Cure for Economic Slumps Seen in Raising Rates: Cutting Research – Bloomberg 11-23-12

Salient to Investors:

Stephanie Schmitt-Grohe and Martin Uribe at the National Bureau of Economic Research said the solution to an economic slump is higher interest rates when the cause of that slump is a confidence shock that cheap borrowing costs are failing to reverse, and ultra-easy monetary policy risks making fears of deflation a self-fulfilling prophecy as spenders sit tight. An increase in borrowing costs can boost inflationary expectations, stimulate employment and end the slump.

Evidence from the US and Japan during the last two decades suggests that zero nominal interest rates are not doing much to push inflation higher.

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JPMorgan Chase said Finland would face the smallest economic cost should it quit the euro, the Netherlands the highest cost – because the higher the current account surplus of a country, the greater the cost of exit as it would probably incur an appreciating currency. Finnish and German 10-year bond yields would fall 35 basis points on an exit, the Netherlands would rise by a similar amount.

Steven Frable at IHS said the legalization of marijuana in Washington and Colorado could boost their economies by providing tax revenue, alleviating stress on law enforcement, transfer jobs out of the underground economy, and create pot tourism. Frable cautioned it could take years before any state can legally sell marijuana.

Joshua Aizenman at University of California and Ilan Noy at University of Hawaii said previous periods of financial pain tend to make repeats more probable possibly because regulators lag behind the pace of bank innovation or are focusing on the causes of the last crisis, not the next one.

The World Bank and PriceWaterhouseCoopers said:

  • Companies worldwide are paying less tax than before the financial crisis.
  • A medium-sized company pays an average 44.7 percent of profits in taxes to all levels of government, and the total tax rate has declined one percent in each of the last eight years.
  • Companies spent 267 hours complying with tax requirements, a fall of 54 hours in the past eight years.
  • Economies that reduced complexity in tax administration tend to enjoy higher economic growth.

The Economist Intelligence Unit said Switzerland has the best long-term economic forecasts to 2030, followed by Australia and Norway, with the US and Germany tied at 16th.

Read the full article at http://www.bloomberg.com/news/2012-11-23/cure-for-economic-slumps-seen-in-raising-rates-cutting-research.html