exchange where it is assumed that most market participants were "neither thieves nor philanthropists", neoclassical economists asserted that "the net value of an individual's planned trades is identically zero" (Robert W. Clower and Axel Leijonhufvud, 1973, p. 146). A seller was assumed to only sell in order to buy, and to expect a fair return, so that the sum of each person's supply would equal that person's demand. Calling the gap between a person's demand and supply "excess demand", neoclassical economists asserted that:

    The money value of all individual EDs [excess demands] summed over all transactors and all commodities, is identically zero. (Robert W. Clower and Axel Leijonhufvud, 1973, p. 152)

Seventy years ago, the great evolutionary economist Joseph Schumpeter argued that Walras Law was false in a credit economy, because credit gave entrepreneurs spending power that did not come from the sale of existing goods.

http://www.debtdeflation.com/blogs/2011 ... %e2%80%9d/