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  • Are Governments Running A Ponzi Scheme?

    Rana Foroohar | Jun 2, 2009 05:07 PM

    There are now lots of folks predicting that economic recovery may come in the shape of a W – that is, a rebound out of recession (soon) followed by another dip at some point in the next couple of years, before things finally stabilize. But the hows and whys of the W recovery are up for grabs—economists say it could be the result of inflation, or a commodities spike, or any number of other reasons. Today, I saw an interesting theory put forward by Eric Chaney, the chief economist of the AXA Group, one of the world’s largest insurers. Chaney used to write opinion columns for me when he was chief European economist for Morgan Stanley, and he’s a pretty smart guy. His take is that the second dip of the W may come from a bond market crisis, touched off by the huge amounts of debt that will be issued by governments all over the world in the coming months and years.

     

    The numbers are truly astounding – the increase in net borrowing by rich countries between 2008 and 2010 will be around $2.5 trillion, or 4 percent of the world’s GDP. Emerging economies will need to borrow hundreds of billions more, of course. In his report Chaney asks, “Will lenders be ready to absorb all this paper at reasonable (for borrowers) prices? To put it bluntly, aren’t governments initializing a generalized Ponzi scheme a la Madoff? If not, how do we get out of the debt spiral?”

     

    It’s a great question. In the short term, things don’t look too bad, because at the moment both consumers and companies are busy trimming their own balance sheets. But as the recovery takes off, and companies once again begin tapping markets for capital, they’ll be competing with governments. This will likely come at a time when the Fed and the ECB start unwinding their monetary stimulus. That, predicts Chaney, could lead to a remake of the 1994 bond crisis, with a large rise in yields, followed by a crash – but this time around, on a global basis. That brings us to the second dip of the W – which, if Chaney is right, could come around 2011. Hang onto your hats – and your wallets.


  • Gauging Peace: The Economic Indicators Edition

    Katie Paul | Jun 2, 2009 03:33 PM
    Global Peace Index 2009, Institue for Economics and Peace
     
    NEWSWEEK's Dina Fine Maron brings us this dispatch from the D.C. bureau, after she spent her afternoon hobnobbing with the policy wonks at the Institute for Economics and Peace. --KP
     
    Since last year, the world has gotten a little less peaceful, according to the team of economists and peace experts who compiled the 2009 Institute for Economics and Peace Global Peace Index. The global economic crisis fueled the threat of public violence, and had political ramifications that negatively impacted global safety and security, says Clyde McConaghy, President of the Global Peace Index. Released today, their third annual Index ranked 144 countries from most to least peaceful, based on internal indicators like a country’s crime rates, political instability, and its level of organized crime alongside external measures like a country’s relations with its neighbors and its military deaths. 

    This year New Zealand tops the chart as the number one most peaceful country, thanks to its stable coalition government and its good relations with its neighbors. Not surprisingly, Iraq, Afghanistan, and Somalia claim the least peaceful countries’ spots, with Iraq in last place. Predictable enough, right? But the GPI designers say their study shows more than just abstraction. They have calculated peace, which they define as “the absence of violence,” into dollars. Their calculations suggest that right now $2.4 trillion, or 4.4 percent, of the global economy is dependent on violence. But if the world were peaceful, they say, the annual economic bonus would be U.S. $7.2 trillion, based on latest data from 2007. Ideally, living without the threat of instability would mean the violence dollars could be redeployed into areas that would cause other less destructive markets to grow.

    The United States ranking has stayed relatively stable in the middle of the pack, though it improved six points since last year, climbing from #89 to #83. The uptick is largely due to external factors: the decreased threat of terrorist attacks against the United States and the drastic slide into violence and unrest in a slew of other countries. Still, that means the U.S. is ranked 22 spots below a notoriously unpeaceful hotspot like Nicaragua. Why? Not all indicators are weighed equally, says McConaghy; indicators resulting in death count more heavily. So although Nicaragua has high levels of political unrest and a higher likelihood of violent demonstrations, the United States ranking suffers from its easy access to arms, high level of organized crime, and large number of military deaths. 

    The study suggests that the recipe for success, other than being a stable, small democratic country (which rounded out all the top spots), is to have a well functioning government, freedom of the press, regional integration, high life expectancy and literacy, and women in parliament.

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  • Breakfast Buffet, Tuesday, June 2

    Barrett Sheridan | Jun 2, 2009 08:08 AM

    Does the DJIA Matter?: Amidst the cacophonous response to the General Motors, the Dow Jones company announced it was removing both Citigroup and General Motors from the Dow Jones Industrial Average, a weighted index of 30 leading stocks. The question, says, Felix Salmon, is who cares? The DJIA is chosen by the Wall Street Journal editorial board, for goodness sake. It's also completely unrepresentative (insurer AIG was replaced by food giant Kraft in September; Cisco gets GM's spot, for some unknowable reason) and weighted by stock price instead of market value. Dumb, dumb, dumb.

    Still the One: Another high-ranking Chinese official comes out and says what we all know: the dollar isn't going away anytime soon. That's probably not much solace at the Treasury auctions that have been going so poorly recently.

    Back to Basics: America is a nation of savers once again.