Low-inflation regime ends

In recent days, the rate the United States government must pay to borrow money for two years has reached its highest level since 2008, and on Tuesday the yield on 10-year Treasury bonds rose above 3 percent for the first time in four years. As recently as September, that rate was near 2 percent.

You see a similar pattern in the bond prices of other advanced nations. For example, German 10-year yields rose to 0.64 percent Wednesday from 0.31 percent in September.

If this really is the start of a resetting of inflation and interest rates toward more historically normal levels, it will be mostly good news for the world economy. Central bankers have spent years trying unsuccessfully to get inflation to the 2 percent level many of them aim for. Full Story

Low-inflation regime ends

Now under House Bill 4774, titled Tax Reform for Acceleration and Inclusion, the revised proposal seeks to exempt those earning P250,000 and below annually from paying personal-income tax—with graded adjustments accordingly to middle- and high-income earners.

To offset the potential losses in revenue from the tax cuts, the bill also includes proposals to impose excise taxes on petroleum. The removal of some incentives is also included.

Some sectors lauded the populist move of the Duterte administration to reform the tax schemes in the country, including senior officials from the Bangko Sentral ng Pilipinas (BSP), as they expressed support for the passage of the bill.

The government’s target growth rate for this year is at a band of 6.5 percent to 7 percent, while it is at 7 percent to 8 percent starting 2018 up until 2022.

While positive for growth, the tax-reform package may spell out problems for the already rising inflation rate upon implementation, as proposed higher taxes on oil will coincide with the projected rise of petroleum prices in the global market.

For the past two years, inflation has been missing its target on the downside, with the low rate of expansion of consumer prices in the country being largely attributed to the sharp drop in oil prices worldwide.

However, starting the fourth quarter of 2016, inflation started to rise back to above 2 percent, with most recent data putting inflation at 2.7 percent in January 201 Full Story

Low inflation and rising global debt: just a coincidence?

It probably all started some 30 years ago. The change did not come suddenly, but slowly and cumulatively, as events unfolded. It was not a development on the surface, but something much deeper, like the adjustment of tectonic plates. Nor was it a single force, but three that eventually came together. Each of them, taken in isolation, was, and is, highly beneficial. All of them, in isolation and as a package, were, and are, precious and worth safeguarding. Taken together, though, they arguably changed the workings of the world economy in subtle and unexpected ways, throwing up new challenges from unsuspected quarters. And policies did not adjust.

The changes engulfed financial, monetary and real-economy regimes.

The first change was financial liberalisation, both domestically and across borders. Financial liberalisation began in earnest in advanced economies in the early 1980s, and by the early 1990s was largely complete around the world. To use Padoa-Schioppa and Saccomanni’s felicitous phrase, liberalisation turned an essentially government-led into a market-led financial system.

The third change was the globalisation of the real side of the economy. Globalisation came into its own in the early 1990s and gathered pace in the early 2000s. It followed on the heels of the entry into the world’s trading system of former communist countries and China as well as of the opening-up of emerging market economies (EMEs), notably India. This added something like 1.6 billion people to the global labour force. Alongside the expansion of global value chains, it amounted to a string of positive supply side shocks, which raised the world’s growth potential and sharpened competition.

Unleashing the global economy’s growth potential helped lift large parts the world’s population out of poverty. But the new regime provided additional fuel for the emergence of outsize financial expansions, sustained by overly optimistic growth expectations – what Kindleberger would call “displacement” – as well as persistent disinflationary pressures. Central banks’ fight against inflation received unexpected support. Full Story