With the Eurozone problems and the elections in France occupying most investors, many tend to “forget” about the ultimate white knight of the World economy, China. Is the “Bo” situation about to have much larger implications for the Chinese economy than we anticipate? The planned smooth transition to the new generation has just hit some bumps. From Businessweek.
Qi hu nan xia, goes a Chinese proverb: When one rides a tiger, it is difficult to dismount. For the leaders of China’s 1.3 billion people, the import is clear. Stay on the tiger’s back, issue commands, and hope like hell the beast doesn’t turn on you. Over the last quarter-century that approach has served the mandarins of the Communist Party well. China became an economic marvel and staked a claim as the world’s next superpower. Civil liberties, social development, environmental husbandry, and political transparency were subordinate to the imperatives of growth. Increasing complaints about the avarice and gangsterism of government officials could be dismissed as local problems as long as an enlightened elite was thought to be guiding the state with a steady hand. Even when under pressure to reform, China’s leaders could reassure themselves that their grip on power remained secure.
Guest post by Predrag Rajsic via The Mises Institute.
If you are taking or have taken some of the typical courses in economics, it is quite likely that you asked yourself questions like the following: If an economic model is not like the real world, why should I trust the results of that model? One of the answers I would often get when posing this question goes something like this: Of course the model is not like the real world; it is not supposed to be like the real world. If it were, then it would not be a model!
This response can leave one feeling intellectually inferior or incapable of abstract thinking. One may get the impression that there is something obvious that he or she is missing. Sometimes, the answer would go a bit further: models are simplified representations of reality that we use to better understand that reality. This answer is somewhat more polite, but it still does not tell us how we determined which features of reality were not important enough to be included in the model. Building a model in this way also seems to imply that we already understand the elements of reality and how they are interrelated.
If none of these answers left you entirely comfortable with the currently predominant, Walrasian approach in economics, you may want to look into the works of some of the Austrian economists.Ludwig von Mises, Friedrich Hayek, and Murray Rothbard were the leading figures in this school of thought in the 20th century. Scholars like Mises, Hayek, and Rothbard showed that there are, in all likelihood, more robust descriptions of markets than those contained solely in mathematical general-equilibrium models.
Must read by sharp minds at PIMCO.
- Today, the Federal Reserve itself faces an “unusually uncertain” period because it lacks a complete understanding of the potential side effects of its unconventional policy actions; in particular the elongated timeline of its zero interest rate policy and its massive money printing.
- What matters in shaping market expectations about inflation and deflation are the credibility of fiscal policy, the prospect for real economic growth and the central bank’s commitment to step back from the punch bowl.
- For the time being, major central banks are putting off the tradeoff between addressing high economic leverage as measured by debt-to-GDP and potentially developing structurally higher inflation expectations for the benefit of jumpstarting their economies.
- As EM central bank reaction functions shift away from inflation targeting to a more hazy combination of growth/exchange rate/inflation targeting, there is a real risk that transparency in monetary policy becomes compromised. The likelihood of forecasting errors becomes amplified with a greater chance of missing policy targets.
Full article here.