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THE MUSINGS OF A TRADITIONAL SOUTHERN DEMOCRAT

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Tuesday, January 20, 2015

Gerard Baker, Editor in Chief of The Wall Street Journal, on U.S. vs. Europe and the Dragon (China)

Gerald Baker, Editor in Chief of The Wall Street Journal, writes online:
Two Roads Diverged
The U.S. and Europe are facing an economic divergence not seen in nearly two decades. While the European Central Bank is considering a stimulus effort to fight deflation, U.S. officials are optimistic about America’s economy. We report that the Federal Reserve is on track to start raising short-term interest rates this year, despite investor worries about weak global growth, oil prices and slowing consumer-price inflation. By contrast, the ECB is widely expected to launch a controversial bond-buying program on Thursday, known as quantitative easing. The program would likely involve the purchase of hundreds of billions or more of euro-denominated government bonds. While the U.S., U.K. and Japanese central banks have used QE, the ECB faces many unknowns. We note that it has 19 different bond markets—from triple-A Germany to junk-rated Greece—and bond yields are near record lows, suggesting it will be difficult to steer them lower. German officials are strongly warning against the bank using the bond-purchase program as a form of fiscal union by the back door, insisting that the national-member banks within the ECB should buy their own governments’ bonds. All of this is likely to limit the effectiveness of QE, Europe-style. Nevertheless, European shares once again neared multiyear highs this morning, buoyed by expectations that the ECB will launch the stimulus program.
 Wane of the Dragon
After experiencing one of the most rapid economic ascents in history, China is slowing. Our story looks at how China’s growth rate fell to 7.4% in 2014, its lowest level in nearly 25 years, weighed down by falling real-estate sales, soaring debt and weak industrial production. The same factors are expected to erode its growth in 2015, and the International Monetary Fund forecast 6.8% growth for China next year. Slipping momentum in China weakens an already soft global economy and is projected to hit emerging markets the hardest. Commodities importers, on the other hand, might benefit as the price of shipments declines. Should growth fall precipitously, economists say Beijing could carry out deeper interest rate cuts, faster spending on infrastructure projects and reductions in the capital that banks must hold on reserve with the central bank. However, if pursued too aggressively, such measures could worsen overcapacity and pile up more debt. Chinese shares rose 1.8% on the news, a day after their largest one-day drop in more than six years following a crackdown by Chinese regulators on margin trading.

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