End of the First Quarter: Economy Still Growing

March closes the year’s first quarter. As such, this reveals the continuation of a soft but constant ascending line towards a moderate growth of the world’s economy. This assertion derives from the study of the economies of the United States, Europe and the most representative emerging countries.

Five years ago, at the bottom of a Great Recession, the United States opted for implementing, as a state policy, a package of fiscal and monetary stimulus (the Recovery Act), the efficacy of which no one gave much credit to originally. But by the summer of 2009, the economy began to grow. By spring 2010, the unemployment line had been reverted and some jobs were created, instead of the 700,000 that were being lost monthly. Today, the Congressional Budget Office, which is quite more objective than the White House, which totally praises the measures, admits that thanks to the Recovery Act the economy (GDP) increased at a 2.5% annual rate between 2009 and 2011. Also, 42,000 miles of road were improved and 160 million workers had a decrease in their taxes. A great push was given to clean energy (solar) to electric vehicles, medical services and hospital infrastructure were increased and more than one hundred thousand miles of internet broadband infrastructure were improved. Currently the nation is in the process of returning to normalcy. It is hoped that the economy will grow without fiscal and monetary stimulus, which is appropriate and necessary to overcome the crisis are alien to its natural progress.

Europe is the other great pole of the world’s economy. Also gravely affected by the Great Recession that began in 2008, and lacking the political unity of the United States, Europe opted for the road of controls and austerity in the most affected countries as roadways to reversing the economic crisis. In its advancement towards recuperation, it has been at the edge of the abyss: Its banking system, wounded by their position in sovereign bonds of countries that had lost their capability for honoring them; its monetary unit and its visible expression questioned in their viability due to the disparity of the circumstances of north and south, and of the economic center and the periphery; and the political crisis of governments that had to deal with their populations discontent due to income and standard of living decreases imposed by the “austerity,” which got to be a symbol of hopelessness. Nevertheless, even with its historic diversity and governments with different ideologies, plus nations and ethnicities with contradicting aspirations, currently the functioning of a regulating institution for the whole of Europe’s financial system has become concrete. This [institution] has enough strength so as to restore the confidence of depositors in its great banks, as well as in the regional ones. Its Central Bank, on whose Board sit 28 members who represent 28 countries of different views and interests, counts with enough support as to be able to execute monetary policies with which diversities are reconciled. It confronts, as ruling body, common problems, among which a very persistent low inflation is highlighted, which brings with it the risk of deflation, the most pernicious of economic sicknesses due to its very challenging reversal, because when prices come down on a wide front, consumers opt for not buying, waiting for them to decrease even more, and in this vicious spiral, companies suffer drops in sales and the immediate effect is the falling of investments and suppression of employment. If this symptom would get worse, the Central Bank can put into effect stimulus measures like injecting capital into the economy, as the Fed did in the United States when it went into massive buying of state bonds and corporate fixed yield papers, systems which would not be easy to implement in Europe, because it would have to make these purchases in 18 countries in the Eurozone, being very careful to not make any suspicion of favoritism to arise.

In March a replica of the Cold War, which ended in 1989 with the fall of the Berlin Wall, was relived. It had Crimea, Ukraine and Russia as scenario and as a detonator a situation, which recalls Hitler’s excuse to invade Austria at the beginning of World War II. In any case, the possibilities of reconstructing the Soviet Empire with a capitalist Russia in the center, through the use of force and with an isolation similar to the Cold War, are very small. The difference is that Russia is now capitalist. Its economy is very vulnerable, because it’s intimately connected to its European exports. Its major corporations, in which the state is a very important partner, have shareholders spread around the world and their shares are recorded and transacted daily in the world’s most important stock exchanges, amongst these Moscow’s Stock Exchange. The winds of war that blew in March generated a fall in the RTSI index of the Moscow Stock Exchange, which in a day of panic lost more than 12%. That means an evaporation of 60 billion euros, which saw a comeback when Putin said he did not see the need for a military intervention. The prevailing feeling is that Russia cannot afford the luxury of another cold war. To create a geopolitical center with an axis in Moscow and orbiting satellites, it must strengthen the rule of the law and freedom of expression and move away from the autocratic system that currently prevails. Even though these nationalist tinted skirmishes continue, it is probable that the markets will interpret them as part of a policy by the governing group to obtain citizen cohesion, lacking the satisfaction obtained through sustained economic growth in a climate of freedom and citizen’s rights.

What precedes is confirmed by the slight variations in the price of shares and bond yields. The prices of the Italian and Spanish bonds give yields close to 3.5% (much less than 5% and 6% the time of the crisis), and the prices of shares earn between 4.5% and 8.5% this quarter. In the United States, bonds are almost, without variation, around 2.5% and shares without important changes this quarter. In Hong Kong and Shanghai, where the deceleration of China is acutely felt, shares have lost between 3.7% and 5% this quarter, and in Brazil, no important changes are noted so far this year, except in the month of March with 7.5% increases.

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