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The Global Economy:
The New “New-Normal”
by
SEBASTIAN EDWARDS
Henry Ford II Distinguished Professor of
International Economics, UCLA
Círculo de Economía ,
Sitges,
May 2014
The end of four cycles
 China’s
super growth cycle
 The U.S. super borrowing cycle
 The monetary expansion cycle
 The Euro Zone crisis cycle
1. The end of China’s
Super Growth Cycle
China’s spectacular trip
Reduced external surplus in
China…
China’s NIIP
Currency appreciation will slow down
significantly, and maybe reverse
(except for Balassa-Samuelson effect)
Commodity Prices and China
Soybeans
Gold
Brent
oil
Copper
Wheat
Natural gas
Also will affect China’s foreign
investment strategy
More selective, more parsimonious.
 Demand for Treasuries will decline; this
will contribute to steeper yield curve in US
 Will concentrate on two areas:

– Selected companies in key industries in
advanced countries, such as the pork meat
provider (Smithfileld) in Virginia.
– Natural resources (mostly metals) in Africa and
some LATAM countries.
2. The end of the U.S.
Super Borrowing
Cycle
Current account deficit
USD RER
NIIP in USA
USD RER
1
2
3
4
5
Public sector deficit in US
Debt to GDP in US
Implications
Stronger USD.
 A higher and flatter yield curve.
 Faster growth in United States.
 An open question is what will happen to
property prices. New bubble?

– Market specific; location will matter
3. The end of the Super
Expansive Monetary
Cycle: Will it Happen?
Should it Happen?
The players
The problem is this:
Bringing the cycle to an end makes (some)
sense in U.S. Is it happening?
 But it is clearly premature in Euro Zone (in
spite of whatever the German’s may say)
 And it is very premature in Japan (in spite of
whatever Abe opponents may say)
 And yet, we are likely to see (some)
synchronicity across these three key players.
 In Japan the money slowdown plus the new
consumption tax could be very negative.

Liquidity in the United States
Yield Curve in the U.S.
Yield Curve in the U.S.
US Inflation Rate
Inflationary expectations in U.S.
A Taylor Rule for the New
New-Normal?

Euro Zone Monetary Conditions
Euro Zone Monetary Base
Deflation in the Euro Zone?
Abenomics and Japan
10year bond yield
4. The end of the Crisis
Cycle in the Euro Zone
Euro Zone Interest Rates: Germany,
Ireland and Spain
The fear of massive default and
restructuring has disappeared
𝑖𝑠 − 𝑖𝐺
𝑝=
1 + 𝑖𝑆 ℎ
The problem is this:
The reforms have stalled and are unlikely to
move forward at the required pace; moreover,
they will not be as deep as they are needed
 This is true both for the Euro Zone – and the
EU, for that matter -- as a whole, and for
individual countries.
 Unfinished business: unified fiscal policy,
unified banking supervision, labor mobility
and flexibility, European Constitution, among
others.

Spain I
Spain II
Unemployment: A tale of two
countries
Spain III
Spain IV
The reforms and
competitiveness

Doing Business
Ratings
– Spain 2007 = 39
– Spain 2014 = 52
– Germany 2007 = 21
– Germany 2014= 21
Euro Zone inherent instability
The Euro Zone will continue to be structurally
unstable
 Germany will have the advantage of a
undervalued currency (“currency
manipulator”?)
 The periphery will face the disadvantage of a
permanently “overvalued currency”

The Euro RER
Some implications of the “End
of Four Cycles”
This picture will have a
negative effect on:
Countries with high current account deficits
 Nations with high public sector debts
 Countries with high foreign currency
indebtness
 Countries with large GEFR
 Countries with overextended construction
sectors

They will have higher rates,
larger primary deficits, and
more depreciated currencies:
𝑃𝑟𝑖𝑚𝑎𝑟𝑦 𝑑𝑒𝑓𝑖𝑐𝑖𝑡 = 𝑔 − 𝑟
𝑒𝑥𝑝𝑒𝑐𝑡𝑒𝑑
𝐸𝑡 =
𝐸𝑡+𝑘
1 + 𝑖𝑡𝑘 − 𝑖𝑡∗𝑘
𝐷𝑒𝑏𝑡
𝐺𝐷𝑃
Currency questions in
advanced nations
Yen
Euro
The good and the bad…

Positive watch list:
–
–
–
–
–
–
–
–
–
USA
Germany
Switzerland
Mexico
China
Indonesia
Ireland
Australia
New Zealand

Negative watch list:
– Brazil,
– Japan,
– EU Mediterranean
periphery,
– Indonesia
– Colombia
– Turkey
– Egypt
– Malaysia
– South Africa
A final word on
political risks
Crimea as a warning sign?
Is Piketty the new Marx?