►Britain to slash welfare in austerity gamble
Sumeet Desai/Reuters/Oct 20
Britain will on Wednesday take an axe to its welfare state as part of an 80 billion-pound cut in public spending that could seal the fate of both the economy and the coalition government…Economists are split between those who say the drastic action is needed and those who argue it will tip Britain back into recession. Almost all agree, however, that growth will slow and the Bank of England will have to keep monetary policy super-loose for the foreseeable future.
►Mervyn King warns of ‘sober’ decade ahead
The UK is facing an unpleasant, “sober” decade, Bank of England governor Mervyn King has warned…Mr King also raised hopes that the Bank may inject more money into the economy through its process of quantitative easing (QE). He said that at present the amount of money in the economy was still “barely growing at all”. He added that it was a “key role” for the Bank to provide stimulus when the economy was in need.
►China Rates Must Rise to Cool ‘Serious Inflation,’ Chen Says
China’s deposit rates must rise by at least another 1.5 percentage points to contain the nation’s “serious inflation,” Yale University finance professor Chen Zhiwu said.
The 25-basis-point increase in China’s one-year lending rate announced by the central bank yesterday should have taken place about four to six months ago, Chen said in a telephone interview from Hong Kong.
►Difficult Policy Choices Await Europe As Recovery Gets Under Way
Christoph Klingen/IMF/Oct 20
Policymakers face difficult choices as they tackle vulnerabilities while nursing a fledgling economic recovery. Fiscal policy needs to strike a delicate balance between supporting demand through deficits on the one hand, and addressing unsustainable debt dynamics and eroding market acceptance on the other.
►Deflation Still The More Probable Outcome In The U.S.
Editors/BCA Research/Oct 19
With oil prices firming and breakeven rates moving higher, it makes sense to ask if U.S. inflation protection is beginning to be warranted. The answer is a definitive no… The overall picture is one of very weak pricing power and a period of outright deflation in 2011 should not be ruled out.
►Rangers, Yankees and Federal Open Market Committee: One Game at a Time
Richard Fisher/Dallas Fed/Oct 19
…the outcome of the next FOMC is yet to be determined…But until the committee meets, nothing is decided. You should bear this in mind given the recent speculation about the prospect for further quantitative easing or the shape and nature of forward policy guidance: No decisions have been made on these fronts and will not be made until the committee concludes its deliberations at its next meeting on Nov. 3.
►How to Prevent a Currency War
Barry Eichengreen/Project Syndicate/Oct 12
Today, the United States is in the position of the gold-standard countries in the 1930’s. It can’t unilaterally adjust the level of the dollar against the Chinese renminbi. Employment growth continues to disappoint, and fears of deflation will not go away. Lacking other instruments with which to address these problems, the pressure for a protectionist response is growing.
So what can be done to address the situation without getting into a beggar-thy-neighbor, retaliatory free-for-all? In the deflationary 1930’s, the most important way that countries could subdue protectionist pressure was to use monetary policy actively to push up the price level and stimulate economic recovery. The same is true today. If fears of deflation were to recede, and if output and employment were to grow more vigorously, the pressure for a protectionist response would dissipate.
The villain of the piece, then, is not China, but the US Federal Reserve Board, which has been reluctant to use all the tools at its disposal to vanquish deflation and jump-start employment growth. Doing so would help to relieve the pressure in Congress to blame someone, anyone – in this case China – for America’s jobless recovery. Where the Bank of Japan has now led, the Fed should follow.
Of course, with China pegging the renminbi to the dollar, the Fed would, in effect, be reflating not just the US but also the Chinese economy. But this is within its capacity. China’s economy is still only a fraction of the size of America’s, and the Fed’s ability to expand its balance sheet is effectively unlimited.
China might not be happy with the result. Inflation there is already too high for comfort. Fortunately, the Chinese government has a ready solution to this problem: that’s right, it can let its currency appreciate.
►Chinese Discomfort With Aggressive Monetary Stimulus Highlights Its Virtues
Matt Yglesias/Yglesias/Oct 18
The Chinese government’s discomfort with monetary stimulus is understandable. Monetary stimulus plus Chinese currency policy will equal an undesirably large amount of inflation in China. That means that in order to avoid an undesirably large amount of inflation, Chinese leaders will need to engage in a more rapid currency readjustment than they want to. That, however, merely underscores that unilateral monetary action is the right way for the US government to handle our concerns about China’s currency policy. We don’t need to threaten them, or bribe them, or cajole them, or go to “currency war” or anything. What we need to do is to adopt monetary policies that are appropriate for our economic situation. The Chinese will learn to deal with it, and in the longer term we’ll all be better off.
►12th Federal Reserve District Fed Views
Editors/San Francisco Fed/Oct 14