People love to use moral hazard as an excuse to inflict pain on others. So do governments, as we are seeing as the European Union once again threatens Greece with severe measures for that nation’s failure to fully implement the EU’s harsh austerity measures. The argument is extraordinarily simple: if a country cannot discipline itself, then we will teach it discipline through financial lashes. After all, didn’t Greece bring this pain on itself?
A similar mindset drove debt restructuring in Argentina in 2001. The U.S. treasury wanted to make Argentina an example for the whole Latin American region: If Argentina did not reduce its fiscal deficit to zero as promised, the argument went, the nation would deserve to suffer and the government would need to go. Indeed, Argentina did not reduce its deficit to zero, but it got it down to 0.6 percent in the third quarter of 2001. This effort by the Argentinean government was, unfortunately, unaccompanied by similar efforts in its provinces, but still, it was a massive success. But not to the enforcers, who basically said the efforts were not good enough.
MIT Sloan Professor Roberto Rigobon chats with Dave Vellante and Stu Miniman from theCube for the live pre-show to the MIT Conference on the Digital Economy: The Second Machine Age to discuss the Billion Prices Project.
On April 10, 2015, the MIT Digital Economy Conference: The Second Machine Age, led by Erik Brynjolfsson, director of the Initiative on the Digital Economy, and Andrew McAfee, co-director of the Initiative on the Digital Economy, featured a series of discussions that highlight MIT’s role in both understanding and shaping our increasingly digital world.
Roberto Rigobon is the Society of Sloan Fellows Professor of Management and a Professor of Applied Economics at the MIT Sloan School of Management.
Next week is a big week for those keeping track of the success of Japanese economic policies. New interest rate numbers will be released on October 29 and these numbers represent the most current report card on Abenomics, as the policies of Japan’s Prime Minister Shinzo Abe are called.
Abenomics was presented just weeks after Abe took office in 2012 as the ultimate solution to almost two decades of stagnation in the country. The program has three pillars: monetary easing, structural reforms and renewed fiscal stimulus. One of the most important goals of Abenomics is increasing inflation, and ultimately changing inflation expectations—hoping to reverse a decade of deflation. To do so, the government began printing Yens in abundance.
Initial signs of success showed in the exchange rate, asset prices, and inflation rate. In fact, the official CPI for July 2014 shows a large annual inflation rate by Japanese standards: 3.4 percent. And from that perspective, it seems as if Abe’s policies have been effective and the job has been accomplished.
More recently, however, the economy has once again shown signs of weakness: Inflation expectations remain surprisingly low at around 1 percent, asset prices and bond markets seem to be unconvinced by the achievements, and the real economy is starting to slow.
U.S. inflation has been accelerating in recent months, presenting the Federal Reserve with a tricky question as it decides how quickly to remove stimulus from the U.S. economy: Is the rise in prices a precursor of things to come or simply a “catching up” phase as people begin to spend again after a brutal winter?
Recent data from the U.S. Labor Department have led some to suggest that the long run of very low U.S. inflation could be ending. From Dec. 31 through May 31, the consumer price index — not seasonally adjusted — rose a cumulative 2.1 percent. That’s equivalent to an annualized inflation rate of more than 5 percent, far exceeding the Fed’s target of about 2 percent.
If this is more than a temporary phenomenon, the Fed might have to respond by raising interest rates sooner than expected — a move that would restrain economic growth and could trigger sharp declines in stock and bond markets.
Some officials at the Fed, though, reportedly do not believe that the surge in consumer prices represents the beginning of a new inflationary trend. After all, in the period just before the winter, from Sept. 30 to Dec. 31, prices actually fell by a cumulative 0.5 percent. Combine the two periods, one with an increase and one with a small drop, and you get an annualized inflation rate since September of about 2.4 percent.
Global-stock mutual funds have become extremely popular investments. But these funds — which invest in companies located anywhere in the world — are not well-diversified and lose investors more than 2% a year on average in additional returns.