On Fostering Higher Growth and Lower Inequality; the ECB Action; Why Eat Walnuts?

From: aditya rana
Date: Sat, Dec 5, 2015 at 2:26 PM
Subject: On Fostering Higher Growth and Lower Inequality; the ECB Action; Why Eat Walnuts?


The enduring features of the post financial crisis global economy have been slow growth, rising inequality and weak aggregate demand. What are the underlying causes and what needs to be done to address these issues? A recent research note by a diverse group lead by the Nobel laureate economist Michael Spence (http://www.voxeu.org/article/restarting-global-economy ), looks at the possible causes behind these trends and offers some solutions to address them. To summarise:

-The three underlying causes behind the suboptimal growth of the global economy have been: 1) the shortfall of aggregate demand compared to aggregate supply; 2) the shortfall in investable funds required for investment; and, 3) the gap between the promise and downside of technological change.

-Looking at the first point, the global economy has been underperforming versus its potential by 1.5-2% of GDP for more than five years after the Great Recession. EM growth has slowed down as well led by falling commodity prices and slowing global trade. Some economies, with fiscal room, have addressed this by taking steps to boost aggregate demand via measures like rebalancing the economy towards consumption rather than investment. However, economies with limited fiscal capacity struggle between the choice of low growth or even larger deficits which negatively impact the sustainability of their debt, particularly if interest rates start rising from current low levels.

-On the second point, huge demands for financing in the developing world are largely going unmet despite large pools of capital earning mediocre returns. The combined holdings of pension, sovereign wealth and asset management funds is estimated to be $60 trillion, which is nearly as large as world GDP. It is estimated that Africa alone has a funding gap of $100 BN, with project, regulatory and institutional risk holding back investment flows.

-Lastly, transformative and disruptive technologies, while holding great promise for raising productivity are also increasing unemployment and concentrating wealth in a few hands. In developed countries, the speed at which routine (codifiable) jobs are being destroyed is exceeding the rate of new job creation, leading to fiscal pressures and social discontent.

-The short-fall in aggregate demand is reducing investment which in turn is lowering the longer term growth potential of the economy. The gap between investments needs in the developing world and available funds also lowers investment which lowers demand and growth now, and productivity in the longer term. In addition, lower aggregate demand creates a vicious loop by lowering demand for labour, leading to lower wages or high unemployment, thereby raising inequality which in turn lowers aggregate demand and growth even further.

-Therefore, the first priority for the global economy is to expand aggregate demand, but lack of political will and excessive debt in the developed world are hindering this process. Focus on debt-to-GDP ratios can be somewhat misleading , as they have been driven more by a weakening denominator, and declining tax revenues have been the major factor behind worsening fiscal deficits rather than government spending. Countries should therefore focus on reforming their tax systems with the aim to increases taxes and prevent tax avoidance, while also balancing government consumption and investment. The multiplier effect of infrastructure spending in the developed world is particularly large and can be a major driver of growth in the world economy.

-Secondly, the gap between infrastructure needs and available funding needs to be bridged, through the expansion of balance sheets of multilateral organisations. The expanded role of the EIB and the China-inspired Asian Infrastructure Investment Bank to increase investment lending in the face of market failure are steps in the right direction. However, much more can be done in this area in light of the immense needs.

-Thirdly, mechanisms for wider and intergenerational sharing of the gains from technological advances are required to offset the downside of increased labour displacement. Policies to invest in the education and health of low-income groups, retraining of labour and enhance productivity of small-scale enterprises in the developing world (being a major source of job creation) need to be developed and implemented over the medium-term. The success of Latin America in keeping inequality in check through investment in education, better integration of labour markets through infrastructure, and cash transfers conditional on keeping children in school – in the face of the same technological and globalisation trends which have raised inequality elsewhere in the world – hold important lessons for the rest of the world. This will also boost aggregate demand by shifting income to higher-consuming sections of society.

-These three basic trends – boosting global demand (via investment), unlocking the flow of surplus funds to investment needs, and mitigating rising inequality – are mutually reinforcing. Political consensus in tackling these issues, both at the national as well as the global level, needs to be fostered quickly to allow the global economy to meets its growth and distribution potential.

An insightful summary of the underlying causes and solutions to the most pressing needs of the global economy – the short-fall in aggregate demand, declining investment and rising inequality. Countries which have the political will, and the fiscal flexibility and savings surplus, to implement policies which foster demand while reducing reduce inequality, will continue to outperform in the years ahead. China stands out as the country most likely to succeed, with its low level of public debt, high savings rate and strong political will. Other emerging market countries like India, which have already undergone the required macro rebalancing, should have the ability to generate higher growth. Latin American countries are currently undergoing a painful macro readjustment process and should emerge with higher growth in 2016. Finally, Europe and Japan, with their aggressive easing policie should continue to witness improving growth prospects in 2016.

The ECB Action:

-The ECB’s policy action on December 3 were not well received by markets causing a large sell-off in bonds, stocks and strengthening of the euro – but this is likely to be temporary as the markets realise the unprecedented nature and significance of their move. As Ambrose Evans-Pritchard of The Telegraph notes:

-“The ECB has cut the deposit rate to a record low of -0.3pc and vowed to print money for as long as it takes to defeat deflation, pushing its radical stimulus measures to extremes never seen before in any major region in modern history. The far-reaching moves come despite signs that economic growth in the eurozone is picking up, and ignores vehement protests from German-led hawks that quantitative easing at this late stage is doing more harm than good.

-Mario Draghi said the bank will keep buying €60bn of bonds each month as far out as March 2017 or “beyond if necessary”. It is effectively an open-ended pledge. “Abundant liquidity will continue for a long, long time,” he said.

-“Markets want immediate gratification. A lot of traders had large positions and they got caught out, but when things settle down in a couple of weeks, people will realize that what happened today is highly significant. The ECB is adding another $360bn to its balance sheet and is now reinvesting its portfolio, like the Bank of England. This is a big deal,” said David Owen, at Jefferies.

-The ruckus on trading floors had echoes of August 2012, when Mr Draghi launched his back-stop plan for Italian and Spanish bonds (OMT), ending the eurozone debt crisis at a stroke. Markets sold off in a knee-jerk fashion at first but soon changed their mind as the significance sunk in. Mr Draghi said QE has been an unqualified success but the summer storm in emerging markets and China diluted the effects, while the commodity crash has made it even harder to fight deflation. Inflation is still stuck at 0.1pc, leaving little safety margin against an external shock. “We are doing more because it works, not because it fails,” said Mr Draghi, insisting that the eurozone would have been in outright deflation this year without QE.”

On why Walnuts?:

The benefits of a daily intake of nuts, especially almonds and walnuts, is well know. David Katz, Director of the Yale University Prevention Research Center, provides more ammunition on why making walnuts a part of your daily diet can be especially beneficial.

Huff Post, 12/4/2015:

-We begin with walnuts, which, on the off chance you didn’t get the memo, are really good for you. The literature on the health benefits of walnuts is extensive. My colleagues and I have contributed to that literature several times before, and just did so again with a new paper in BMJ Open Diabetes Research & Care.

-In our new study, we followed up on prior evidence that walnuts appear to confer benefits in people with, and at risk for, Type 2 diabetes. This time, we enrolled 112 overweight adults with prediabetes, the metabolic syndrome, or other clear evidence of high diabetes risk. Our principal aim was to see if walnuts could be added to the daily diet over an extended time frame (6 months) to improve overall diet quality, without resulting in weight gain.

-Prior study has suggested that walnuts, despite their high calorie content, tend to have a favorable effect on appetite and weight, presumably because they are very satiating. Calories count, but counting them is certainly not the best way to combine satisfaction with weight control. Highly satiating foods, which help us get full and stay full, are best for that.

-Our results largely affirmed the hypotheses we were testing. Daily intake of walnuts significantly improved overall diet quality, measured objectively, and did so without causing weight gain. There is both an obvious and subtle component to this effect. The obvious contribution is direct; walnuts are highly nutritious, and adding them to the diet is apt to improve diet quality somewhat. The subtle contribution is indirect; if we add walnuts without gaining weight, it suggests that something is being displaced from our diet to make room. If that something is much less nutritious than the nuts, the benefit may be amplified: more of a good food, plus less of a "bad" (or at least less good) food. Our results suggest this effect.

-With regard to dietary counseling, we found initial evidence of added benefit. When a dietitian provided study participants explicit guidance about making room for the walnut calories in their daily diets, waist circumference went down significantly, by about an inch on average. Without dietary counseling, both waist size and weight trended up slightly, although the changes seen were not significant.

-As with our prior studies, we saw evidence of improvement in overall cardio-metabolic health with walnut consumption. Here, our main measure was endothelial function, which essentially assesses the capacity of arteries to dilate and enhance blood flow. This improved significantly from baseline with walnuts.

-Our data painted a clear enough picture just the same. Walnuts are very good for people with and at risk for diabetes, and for that matter the rest of us. They can be added to the diet routinely without much if any risk of weight gain, because of their high satiety index. Some counseling from a dietitian about how best to make room for walnuts may enhance benefits, especially related to weight.

-One other quick comment about walnuts before moving on.. To satisfy our societal preoccupation with active ingredients, many of the studies have attempted to isolate the beneficial factors in walnuts from among the obvious candidates: omega-3 fat; monounsaturated fat; vitamins; minerals; antioxidants; and fiber, to name a salient few. Whereas almost all results with walnuts have been impressive, the results with isolated components have been much less so. The active ingredient in walnuts is, apparently, walnuts.

-Nuts remind us how we went wrong with regard to dietary fat. For one thing, we got carried away, and tossed out the baby with the bathwater. Nuts were the baby, rich in health-promoting unsaturated fats. At the height of our cultural fat phobia, nuts were off the menu, and this was clearly mistaken. For another, we made the even graver mistake, propagated for profit by Big Food, that any alternative to dietary fat was a good alternative. This was benighted nonsense from the start, with on-going reverberations today. Low-fat junk foods still abound.

-Which brings us to the wingnuts. Their voices have predominated in our dietary dialogues for far too long. They offer us fixations on nutrients that cost us the view of the forest through the trees. They offer us quick-fix fad diets that are to health what get-rich-quick schemes are to wealth. They offer us misinterpretations of science, and misguided advice- such as eating more meat, butter, and cheese, when the weight of evidence clearly says otherwise. They routinely ignore the confluent interests in diet of people, and the planet.

-We would likely all benefit by eating nuts, walnuts perhaps in particular, more often. We would benefit by eating doughnuts less so. We would benefit most by denying the wingnuts and hucksters an audience. May their dwindling influence figure among the gifts in the offing this holiday season.

Here’s to adding more walnuts (and other nuts) to your diet at the expense of junk food, meat, and dairy!




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