Friday, June 24, 2016

Could we profit from the confusion?

After the turmoil of Britain's exit from the European Union, known as Brexit, we have miles of analysis this morning. The Leave side won by concentrating on uncontrolled migration, not just from the Middle East, but mainly from eastern Europe. Were they being selfish? Nobel Prize winner, Angus Deaton has studied global poverty and writes that there is genuine suffering in rich countries, like the US. " International development aid is based on the Robin Hood principle: take from the rich and give to the poor," he writes. Currently $135 billion are transferred from rich to poor countries. This is known as "cosmopolitan prioritarianism". This makes sense because a dollar or a euro goes twice or three times further in a poor country than in a rich one. The problem is that " those of us who make these judgements are not exactly well placed to assess the costs". The poor in the US have suffered from globalization. How badly? "....several million Americans - black, white and Hispanic - now live in households with per capita income of less that $2 a day, essentially the same standard that the World Bank uses to define destitution-level poverty in India or Africa. Finding shelter in the United States on that income is so difficult that $2-a-day poverty is almost certainly much worse in the US than $2-a-day poverty in India and Africa." People get angry when they read lurid accounts of aid money going to dictators who are hostile to their country. While they are reading such articles they are told that the government has to reduce spending to reduce its debts so their services must be cut. Local councils have drastically reduced services, directly affecting poor people who are dependent on such services. Does austerity result in increased growth in the economy? Seems that the International Monetary Fund which was a strong believer in austerity now believes that fiscal expansion is much better. A report from 2012 says," ( Economic ) activity has disappointed in a number of economies undertaking fiscal consolidation....So a natural question is whether the negative short-term effects of fiscal cutbacks have been larger than (we) expected because fiscal multipliers were underestimated....(our new) results suggest that actual fiscal multipliers were larger that (our) forecasters assumed." That is why Donald Trump has so much support in the US. What about India? Our exports have been falling for 17 months and are a small part of the economy. It was difficult to negotiate with Europe as a whole so our businesses may benefit. If increasing protectionism causes a hard landing for the Chinese economy so that there is widespread civil unrest in China it will be heaven-sent for us. Its all in the stars.

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