iftttwall

In the near term, BofAML’s Macneil Curry warns “we are growing a bit cautious/nervous, as US equity volatility is flashing a warning sign of market complacency that has often preceded a correction or a pause in trend.” This ‘red flag’ is asterisk’d appropriately in the new normal with “to be clear, the balance of evidence is still very much US equity positive, but the near term downside risks have increased.”

Via BofAML’s MacNeil Curry,

We are bullish stocks, with the S&P500 targeting 1844 into year end [ZH: which sounds awfully close to an extraplotaed protjection of where the Fed’s balance sheet implies year-end target].

 

However, in the near term, equity volatility warns of complacency and the potential for a correction lower.

Specifically, the VXV/VIX ratio (VXV is the BBG ticker for 3m SP500 Volatility) has reached levels that have often led to a market pause/correction.

 

 

While such a pullback would ultimately be corrective, Be Alert!

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/ZHGfVxEhloI/story01.htm Tyler Durden

In the near term, BofAML’s Macneil Curry warns “we are growing a bit cautious/nervous, as US equity volatility is flashing a warning sign of market complacency that has often preceded a correction or a pause in trend.” This ‘red flag’ is asterisk’d appropriately in the new normal with “to be clear, the balance of evidence is still very much US equity positive, but the near term downside risks have increased.”

Via BofAML’s MacNeil Curry,

We are bullish stocks, with the S&P500 targeting 1844 into year end [ZH: which sounds awfully close to an extraplotaed protjection of where the Fed’s balance sheet implies year-end target].

 

However, in the near term, equity volatility warns of complacency and the potential for a correction lower.

Specifically, the VXV/VIX ratio (VXV is the BBG ticker for 3m SP500 Volatility) has reached levels that have often led to a market pause/correction.

 

 

While such a pullback would ultimately be corrective, Be Alert!

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/ZHGfVxEhloI/story01.htm Tyler Durden

“Debt increases tail-risk,” warns anti-fragility expert Nassim Taleb, “whether it’s personal, corporate, or governmental.” A rise in debt, he warns, implies nothing less than a rise in “the risk of catastrophe,” and Taleb chides,  governments “should be focused in risk-management… instead of creating these risks.” This brief Bloomberg TV clip cuts to the chase as the normally circumlocutory Taleb unloads on the perils of central banks, “Mr. Greenspan created tail risk by eliminating the business cycle,” and since then tail-risks have accumulated with debt the “number one creator of these risks.” In a fascinating phrase, Taleb notes, “corporate debt is benign,” since in failure it turns into equity, “but government debt is another matter… for it turns into inflation or worse invasion…”

Reflecting on his “skin in the game” approach to risk management (forecast and over-confidence)…

“Mr. Greespan and Mr. Bernanke are unharmed by their mistakes… but who is harmed – you, me, all taxpayers.“

On models ignorant of tail-risks

“borrowing money to ‘create growth’ is an incorrect thesis – take all the ‘spurts’ of growth from the Industrial Revolution onwards, debt has been used to finance wars – not a good thing…

On Keynes…

“Keynes understood uncertainty all too well and would have encouraged borrowing like this”

 

“Even Keynes would not have encouraged quantitative easing”

 

“There is no excuse to accumulate debt on the grounds of growth”

What are the elements that create the framework for the next crisis…

Simply put, Taleb says governments are “painting the tape” as headline numbers may look good but the middle class is being destroyed

 

It’s Sunday afternoon, take 8 minutes and watch/listen to Taleb…

 

 

And the infamous Black Swan of Cairo article that repressing ‘normal volatility’ for long enough creates an ever-increasing likelihood of ‘catastrophic volatility’…

ForeignAffairs

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/WaWKXNCgA2Y/story01.htm Tyler Durden

“Debt increases tail-risk,” warns anti-fragility expert Nassim Taleb, “whether it’s personal, corporate, or governmental.” A rise in debt, he warns, implies nothing less than a rise in “the risk of catastrophe,” and Taleb chides,  governments “should be focused in risk-management… instead of creating these risks.” This brief Bloomberg TV clip cuts to the chase as the normally circumlocutory Taleb unloads on the perils of central banks, “Mr. Greenspan created tail risk by eliminating the business cycle,” and since then tail-risks have accumulated with debt the “number one creator of these risks.” In a fascinating phrase, Taleb notes, “corporate debt is benign,” since in failure it turns into equity, “but government debt is another matter… for it turns into inflation or worse invasion…”

Reflecting on his “skin in the game” approach to risk management (forecast and over-confidence)…

“Mr. Greespan and Mr. Bernanke are unharmed by their mistakes… but who is harmed – you, me, all taxpayers.“

On models ignorant of tail-risks

“borrowing money to ‘create growth’ is an incorrect thesis – take all the ‘spurts’ of growth from the Industrial Revolution onwards, debt has been used to finance wars – not a good thing…

On Keynes…

“Keynes understood uncertainty all too well and would have encouraged borrowing like this”

 

“Even Keynes would not have encouraged quantitative easing”

 

“There is no excuse to accumulate debt on the grounds of growth”

What are the elements that create the framework for the next crisis…

Simply put, Taleb says governments are “painting the tape” as headline numbers may look good but the middle class is being destroyed

 

It’s Sunday afternoon, take 8 minutes and watch/listen to Taleb…

 

 

And the infamous Black Swan of Cairo article that repressing ‘normal volatility’ for long enough creates an ever-increasing likelihood of ‘catastrophic volatility’…

ForeignAffairs

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/WaWKXNCgA2Y/story01.htm Tyler Durden

The following brief speech by Larry Summers given at the November 8 IMF Economic forum has been getting some attention in the blogosphere over the weekend.

The topic of Summers’ speech is the age-old debate of how to overcome the zero lower bound in which the global economy has, reflexively, found itself in over the past five years (today more than ever, with $160 billion in monthly flow from the Fed and BOJ for now, and the ECB joining soon) which incidentally is the outcome of 100 years of monetary distortions resulting from central banking and which has led to a perverted state in which the global economy is unable to revert to its trendline absent the perpetual reflation of new, bigger and better asset bubbles. “Reflexively”, because the “solution” to the problem merely makes it even worse, but we doubt even 5 more years of global QE will be enough for the world’s tenured economists and Nobel prize winners to figure that out.

Summers’ recommendation is simple: boost inflation (presumably through NGDP targeting, the same thing we said back in September would happen soon, which would unanchor 2% inflationary expectations as money literally dropped from the sky), and encourage a cashless society allowing the Fed to punish all deposit account holders through negative rates (or outright confiscation) forcing massive spending (see the Cyprus deposit confiscation and the subsequent London real-estate mega bubble as an example).

Of course, as any rational person understands very well, the above core problem will never be fixed unless the monetary excesses accumulated in the post Bretton-Woods era and mostly over the past three decades – beginning with Greenspan’s Great Moderation and ending with Yellen’s “I see dead bubbles” speech – are purged through liquidationist policies that allow the world’s balance sheet to revert to viable model. Unfortunately, at this point it is far too late to do “the right thing”, and the Fed is stuck with just one option: reflate or bust, because even the smallest risk price correction could spiral out of control and end the world’s biggest experiment in central planning.

There is nothing magical about this, and anyone who has even the faintest inkling of how traditional restructurings and reorgs work will tell you as much.

Which means certainly not Nobel prize winner Paul Krugman. For this “doctor” of voodoonomics, Larry Summers’ speech is profound and deep for the simple reason that Summers promotes the same policy that none other than Krugman proposed back in 2002, and whose implementation nearly resulted in the end of finance as we know it. Recall from a 2002 NYT editorial:

To fight this recession the Fed needs…soaring household spending to offset moribund business investment. Alan Greenspan needs to create a housing bubble to replace the Nasdaq bubble.

Well, now Mr. Yellen needs to create the bubble of all bubbles to replace the housing (and credit) bubble which replaced the Nasdaq bubble and so on. And she is doing just that.

Which obviously is earning instapraise from Krugs:

We now know that the economic expansion of 2003-2007 was driven by a bubble. You can say the same about the latter part of the 90s expansion; and you can in fact say the same about the later years of the Reagan expansion, which was driven at that point by runaway thrift institutions and a large bubble in commercial real estate…. how can you reconcile repeated bubbles with an economy showing no sign of inflationary pressures? Summers’s answer is that we may be an economy that needs bubbles just to achieve something near full employment – that in the absence of bubbles the economy has a negative natural rate of interest.

 

In other words, you can argue that our economy has been trying to get into the liquidity trap for a number of years, and that it only avoided the trap for a while thanks to successive bubbles.

 

And if that’s how you see things, when looking forward you have to regard the liquidity trap not as an exceptional state of affairs but as the new normal.

Bottom line: the US economy can’t “grow” without bubbles, so we need a bubble.

In principle that’s great. The only problem is that the bubble reflation and bursting process always and without fail is destructive to those people who live within their means, and rewards those who spend like drunken sailors, who engage in reckless economic behavior, who build up massive debt burdens which can never be repaid, who misallocate capital and resources, and who become too big to fail and are allowed to hold the entire global economy hostage. For a great example of all of the above, see 2008.

We can assure everyone that the next bubble bursting process will be orders of magnitude worse, as yet another bubble will have to be reflated just to compensate for the Nasdaq, housing, credit and whatever it is that the current bubble is called: the Bernanke/Yellen double down, all-in gamble.

Sadly, the downside is the loss of the reserve currency status of the dollar: something economists are completely unable to grasp, but which China, and its 100 tons of monthly gold imports understands very well.

 

---

 

However, none of the above is the actual topic of this post: we will leave it to others to debate the idiocy of summoning yet another bubble to fix the disastrous consequences brought upon by previous bubbles.

What we did want to highlight is that it now has become perfectly clear just what the source is of “profound” insight for such brilliant economists as Summers and Krugman. That source is… The Onion. In this case from July 18, 2008.

From Recession-Plagued Nation Demands New Bubble To Invest In

WASHINGTON—A panel of top business leaders testified before Congress about the worsening recession Monday, demanding the government provide Americans with a new irresponsible and largely illusory economic bubble in which to invest.

 

“What America needs right now is not more talk and long-term strategy, but a concrete way to create more imaginary wealth in the very immediate future,” said Thomas Jenkins, CFO of the Boston-area Jenkins Financial Group, a bubble-based investment firm. “We are in a crisis, and that crisis demands an unviable short-term solution.”

 

The current economic woes, brought on by the collapse of the so-called “housing bubble,” are considered the worst to hit investors since the equally untenable dot-com bubble burst in 2001. According to investment experts, now that the option of making millions of dollars in a short time with imaginary profits from bad real-estate deals has disappeared, the need for another spontaneous make-believe source of wealth has never been more urgent.

 

“Perhaps the new bubble could have something to do with watching movies on cell phones,” said investment banker Greg Carlisle of the New York firm Carlisle, Shaloe & Graves. “Or, say, medicine, or shipping. Or clouds. The manner of bubble isn’t important—just as long as it creates a hugely overvalued market based on nothing more than whimsical fantasy and saddled with the potential for a long-term accrual of debts that will never be paid back, thereby unleashing a ripple effect that will take nearly a decade to correct.”

 

“The U.S. economy cannot survive on sound investments alone,” Carlisle added.

 

Congress is currently considering an emergency economic-stimulus measure, tentatively called the Bubble Act, which would order the Federal Reserve to† begin encouraging massive private investment in some fantastical financial scheme in order to get the nation’s false economy back on track.

 

Current bubbles being considered include the handheld electronics bubble, the undersea-mining-rights bubble, and the decorative office-plant bubble. Additional options include speculative trading in fairy dust—which lobbyists point out has the advantage of being an entirely imaginary commodity to begin with—and a bubble based around a hypothetical, to-be-determined product called “widgets.”

 

The most support thus far has gone toward the so-called paper bubble. In this appealing scenario, various privately issued pieces of paper, backed by government tax incentives but entirely worthless, would temporarily be given grossly inflated artificial values and sold to unsuspecting stockholders by greedy and unscrupulous entrepreneurs.

 

“Little pieces of paper are the next big thing,” speculator Joanna Nadir, of Falls Church, VA said. “Just keep telling yourself that. If enough people can be talked into thinking it’s legitimate, it will become temporarily true.”

 

Demand for a new investment bubble began months ago, when the subprime mortgage bubble burst and left the business world without a suitable source of pretend income. But as more and more time has passed with no substitute bubble forthcoming, investors have begun to fear that the worst-case scenario—an outcome known among economists as “real-world repercussions”—may be inevitable.

 

“Every American family deserves a false sense of security,” said Chris Reppto, a risk analyst for Citigroup in New York. “Once we have a bubble to provide a fragile foundation, we can begin building pyramid scheme on top of pyramid scheme, and before we know it, the financial situation will return to normal.”

 

Despite the overwhelming support for a new bubble among investors, some in Washington are critical of the idea, calling continued reliance on bubble-based economics a mistake. Regardless of the outcome of this week’s congressional hearings, however, one thing will remain certain: The calls for a new bubble are only going to get louder.

 

“America needs another bubble,” said Chicago investor Bob Taiken. “At this point, bubbles are the only thing keeping us afloat.”

* * *

What can we say in conclusion but… Krugmerica: where satire is now cutting edge economic thought.

h/t @reinman_mt

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/wE-jF4LiKmQ/story01.htm Tyler Durden

The following brief speech by Larry Summers given at the November 8 IMF Economic forum has been getting some attention in the blogosphere over the weekend.

The topic of Summers’ speech is the age-old debate of how to overcome the zero lower bound in which the global economy has, reflexively, found itself in over the past five years (today more than ever, with $160 billion in monthly flow from the Fed and BOJ for now, and the ECB joining soon) which incidentally is the outcome of 100 years of monetary distortions resulting from central banking and which has led to a perverted state in which the global economy is unable to revert to its trendline absent the perpetual reflation of new, bigger and better asset bubbles. “Reflexively”, because the “solution” to the problem merely makes it even worse, but we doubt even 5 more years of global QE will be enough for the world’s tenured economists and Nobel prize winners to figure that out.

Summers’ recommendation is simple: boost inflation (presumably through NGDP targeting, the same thing we said back in September would happen soon, which would unanchor 2% inflationary expectations as money literally dropped from the sky), and encourage a cashless society allowing the Fed to punish all deposit account holders through negative rates (or outright confiscation) forcing massive spending (see the Cyprus deposit confiscation and the subsequent London real-estate mega bubble as an example).

Of course, as any rational person understands very well, the above core problem will never be fixed unless the monetary excesses accumulated in the post Bretton-Woods era and mostly over the past three decades – beginning with Greenspan’s Great Moderation and ending with Yellen’s “I see dead bubbles” speech – are purged through liquidationist policies that allow the world’s balance sheet to revert to viable model. Unfortunately, at this point it is far too late to do “the right thing”, and the Fed is stuck with just one option: reflate or bust, because even the smallest risk price correction could spiral out of control and end the world’s biggest experiment in central planning.

There is nothing magical about this, and anyone who has even the faintest inkling of how traditional restructurings and reorgs work will tell you as much.

Which means certainly not Nobel prize winner Paul Krugman. For this “doctor” of voodoonomics, Larry Summers’ speech is profound and deep for the simple reason that Summers promotes the same policy that none other than Krugman proposed back in 2002, and whose implementation nearly resulted in the end of finance as we know it. Recall from a 2002 NYT editorial:

To fight this recession the Fed needs…soaring household spending to offset moribund business investment. Alan Greenspan needs to create a housing bubble to replace the Nasdaq bubble.

Well, now Mr. Yellen needs to create the bubble of all bubbles to replace the housing (and credit) bubble which replaced the Nasdaq bubble and so on. And she is doing just that.

Which obviously is earning instapraise from Krugs:

We now know that the economic expansion of 2003-2007 was driven by a bubble. You can say the same about the latter part of the 90s expansion; and you can in fact say the same about the later years of the Reagan expansion, which was driven at that point by runaway thrift institutions and a large bubble in commercial real estate…. how can you reconcile repeated bubbles with an economy showing no sign of inflationary pressures? Summers’s answer is that we may be an economy that needs bubbles just to achieve something near full employment – that in the absence of bubbles the economy has a negative natural rate of interest.

 

In other words, you can argue that our economy has been trying to get into the liquidity trap for a number of years, and that it only avoided the trap for a while thanks to successive bubbles.

 

And if that’s how you see things, when looking forward you have to regard the liquidity trap not as an exceptional state of affairs but as the new normal.

Bottom line: the US economy can’t “grow” without bubbles, so we need a bubble.

In principle that’s great. The only problem is that the bubble reflation and bursting process always and without fail is destructive to those people who live within their means, and rewards those who spend like drunken sailors, who engage in reckless economic behavior, who build up massive debt burdens which can never be repaid, who misallocate capital and resources, and who become too big to fail and are allowed to hold the entire global economy hostage. For a great example of all of the above, see 2008.

We can assure everyone that the next bubble bursting process will be orders of magnitude worse, as yet another bubble will have to be reflated just to compensate for the Nasdaq, housing, credit and whatever it is that the current bubble is called: the Bernanke/Yellen double down, all-in gamble.

Sadly, the downside is the loss of the reserve currency status of the dollar: something economists are completely unable to grasp, but which China, and its 100 tons of monthly gold imports understands very well.

 

---

 

However, none of the above is the actual topic of this post: we will leave it to others to debate the idiocy of summoning yet another bubble to fix the disastrous consequences brought upon by previous bubbles.

What we did want to highlight is that it now has become perfectly clear just what the source is of “profound” insight for such brilliant economists as Summers and Krugman. That source is… The Onion. In this case from July 18, 2008.

From Recession-Plagued Nation Demands New Bubble To Invest In

WASHINGTON—A panel of top business leaders testified before Congress about the worsening recession Monday, demanding the government provide Americans with a new irresponsible and largely illusory economic bubble in which to invest.

 

“What America needs right now is not more talk and long-term strategy, but a concrete way to create more imaginary wealth in the very immediate future,” said Thomas Jenkins, CFO of the Boston-area Jenkins Financial Group, a bubble-based investment firm. “We are in a crisis, and that crisis demands an unviable short-term solution.”

 

The current economic woes, brought on by the collapse of the so-called “housing bubble,” are considered the worst to hit investors since the equally untenable dot-com bubble burst in 2001. According to investment experts, now that the option of making millions of dollars in a short time with imaginary profits from bad real-estate deals has disappeared, the need for another spontaneous make-believe source of wealth has never been more urgent.

 

“Perhaps the new bubble could
have something to do with watching movies on cell phones,” said investment banker Greg Carlisle of the New York firm Carlisle, Shaloe & Graves. “Or, say, medicine, or shipping. Or clouds. The manner of bubble isn’t important—just as long as it creates a hugely overvalued market based on nothing more than whimsical fantasy and saddled with the potential for a long-term accrual of debts that will never be paid back, thereby unleashing a ripple effect that will take nearly a decade to correct.”

 

“The U.S. economy cannot survive on sound investments alone,” Carlisle added.

 

Congress is currently considering an emergency economic-stimulus measure, tentatively called the Bubble Act, which would order the Federal Reserve to† begin encouraging massive private investment in some fantastical financial scheme in order to get the nation’s false economy back on track.

 

Current bubbles being considered include the handheld electronics bubble, the undersea-mining-rights bubble, and the decorative office-plant bubble. Additional options include speculative trading in fairy dust—which lobbyists point out has the advantage of being an entirely imaginary commodity to begin with—and a bubble based around a hypothetical, to-be-determined product called “widgets.”

 

The most support thus far has gone toward the so-called paper bubble. In this appealing scenario, various privately issued pieces of paper, backed by government tax incentives but entirely worthless, would temporarily be given grossly inflated artificial values and sold to unsuspecting stockholders by greedy and unscrupulous entrepreneurs.

 

“Little pieces of paper are the next big thing,” speculator Joanna Nadir, of Falls Church, VA said. “Just keep telling yourself that. If enough people can be talked into thinking it’s legitimate, it will become temporarily true.”

 

Demand for a new investment bubble began months ago, when the subprime mortgage bubble burst and left the business world without a suitable source of pretend income. But as more and more time has passed with no substitute bubble forthcoming, investors have begun to fear that the worst-case scenario—an outcome known among economists as “real-world repercussions”—may be inevitable.

 

“Every American family deserves a false sense of security,” said Chris Reppto, a risk analyst for Citigroup in New York. “Once we have a bubble to provide a fragile foundation, we can begin building pyramid scheme on top of pyramid scheme, and before we know it, the financial situation will return to normal.”

 

Despite the overwhelming support for a new bubble among investors, some in Washington are critical of the idea, calling continued reliance on bubble-based economics a mistake. Regardless of the outcome of this week’s congressional hearings, however, one thing will remain certain: The calls for a new bubble are only going to get louder.

 

“America needs another bubble,” said Chicago investor Bob Taiken. “At this point, bubbles are the only thing keeping us afloat.”

* * *

What can we say in conclusion but… Krugmerica: where satire is now cutting edge economic thought.

h/t @reinman_mt

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/wE-jF4LiKmQ/story01.htm Tyler Durden

Presented with no comment…

 

 

(h/t Sunday Funnies via The Burning Platform blog)

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/F_duyOsgtlI/story01.htm Tyler Durden

Authored by Dani Rodrik, originally posted at Project Syndicate,

Economic policymakers seeking successful models to emulate apparently have an abundance of choices nowadays. Led by China, scores of emerging and developing countries have registered record-high growth rates over recent decades, setting precedents for others to follow. While advanced economies have performed far worse on average, there are notable exceptions, such as Germany and Sweden. “Do as we do,” these countries’ leaders often say, “and you will prosper, too.”

Look more closely, however, and you will discover that these countries’ vaunted growth models cannot possibly be replicated everywhere, because they rely on large external surpluses to stimulate the tradable sector and the rest of the economy. Sweden’s current-account surplus has averaged above a whopping 7% of GDP over the last decade; Germany’s has averaged close to 6% during the same period.

China’s large external surplus – above 10% of GDP in 2007 – has narrowed significantly in recent years, with the trade imbalance falling to about 2.5% of GDP. As the surplus came down, so did the economy’s growth rate – indeed, almost point for point. To be sure, China’s annual growth remains comparatively high, at above 7%. But growth at this level reflects an unprecedented – and unsustainable – rise in domestic investment to nearly 50% of GDP. When investment returns to normal levels, economic growth will slow further.

Obviously, not all countries can run trade surpluses at the same time. In fact, the successful economies’ superlative growth performance has been enabled by other countries’ choice not to emulate them.

But one would never know that from listening, for example, to Germany’s finance minister, Wolfgang Schäuble, extolling his country’s virtues. “In the late 1990’s, [Germany] was the undisputed ‘sick man’ of Europe,” Schäuble wrote recently. What turned the country around, he claims, was labor-market liberalization and restrained public spending.

In fact, while Germany did undertake some reforms, so did others, and its labor market does not look substantially more flexible than what one finds in other European economies. A big difference, however, was the turnaround in Germany’s external balance, with annual deficits in the 1990’s swinging to a substantial surplus in recent years, thanks to its trade partners in the eurozone and, more recently, the rest of the world. As the Financial Times’ Martin Wolf, among others, has pointed out, the German economy has been free-riding on global demand.

Other countries have grown rapidly in recent decades without relying on external surpluses. But most have suffered from the opposite syndrome: excessive reliance on capital inflows, which, by spurring domestic credit and consumption, generate temporary growth. But recipient economies are vulnerable to financial-market sentiment and sudden capital flight – as happened recently when investors anticipated monetary-policy tightening in the United States.

Consider India, until recently another much-celebrated success story. India’s growth during the past decade had much to do with loose macroeconomic policies and a deteriorating current account – which recorded a deficit of more than 5% of GDP in 2012, having been in surplus in the early 2000’s. Turkey, another country whose star has faded, also relied on large annual current-account deficits, reaching 10% of GDP in 2011.

Elsewhere, small, formerly socialist economies – Armenia, Belarus, Moldova, Georgia, Lithuania, and Kosovo – have grown very rapidly since the early 2000’s. But look at their average current-account deficits from 2000 to 2013 – which range from a low of 5.5% of GDP in Lithuania to a high of 13.4% in Kosovo – and it becomes evident that these are not countries to emulate.

The story is similar in Africa. The continent’s fastest-growing economies are those that have been willing and able to allow yawning external gaps from 2000 to 2013: 26% of GDP, on average, in Liberia, 17% in Mozambique, 14% in Chad, 11% in Sierra Leone, and 7% in Ghana. Rwanda’s current account has deteriorated steadily, with the deficit now exceeding 10% of GDP.

The world’s current-account balances must ultimately sum up to zero. In an optimal world, the surpluses of countries pursuing export-led growth would be willingly matched by the deficits of those pursuing debt-led growth. In the real world, there is no mechanism to ensure such an equilibrium on a continuous basis; national economic policies can be (and often are) mutually incompatible.

When some countries want to run smaller deficits without a corresponding desire by others to reduce surpluses, the result is the exportation of unemployment and a bias toward deflation (as is the case now). When some want to reduce their surpluses without a corresponding desire by others to reduce deficits, the result is a “sudden stop” in capital flows and financial crisis. As external imbalances grow larger, each phase of this cycle becomes more painful.

The real heroes of the world economy – the role models that others should emulate – are countries that have done relatively well while running only small external imbalances. Countries like Austria, Canada, the Philippines, Lesotho, and Uruguay cannot match the world’s growth champions, because they do not over-borrow or sustain a mercantilist economic model. Theirs are unremarkable economies that do not garner many headlines. But without them, the global economy would be even less manageable than it already is.

via Zero Hedge http://feedproxy.google.com/~r/zerohedge/feed/~3/F6yqnsrK-6Y/story01.htm Tyler Durden