Paul Ryan’s Budget
Guest poist by Azizonomics.
So Romney has picked Paul Ryan for Vice President; a man with a remarkably similar “deficit-reduction” strategy to that of George Osborne here in the UK, where unemployment and budget deficits have soared, and GDP remains well off its peak.
If Ryan or his Democratic rivals really understood the budget deficit, they would understand that its huge size is a result coming primarily out of a depression brought on by excessive total debt:
As debt soared from the 80s to the 90s, tax revenues soared as the economy boomed on borrowed money. But as the debt continued to grow relative to income, the costs of the debt mountain meant that income that might once have been invested in businesses and consumption went toward debt service instead. And so once we hit the point at which debt repayment exceeded new debt acquisition, we were flung into a depression. This has had a relatively severe impact on growth; since the deleveraging hit in 2008, GDP growth fell considerably from its long-term trend (nominal potential GDP):
Hard landing in China
Although “we” are all focusing on Europe and Spain mainly, China is slowing down irrespective of what they tell you. From The Telegraph.
“Severe deflation pressures are rippling across the country,” said Alistair Thornton and Xianfeng Ren from IHS Global Insight. “Deflation, not inflation, is the greatest short-term threat to the Chinese economy.”
“The hard landing has happened,” said Charles Dumas from Lombard Street Research. “We don’t believe official data. We think GDP slowed to a 1pc rate in the second quarter.”
A blizzard of weak data has caught policy-makers off guard, though shares rallied in Shanghai on hopes for monetary loosening fromChina’s central bank after consumer price inflation (CPI) fell to 1.8pc.
New property starts fell 27pc in July. Industrial output growth fell to 9.2pc for a year ago but has been flat over recent months.
“This was the moment when stimulus was supposed to bite. It didn’t,” said Global Insight. Critics say Beijing let the property boom go too far and then hit the brakes too hard last year. Monetary tightening led to a contraction in real M1 money. The delayed effects kicked in this year just as Europe fell back into recession and the US slowed abruptly. (full article here).
What about a German Referendum?
It is all (still) about Europe, although investors are getting tired of the “old” story. When will Spain stop imploding, what about Greece, will the core be immune?
All the above questions and a few more are keeping Merkel busy. The question is, should Germany hold a referendum? From Spiegel.
Chancellor Angela Merkel wants Europe to move toward an ever closer union in a bid to solve the euro crisis. But she is already pushing at the limits of what is possible under the constitution. The debate about holding a referendum on transferring power to Brussels is gathering momentum in Germany.
Indeed, the chancellor is in a tricky position at the moment, as she fails to get the euro crisis under control. Of course, the Economist’s notion of a secret plan to break up the euro zone is purely fictitious. But it fits into the current debate, where more and more politicians from Germany’s coalition government are talking about radical steps to solve the euro crisis.
Market volatility – Siesta time
With the markets having traded like when pushing a cork into the water, it always come back up, many investors are now once again feeling the security of low volatility.
It was only a year ago when the world was imploding and the VIX traded at 40+. A few points on the lazy VIX, by Doug Short.
Let’s review the recent volatility, or absence thereof) in the S&P 500. The first chart below features an overlay of the index and the CBOE Volatility Index (VIX) since 2007. The current levels of this index are well below the 20 level, a traditional traditionally associated with increased market risk. A recent WSJ article summarizes the usual interpretation of this indicator.
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