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Guest Contribution: “Post COVID-19 Exit strategies and Emerging Markets Economic Challenges”

Guest Contribution: “Post COVID-19 Exit strategies and Emerging Markets Economic Challenges”

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Today, we are pleased to present a guest contribution written by Joshua Aizenman (University of Southern California) and Hiro Ito (Portland State University) . 


The pandemic of the new corona virus, COVID-19, wreaked havoc of the global economy in 2020. According to the International Monetary Fund (IMF), as of June 2020, the world economy’s GDP is predicted to shrink by 4.4% in 2020, the largest shrinkage since the Great Depression of the 1930s. To calm financial markets and avoid a possible free fall into a Great Depression, many countries, especially AEs, mobilized policy resources. The stimulus packages among AEs have amounted to about $4.2 trillion in 2020, leading these economies to run budget deficits of almost 17% of their GDP. Their central banks rapidly expanded balance sheets to 10% of GDP. According to the Manhattan Institute, the U.S. alone will run a budget deficit of $4.2 trillion, or 19% of its GDP, the largest share since the deficit peak occurring during WWII (Figure 1). That would push the U.S. national debt held by the public to $41 trillion or 128% of GDP by 2030. This level of the national debt would exceed the level that occurred in 1946 (Figures 2 and 3).

Figure 1: U.S. budget deficit. Source: Manhattan Institute

Figure 2: U.S. national debt. Source: Manhattan Institute

Figure 3: U.S. national debt projection, September 2020. Source: Congressional Budget Office, An Update to the Budget Outlook, September 2020

With vaccinations for the virus possibly in sight, it is time to ponder an effective economic exit strategy into the post-COVID era. The road the U.S. will take will have overarching repercussions on the global economy given the size and the pivotal role of the U.S. dollar as the anchor of the global financial system.  To gain more insight on the road ahead, in Aizenman and Ito (2020) we compare two divergent U.S. post COVID economic strategies. The first is just ‘kick the can down the road.’ That is, the U.S. government could delay implementing needed macroeconomic adjustments and gamble for resurrection of the economy while continuing to run lax monetary and expansionary fiscal policies. This choice may bring about short-term buoyancy to the U.S. economy, but will more likely come with growing exposure to the risk of a future global crisis, possibly worse than the 2008-2011 crisis.

Alternatively, the administration could adopt a two-pronged policy, reallocating the fiscal efforts first, while aiming at reaching a primary surplus overtime.  Specifically, it could retrench from expenditures oriented towards COVID-related challenges, and move towards expenses with a high social payoff (e.g., upgrading K-12 education, investing in medical infrastructures, etc.). With a lag, the restructured fiscal policy together with a rise in tax collection may reduce primary budget deficits, aiming to reach surpluses.

In this paper, we analyze these divergent policies in terms of their implications on the gap between the interest rate paid to service government debt, denoted by r, and the growth rate of the economy, denoted by g. This gap, rg, aka the “snowball effect,” is the exponential growth of the public debt/GDP in countries with zero primary deficit.  It is tempting to presume that the new normal for the future comprises negative snowball effects associated with secular stagnation. Yet, there are several concerns to keep in mind. First, Wyplosz (2019) pointed out that negative snowball effects are not the rule, and even in the US, r – g < 0 happened in 56% of the years. Furthermore, the past performance of the U.S. as the safe anchor of the global financial system does not guarantee maintaining the “exorbitant privilege” status into the future [see Gourinchas, Rey and Govillot (2010), Eichengreen (2011) and Carney (2019)].  The two-pronged U.S. post COVID exit strategy discussed in our paper may mitigate the growing discontent with the dominance of the U.S. dollar.  Greater attention on the part of the U.S. to scaling down overtime its public debt overhang will mitigate the present centrifugal forces working towards multipolar global currencies discussed by Carney (2019).  An additional concern is that the record of predicting future changes of the snowball effects is mixed, at best.  Presuming that the new normal is a negative snowball effect may increase overtime the risk of a deeper future crisis, as was the case in the late 1990s and early 2000s when the presumption of an enduring ‘Great Moderation’ permeated policy makers.

Specifically, we examine the interest-rate-growth differentials in the post-WWII period.  In the period of 1946-1956, the post-WWII U.S. fiscal policy facilitated global growth where the U.S., Western European countries and Japan successfully grew while repressing the interest rate. Their snowball effect, rg, was often negative during that period. This helped to load-off the public debt overhang associated with the war and reconstruction efforts.  In contrast, during 1974-1984, the snowball effect became unsustainably high for many EMEs, triggering a series of financial crises.  Next, we investigate whether and to what extent the cost of serving the public debt affected real output growth. The flow cost of serving debt is estimated by the snowball effect times the public debt as a share of GDP. A higher flow cost of serving the debt may lead investors to question debt sustainability, raising the interest rate, reducing the growth rate, further increasing the snowball effect.  This negative feedback may induce costly market corrections, financial instability and crisis.  The Emerging Markets’ lost growth decade during the 1980s, and the Eurozone sovereign debt crisis affecting mostly the Southern Eurozone states illustrate vividly these dynamics.

Figure 4 shows that the median interest-rate-growth differential, rg, is mostly low and in the negative territory during the 1940s and 1950s – Our sample is composed of 23 traditional OECD countries and 34 EMEs. For the interest rate, we use the 10-year government bond yields for the countries for which such data are available. Thereby, the U.S., Japan and Western European countries benefited from low costs of serving their public debt during the post-WWII recovery decades. The snowball differential continues to be in the negative territory through the 1970s. In the early 1980s, the differential rises up rapidly to the positive territory and mostly remains there until 2000. The 75th percentile (dotted blue) line hovers at high levels in the 1980s and 1990s, indicating that the top 25% of countries in the interest-rate-growth differentials faced very high costs of serving their public debt. These countries include mostly Latin American states, experiencing debt crises and hyperinflation spells during the 1980s. In the mid-2000s, the differential drops towards negative figures, but rises up again to the positive territory in the 2010s.

Figure 4: The interest-rate-growth differential (percentage points)

The grey solid in in Figure 4 is the median growth rate of real GDP (in local currency), measured by the right scale. A casual observation is that there is a negative correlation between real output growth and the interest-rate-growth differential.  Our empirical work validates that a rise in the cost of external debt would lead with lags of two to three years to output growth slowdown, and these effects add up, explaining the lost growth effects of Latin America and other EMs during 1980s.  A faster rise in the flow cost of serving external debt has a negative impact on output growth, and this effect is dampened if the country experiences real appreciation.  Consequently, U.S. post COVID exit policies reducing the odds of rapid increase in snowball effects may reduce future volatility, stabilize and increasing the global growth rate.

The history of the U.S. after WWII provides a vivid example of the success of a two-pronged approach in facilitating the exit from a public debt overhang, stabilizing the global economy, and solidifying the global role of the dollar.  The rapid decline in public debt/GDP from 1946 to 1955, exhibited in Figures 2 and 3, was accommodated by financial repression inducing lower r, mild inflation (~ 4.2%), higher taxes and robust GDP growth [Aizenman and Marion (2011), Reinhart and Sbrancia (2015), Reinhart, Reinhart and Rogoff (2015)]. Figure 5 shows vividly the sharp drop of WWII U.S. fiscal revenue mobilization from 50% GDP points in 1944 towards 20% by 1946. Starting in 1947, this large revenue contraction was followed by an upwards trend, increasing the fiscal revenue/GDP to 35% in the 1970s.  Remarkably, the US government was running mostly primary surpluses during that period (Figure 6). These policies supported a solid economic growth, reducing the public debt/GDP from 106% in 1946 to 23% in 1974.

Figure 5: Spending as a % of GDP. Source:  https://www.usgovernmentrevenue.com/revenue_chart_1960_2018USp_18s1li011lcn_F1fF0sF0lhttps://www.usgovernmentrevenue.com/revenue_chart_1792_2018USp_18s1li011lcn_F1fF0sF0lhttps://en.wikipedia.org/wiki/Government_spending_in_the_United_States#/media/File:Government_Revenue_and_spending_GDP.png

 

Figure 6: US fiscal surpluses/GDP after WWII. Source: Cochrane (2020).

This post WWII success story illustrates the feasibility and gains from a two-pronged fiscal strategy.  Looking forward, reallocation of fiscal spending from fighting COVID’s medical and economic challenges towards physical, medical and social infrastructures may provide a welcome burst to future growth.  With a lag, following the resumption of robust growth, increasing taxes and reaching primary surplus may stabilize the U.S. and the global economy.  Such a trajectory may solidify the viability and credibility of the US dollar as a global anchor, stabilizing thereby Emerging Markets economies and global growth.

 

References:

Aizenman J. and Ito H. (2020) “Post COVID-19 Exit Strategies and Emerging Markets Economic Challenges,” NBER Working Paper No. 27966 October 2020.

Aizenman, J. and Marion, N., 2011. “Using inflation to erode the US public debt.” Journal of Macroeconomics, 33(4): 524-541.

Carney, M. 2019. August. “The growing challenges for monetary policy in the current international monetary and financial system.” In Remarks at the Jackson Hole Symposium (Vol. 23).

Cochrane J. 2020. The Grumpy Economist Perpetuities, debt crises, and inflation.

Eichengreen, B., 2011. Exorbitant Privilege: The rise and fall of the Dollar and the Future of the International Monetary System. Oxford University Press.

Gourinchas, P. O., Rey, H., & Govillot, N. (2010). Exorbitant privilege and exorbitant duty (No. 10-E-20). Tokyo: Institute for Monetary and Economic Studies, Bank of Japan.

Reinhart, C.M., Reinhart, V. and Rogoff, K., 2015. Dealing with debt. Journal of International Economics96, pp.S43-S55.

Reinhart, C.M. and Sbrancia, M.B., 2015. The liquidation of government debt. Economic Policy30(82), pp.291-333.

Wyplosz, C. 2019. “Olivier in Wonderland,” VOX CEPR’s Policy Portal (June 17, 2019).

 


This post written by Joshua Aizenman and Hiro Ito.

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Are Voters Recoiling Against Disorder?

Are Voters Recoiling Against Disorder?

Authored by Michael Barone via The Epoch Times (emphasis ours),

The headlines coming out of the Super…

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Are Voters Recoiling Against Disorder?

Authored by Michael Barone via The Epoch Times (emphasis ours),

The headlines coming out of the Super Tuesday primaries have got it right. Barring cataclysmic changes, Donald Trump and Joe Biden will be the Republican and Democratic nominees for president in 2024.

(Left) President Joe Biden delivers remarks on canceling student debt at Culver City Julian Dixon Library in Culver City, Calif., on Feb. 21, 2024. (Right) Republican presidential candidate and former U.S. President Donald Trump stands on stage during a campaign event at Big League Dreams Las Vegas in Las Vegas, Nev., on Jan. 27, 2024. (Mario Tama/Getty Images; David Becker/Getty Images)

With Nikki Haley’s withdrawal, there will be no more significantly contested primaries or caucuses—the earliest both parties’ races have been over since something like the current primary-dominated system was put in place in 1972.

The primary results have spotlighted some of both nominees’ weaknesses.

Donald Trump lost high-income, high-educated constituencies, including the entire metro area—aka the Swamp. Many but by no means all Haley votes there were cast by Biden Democrats. Mr. Trump can’t afford to lose too many of the others in target states like Pennsylvania and Michigan.

Majorities and large minorities of voters in overwhelmingly Latino counties in Texas’s Rio Grande Valley and some in Houston voted against Joe Biden, and even more against Senate nominee Rep. Colin Allred (D-Texas).

Returns from Hispanic precincts in New Hampshire and Massachusetts show the same thing. Mr. Biden can’t afford to lose too many Latino votes in target states like Arizona and Georgia.

When Mr. Trump rode down that escalator in 2015, commentators assumed he’d repel Latinos. Instead, Latino voters nationally, and especially the closest eyewitnesses of Biden’s open-border policy, have been trending heavily Republican.

High-income liberal Democrats may sport lawn signs proclaiming, “In this house, we believe ... no human is illegal.” The logical consequence of that belief is an open border. But modest-income folks in border counties know that flows of illegal immigrants result in disorder, disease, and crime.

There is plenty of impatience with increased disorder in election returns below the presidential level. Consider Los Angeles County, America’s largest county, with nearly 10 million people, more people than 40 of the 50 states. It voted 71 percent for Mr. Biden in 2020.

Current returns show county District Attorney George Gascon winning only 21 percent of the vote in the nonpartisan primary. He’ll apparently face Republican Nathan Hochman, a critic of his liberal policies, in November.

Gascon, elected after the May 2020 death of counterfeit-passing suspect George Floyd in Minneapolis, is one of many county prosecutors supported by billionaire George Soros. His policies include not charging juveniles as adults, not seeking higher penalties for gang membership or use of firearms, and bringing fewer misdemeanor cases.

The predictable result has been increased car thefts, burglaries, and personal robberies. Some 120 assistant district attorneys have left the office, and there’s a backlog of 10,000 unprosecuted cases.

More than a dozen other Soros-backed and similarly liberal prosecutors have faced strong opposition or have left office.

St. Louis prosecutor Kim Gardner resigned last May amid lawsuits seeking her removal, Milwaukee’s John Chisholm retired in January, and Baltimore’s Marilyn Mosby was defeated in July 2022 and convicted of perjury in September 2023. Last November, Loudoun County, Virginia, voters (62 percent Biden) ousted liberal Buta Biberaj, who declined to prosecute a transgender student for assault, and in June 2022 voters in San Francisco (85 percent Biden) recalled famed radical Chesa Boudin.

Similarly, this Tuesday, voters in San Francisco passed ballot measures strengthening police powers and requiring treatment of drug-addicted welfare recipients.

In retrospect, it appears the Floyd video, appearing after three months of COVID-19 confinement, sparked a frenzied, even crazed reaction, especially among the highly educated and articulate. One fatal incident was seen as proof that America’s “systemic racism” was worse than ever and that police forces should be defunded and perhaps abolished.

2020 was “the year America went crazy,” I wrote in January 2021, a year in which police funding was actually cut by Democrats in New York, Los Angeles, San Francisco, Seattle, and Denver. A year in which young New York Times (NYT) staffers claimed they were endangered by the publication of Sen. Tom Cotton’s (R-Ark.) opinion article advocating calling in military forces if necessary to stop rioting, as had been done in Detroit in 1967 and Los Angeles in 1992. A craven NYT publisher even fired the editorial page editor for running the article.

Evidence of visible and tangible discontent with increasing violence and its consequences—barren and locked shelves in Manhattan chain drugstores, skyrocketing carjackings in Washington, D.C.—is as unmistakable in polls and election results as it is in daily life in large metropolitan areas. Maybe 2024 will turn out to be the year even liberal America stopped acting crazy.

Chaos and disorder work against incumbents, as they did in 1968 when Democrats saw their party’s popular vote fall from 61 percent to 43 percent.

Views expressed in this article are opinions of the author and do not necessarily reflect the views of The Epoch Times or ZeroHedge.

Tyler Durden Sat, 03/09/2024 - 23:20

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Veterans Affairs Kept COVID-19 Vaccine Mandate In Place Without Evidence

Veterans Affairs Kept COVID-19 Vaccine Mandate In Place Without Evidence

Authored by Zachary Stieber via The Epoch Times (emphasis ours),

The…

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Veterans Affairs Kept COVID-19 Vaccine Mandate In Place Without Evidence

Authored by Zachary Stieber via The Epoch Times (emphasis ours),

The U.S. Department of Veterans Affairs (VA) reviewed no data when deciding in 2023 to keep its COVID-19 vaccine mandate in place.

Doses of a COVID-19 vaccine in Washington in a file image. (Jacquelyn Martin/Pool/AFP via Getty Images)

VA Secretary Denis McDonough said on May 1, 2023, that the end of many other federal mandates “will not impact current policies at the Department of Veterans Affairs.”

He said the mandate was remaining for VA health care personnel “to ensure the safety of veterans and our colleagues.”

Mr. McDonough did not cite any studies or other data. A VA spokesperson declined to provide any data that was reviewed when deciding not to rescind the mandate. The Epoch Times submitted a Freedom of Information Act for “all documents outlining which data was relied upon when establishing the mandate when deciding to keep the mandate in place.”

The agency searched for such data and did not find any.

The VA does not even attempt to justify its policies with science, because it can’t,” Leslie Manookian, president and founder of the Health Freedom Defense Fund, told The Epoch Times.

“The VA just trusts that the process and cost of challenging its unfounded policies is so onerous, most people are dissuaded from even trying,” she added.

The VA’s mandate remains in place to this day.

The VA’s website claims that vaccines “help protect you from getting severe illness” and “offer good protection against most COVID-19 variants,” pointing in part to observational data from the U.S. Centers for Disease Control and Prevention (CDC) that estimate the vaccines provide poor protection against symptomatic infection and transient shielding against hospitalization.

There have also been increasing concerns among outside scientists about confirmed side effects like heart inflammation—the VA hid a safety signal it detected for the inflammation—and possible side effects such as tinnitus, which shift the benefit-risk calculus.

President Joe Biden imposed a slate of COVID-19 vaccine mandates in 2021. The VA was the first federal agency to implement a mandate.

President Biden rescinded the mandates in May 2023, citing a drop in COVID-19 cases and hospitalizations. His administration maintains the choice to require vaccines was the right one and saved lives.

“Our administration’s vaccination requirements helped ensure the safety of workers in critical workforces including those in the healthcare and education sectors, protecting themselves and the populations they serve, and strengthening their ability to provide services without disruptions to operations,” the White House said.

Some experts said requiring vaccination meant many younger people were forced to get a vaccine despite the risks potentially outweighing the benefits, leaving fewer doses for older adults.

By mandating the vaccines to younger people and those with natural immunity from having had COVID, older people in the U.S. and other countries did not have access to them, and many people might have died because of that,” Martin Kulldorff, a professor of medicine on leave from Harvard Medical School, told The Epoch Times previously.

The VA was one of just a handful of agencies to keep its mandate in place following the removal of many federal mandates.

“At this time, the vaccine requirement will remain in effect for VA health care personnel, including VA psychologists, pharmacists, social workers, nursing assistants, physical therapists, respiratory therapists, peer specialists, medical support assistants, engineers, housekeepers, and other clinical, administrative, and infrastructure support employees,” Mr. McDonough wrote to VA employees at the time.

This also includes VA volunteers and contractors. Effectively, this means that any Veterans Health Administration (VHA) employee, volunteer, or contractor who works in VHA facilities, visits VHA facilities, or provides direct care to those we serve will still be subject to the vaccine requirement at this time,” he said. “We continue to monitor and discuss this requirement, and we will provide more information about the vaccination requirements for VA health care employees soon. As always, we will process requests for vaccination exceptions in accordance with applicable laws, regulations, and policies.”

The version of the shots cleared in the fall of 2022, and available through the fall of 2023, did not have any clinical trial data supporting them.

A new version was approved in the fall of 2023 because there were indications that the shots not only offered temporary protection but also that the level of protection was lower than what was observed during earlier stages of the pandemic.

Ms. Manookian, whose group has challenged several of the federal mandates, said that the mandate “illustrates the dangers of the administrative state and how these federal agencies have become a law unto themselves.”

Tyler Durden Sat, 03/09/2024 - 22:10

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Low Iron Levels In Blood Could Trigger Long COVID: Study

Low Iron Levels In Blood Could Trigger Long COVID: Study

Authored by Amie Dahnke via The Epoch Times (emphasis ours),

People with inadequate…

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Low Iron Levels In Blood Could Trigger Long COVID: Study

Authored by Amie Dahnke via The Epoch Times (emphasis ours),

People with inadequate iron levels in their blood due to a COVID-19 infection could be at greater risk of long COVID.

(Shutterstock)

A new study indicates that problems with iron levels in the bloodstream likely trigger chronic inflammation and other conditions associated with the post-COVID phenomenon. The findings, published on March 1 in Nature Immunology, could offer new ways to treat or prevent the condition.

Long COVID Patients Have Low Iron Levels

Researchers at the University of Cambridge pinpointed low iron as a potential link to long-COVID symptoms thanks to a study they initiated shortly after the start of the pandemic. They recruited people who tested positive for the virus to provide blood samples for analysis over a year, which allowed the researchers to look for post-infection changes in the blood. The researchers looked at 214 samples and found that 45 percent of patients reported symptoms of long COVID that lasted between three and 10 months.

In analyzing the blood samples, the research team noticed that people experiencing long COVID had low iron levels, contributing to anemia and low red blood cell production, just two weeks after they were diagnosed with COVID-19. This was true for patients regardless of age, sex, or the initial severity of their infection.

According to one of the study co-authors, the removal of iron from the bloodstream is a natural process and defense mechanism of the body.

But it can jeopardize a person’s recovery.

When the body has an infection, it responds by removing iron from the bloodstream. This protects us from potentially lethal bacteria that capture the iron in the bloodstream and grow rapidly. It’s an evolutionary response that redistributes iron in the body, and the blood plasma becomes an iron desert,” University of Oxford professor Hal Drakesmith said in a press release. “However, if this goes on for a long time, there is less iron for red blood cells, so oxygen is transported less efficiently affecting metabolism and energy production, and for white blood cells, which need iron to work properly. The protective mechanism ends up becoming a problem.”

The research team believes that consistently low iron levels could explain why individuals with long COVID continue to experience fatigue and difficulty exercising. As such, the researchers suggested iron supplementation to help regulate and prevent the often debilitating symptoms associated with long COVID.

It isn’t necessarily the case that individuals don’t have enough iron in their body, it’s just that it’s trapped in the wrong place,” Aimee Hanson, a postdoctoral researcher at the University of Cambridge who worked on the study, said in the press release. “What we need is a way to remobilize the iron and pull it back into the bloodstream, where it becomes more useful to the red blood cells.”

The research team pointed out that iron supplementation isn’t always straightforward. Achieving the right level of iron varies from person to person. Too much iron can cause stomach issues, ranging from constipation, nausea, and abdominal pain to gastritis and gastric lesions.

1 in 5 Still Affected by Long COVID

COVID-19 has affected nearly 40 percent of Americans, with one in five of those still suffering from symptoms of long COVID, according to the U.S. Centers for Disease Control and Prevention (CDC). Long COVID is marked by health issues that continue at least four weeks after an individual was initially diagnosed with COVID-19. Symptoms can last for days, weeks, months, or years and may include fatigue, cough or chest pain, headache, brain fog, depression or anxiety, digestive issues, and joint or muscle pain.

Tyler Durden Sat, 03/09/2024 - 12:50

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