Economics News : 26 Feb

February 26, 2010

It’s often darkest just before the dawn;
But it’s also jolly dark just before midnight!

The economics outlook is difficult in most parts of the world. It’s particularly bad in Europe. Blame the clueless politicians.

Europe is performing well at the winter Olympics . . .
Europe’s economics problems show no sign of abating. Recently published data imply that activity was anaemic in the early months of 2010, and may actually have been retreating. Sales and production were reported to be faltering, exports disappointing, and sentiment plunging.

. . . but not on the international economics stage.
It looks as if it’s largely a question of competitiveness. Europeans can’t match the price-quality combination of Asians in industry, of Americans in agriculture, or of anybody in finance. Understandably, therefore, the euro is feeling the heat.

It’s highly competitive in the one arena but not in the other.
The problem is not that the Greeks have too high a budget deficit (although they do); but that they (and most of the rest of Europe) have a productivity that’s too low. Tax hikes and spending cuts won’t resolve the issue. It’s costs (relative to those elsewhere in the world) that have to be lowered.

Long term, what’s required is s new economics coach.
The most effective way of doing so would be to remove the dead hand of the bureaucrat from the windpipe of European business. But that’s something that’d take a long time to achieve—possibly a generation. In the shorter term, the only effective alternative is a devaluation of the euro.

Short term, it’s a sizeable devaluation.
The change’d have to be sizeable, though. Enough to make Greece (and other straggl¬ers) viable: 20% might work the trick; 40% would be safer. Interested parties should keep an eye on the external accounts. Not until euro-members had achieved foreign trade equilibrium (at satisfactory rates of domestic econ¬omics growth) could the currency be said to be fairly valued.

The Mitterrands and the Kohls have a lot for which to answer.
In the meantime, it would be helpful if the politicians recognised the errors they’d made in the last twenty years. Maastricht, monetary union and the constitution were all ghastly misjudgements. At best they diverted attention from the EU’s failings; at worst, they added substantially to those failings. If the politicians had any sense, they’d resolve not to “deepen or broaden” the Union for the next twenty years! Some hope!

The US looked good by comparison, but only by comparison.
America’s economics numbers were better than Europe’s, but not wholly satisfactory. The labour market appeared to faltering again and the housing sector reported some dire (possibly weather affected) returns. Unsurprisingly, sentiment dipped.

The Fed acknowledged that the economy’s difficulties would last a long time.
Chairman Bernanke responded to the less favourable data. A month earlier he’d hinted at the possibility of a near term return to monetary neutrality; last week, he spoke of the probability of keeping interest rates at negligible levels for a protracted period. In doing so, he quietly acknowledged that the consu¬mer’s loss of spending enthusiasm. He knew that if the personal sector were to wish to continue to rebuild its balance sheet, the economy’s debility would last for a long time.

It was only in Asia that genuine resilience was to be found.
Asia was (again) the star performer. And, recently, Japan has been part of the buoyancy. In the last six months, it has been taking market share from Germany in a number of key export markets. The driving force, though, has been China. Public expenditure there has been extraordinary and consumer spending remarkable. Imports (finally) have surged; and it’s that which has caused the region as a whole to quicken.

But, even there, the risks were sizeable.
Can it last? Can it revive, not just the efficient economies in south east Asia, but the inefficient ones in Europe and the Americas? Probably not. And Beijing knows it. The monetary authorities want to slow the growth of credit to deflate an incipient bubble. But they know that, doing so, they risk plunging the rest of the world, and themselves, into recession.

Double dip recession of full blown depression?
It’s all rather grim. The only good news is that the rascally political incumbents who’ve been responsible for so much of the recent mismanagement will be sent packing as soon as voters get a chance to express their views. And, in the meantime, securities markets will hold up fairly well.

Economics Views : 24 Feb

February 24, 2010

Darkness teaches the value of the lamp; fog, that of the compass;
depression, how lucky we are if we’ve got a job.

Victor Hugo said that adversity was a good teacher; Schumpeter agreed; but why do bankers and economists seem always to miss the point of the lesson?

The consensus has probably got it wrong again!
Six months ago, Governments and Central Banks were quietly optimistic; economics activity, they thought, had begun a sustained recovery. Today, they are much less confident. Recent data have been disappointing. A pause, maybe a relapse, is indicated. But how bad will it be? Joy merely delayed, or joy definitively cancelled? A double-dip recession or a lingering depression?

We’re not headed back to the status quo ante, but somewhere much duller.
Nobody knows. And not many are prepared to ask the question. But the evidence is that the authorities have only to toy with the idea of moderating the monetary stimulus to cause GDP to stall. If so, they’re going to find themselves in a tricky Catch-22 dilemma: protracted real debility on the one hand, or protracted credit excesses on the other!

The consumer, hitherto the economy’s willing workhorse, is tired.
The problem is consumer sentiment. It’s proving almost impossible to re-energise the private sector worker. He distrusts (with good reason) politicians, employers and bankers. He knows that job security is to be threatened, real wages squeezed and real interest rates raised. It’s not the time, he concludes, for exuberance, but for retrenchment.

If he wants to rest, the rest of us will have a hard time of it.
If the consumer stays disheartened, the rest of the economy will follow suit. Eventually, even the public sector, lacking the tax revenues to finance it, will collapse. Dozy economists will no longer argue that spending cuts ought to be delayed until GDP recovers because they’ll have realised that GDP isn’t going to recover!

And what if protectionism should kick in?
And what will be the reaction from Governments and Central Banks if protectionism should be proposed? In the last couple of years, officials have condemned the failings of others while ignoring their own shortcomings. Thus far, of course, the measures haven’t made much difference. But what if, six months hence, economies still in the doldrums, there should be demands for state assistance for a huge range of sectors. Why, it’ll be asked, if resources could be found to bail out the appalling banker, can’t similar aid be supplied to the much more worthwhile industrialist, retailer, hotelier etc?

It’d be depression for certain!
Depressions always provoke protectionism. This one, if it should occur, will be no different. A distinction will be drawn between “free trade” and “fair trade.” The World Trade Organisation? A paper tiger! It’ll prove itself as ineffective at preventing misbehaviour as any other regulator! The result will be a lengthening and a deepening of the disequilibrium.

We might yet escape—the incompetence of the helmsmen notwithstanding.
There’s still every reason to hope that things won’t get so bad, that the anglo-saxon consumer will be re-enthused and that his spending will pick up. But it would be negligent of the authorities not to consider the worst-case scenario. It would be negligent also of investors not to think about the issue.

At least, it might be better for those who provide their own pensions.
In the past, securities markets have usually performed reasonably strongly in periods of excess supply. The employer’s bargaining position tends to improve relative to the employee’s. As a result, wage settlements moderate, unit labour costs are contained and profits (dividends also) rise fairly briskly. Set that in the context of a still expansive monetary environment and the bottom line is a return on equity holdings that is generous in real terms. The DC pension, so long as the Government stays away, will perform quite well.

Economics News : 19 Feb

February 19, 2010

Pure mathematics is fantasy, peopled by logicians;
impure economics reality, peopled by madmen.

The first are always right about things others don’t want to know; the second usually wrong about those they do.

Some are born ignorant; some achieve it; others have it thrust upon them . . .
The Law of Large Numbers applies as rigorously in economics as in statistics. It states that, taken singly, the analysis of an economist will be wrong with a probability that is only marginally above 50%. But, taken severally, so long as there is agreement, a clustering of opinion, the probability of error rises impressively. And, paralleling the mathematical theorem, the greater the consensus, the greater the certainty of misanalysis.

. . . economists score in all three categories.
When, in the eighties, hundreds of economists wrote to Mrs Thatcher saying that her policies were misguided and would lead to national penury, those who were enlightened knew the country’s success and the people’s affluence to be all but assured. When, in early 2008, the great and the good in the economics firmament agreed that inflation was a serious threat, but recession a negligible one, those who understood the ways of the world were convinced of the need to prepare for price stability and slump. And, today, when sixty-odd of the cream of the cream warn the Government not to cut public spending precipitately, there’s a compelling mathematical imperative to implement austerity immediately.

Public spending is, arguably, the source of much of our difficulty.
Sadly, though, the opportunity will be missed. Brown’s Government is ideologically committed to public sector indulgence and what passes for an Opposition is too worried about not offending any special interest (other than its core voters) to take fiscal affairs seriously. Even when the January tax returns were published—indicating Britain’s deficit to be worse than Greece’s—there appeared to be no great urgency in either Party to start to put matters right.

Perhaps because of it, recession is louring again.
Recent economics statistics, unsurprisingly, paint a depressing picture. Retail spending fell sharply after VAT had been restored to its original rate. And bank lending to the private sector was shown to be falling. GDP is probably retreating again!

What’s best for the future?
The economists say that’s the justification for not cutting public spending. They say that things would be even worse if handouts to the feckless and the inept were to be reduced. They think that incompetent British bankers deserve taxpayer aid, that inefficient French farmers merit the subsidy paid to them by their northern neighbours, and that the world is a better place (terrorist threats reduced) in consequence of fighting illegitimate Middle Eastern wars!

A sensible deployment of resources would probably help.
Realists take the opposite line. They say that economics weakness is caused by the public sector’s profligacy, not moderated by it. If activity is to be revived, and life returned to something like normality, the lunatics mustn’t be allowed to run the asylum. They have to be ejected and replaced by others who understand economics—not economists, therefore.

Why is unemployment apparently so low?
In contrast to the generally bad data published in the last week or two, the latest unemployment numbers were surprisingly (some would say, incomprehensibly) upbeat. The numbers were stable despite indications that output was falling! How could this be? Had productivity plunged or were the published returns measuring something other than what used to be called unemployment?

Changed definitions!
Probably the latter. It’s difficult to understand all of the ONS’s terminology, but it looks as if there are rather more categories of “non-worker” than used to be the case. And, whereas in the past, it would have been unemployment that ballooned in the face of weakening activity; it is, today, other categories that do so.

It’s a subterfuge.
Does that make voters feel better? Does it paint the authorities in a better light? Possibly so. But why haven’t analysts investigated the phenomenon? Why haven’t economists estimated what the numbers would have been on the old definitions? Why haven’t Opposition Parties done so? The questions, as usual, are easy; the answers difficult.

And global money may continue to tighten.
The bigger economics quandary is the international monetary environment. Conditions have become a little tighter in recent weeks, and may continue to do so. The PRC’s Central Bank is fretting about overheating and asset bubbles; likewise the US’s one. Both will be lifting interest rates and restricting the growth of credit.

Europe and Britain will be hurt, but equities may hold up.
That’s fine for those with robust economies; but not for Europe, of course. The EZ is in a frightful mess and so is Britain. Both face a difficult future: risking either double-dip recession or savage devaluation. Ironically, equity markets, London’s in particular, driven by profits resilience rather than investor confidence, may hold up quite well.

Economics Views : 17 Feb

February 17, 2010

Don’t let politicians drive you crazy,
especially when you know it’s in walking distance.

Stoicism is intellectually attractive, but psychologically unsatisfactory. The case for violent retribution is recurringly compelling.

Recessions “cure” themselves; depressions don’t.
Severe financial crises occur only rarely. It’s not surprising, therefore, that Governments develop no expertise in dealing with them. That said, the US seems usually to demonstrate a modicum of competence; the rest of the world invariably none at all.

The latter need skilful treatment. Britain didn’t get it.
Britain’s response to the turmoil that manifested itself in 2008 was very disappointing. Why, for instance, was the rate of Value Added Tax cut for twelve months? Did the authorities suppose the economics hiccup would be short-lived? That a temporary boost to demand would be sufficient to restore activity to its earlier vitality?

Because of politics?
Or were economics considerations ignored? Was it politics that drove the change? Did Ministers calculate that a sop to the consumer in front of the election would buy them extra votes?

The cut in VAT was puerile.
Nobody will ever know. But the economics consequences of the decision have gradually become clearer. The lower VAT rate added to the country’s monstrous fiscal deficit and camouflaged its incipient inflation. But it did very little to revive GDP. As a result, the country in 2010 seems to have been left with the worst of all worlds.

The bailout of the banks unconscionable!
But the error of analysis that led to the VAT decision was as nothing in comparison to that which prompted the rescue of the banks. Who in his right mind could have thought that the way to help non-banks was to give taxpayer funds to banks? Only those with a Kafkaesque strain of insanity would have recommended such a policy.

There ought to be an inquiry.
Are we surprised that it didn’t work? Are we surprised that loathsome bankers grabbed the money and, instead of advancing it to others, paid it to themselves? Of course not; it’s in the nature of the beast. But why was there nobody in Government (Parliament, Treasury or Bank of England) who anticipated the outrage? Perhaps after Chilcot has condemned one set of malefactors, he can turn his attention to another!

Prisons may be overcrowded, but some villains . . .
Last week, illustrating the extent of bankers’ insensitivity, we learned that credit card interest rates were at their highest levels for twelve years even though official rates were at their lowest ever. Is there perhaps a shortage of funds in the banks? No, of course not. The supply is virtually limitless. It comes, courtesy of the Treasury, from taxpayers. It’s lent to banks at negligible rates. And they lend it back to taxpayers at extortionate ones!

. . . have nevertheless to be incarcerated.
It’s the geniuses effecting the scam who are said to deserve huge bonuses! It’s claimed that, if not paid sufficiently, they’ll go abroad and rip-off foreigners instead. Excellent. Let them go. And let them take also the numbskulls in Parliament, Treasury and B-of-E who licensed the malfeasance.

Equities are, at least temporarily, back on track.
The good news is that the Central Bankers who’d been toying with the idea of tightening liquidity to forestall potential overheating may have thought again. The risks of doing so, they’ve possibly concluded, could exceed the benefits. That being the case, stock price indices will recover. But a degree of vulnerability is likely to remain. Looking to the longer term, therefore, valuations may respond more to corporate profits and less to monetary conditions.

Economics News : 12 Feb

February 12, 2010

Governments’ problems stem from having to reconcile
gross habits with net income.

Adapted from a remark made by Errol Flynn—the eternal truth is that people have no respect for what belongs to others.

This is not the end of Greece’s financial crisis . . .
It’s one thing to contain the symptoms of a crisis; quite another to remedy its causes. Doctors usually recognize the distinction; economists and politicians don’t. Recent developments in Greece make the point. Europe’s self-appointed leaders, its Commissioners and Central Bankers, may have staunched the flow of Hellenic blood, but haven’t closed the wound. The respite they’ve secured is likely to be temporary therefore, not permanent. Reconstruction hasn’t yet begun.

. . . nor the beginning of the end . . .
Barroso and Trichet missed the point, perhaps deliberately, when they said at a Press Conference last week that the priority was the re-establishment of confidence in Europe’s financial affairs. That’s a mis-analysis; the priority is (it certainly ought to be) the re-establishment of economics competence within the European Community. If the region were to be competitive, its other problems would diminish; if uncompetitive, they’d intensify. If Greece’s costs were consistent with its membership of the euro at current levels, it’d prosper; if not, it’d atrophy.

. . . merely the end of the beginning.
To demand that the country reduce its fiscal deficit is to attack symptoms not causes. It’ll probably delay the denouement, but not alter it. The EU is a mess and Monetary Union its greatest catastrophe. Politicians will pretend otherwise, but the simple fact is that the core no longer has the resources to support the fringe.

Will Germany once again sacrifice itself on the altar of European Unity?
Germany could easily afford to support West Berliners in the sixties and seventies. And it could make a good fist of subsidising French farmers in the seventies and eighties. But it was severely stretched when asked to bail out the DDR in the nineties and noughties. Compelled to do so, economics growth slowed progressively. What had been impressively fast at the beginning of the period was disappointingly slow at the end of it; unemployment initially well below international norms was latterly well above them.

If in doubt, ask the people!
Can the country be asked to be paymaster once again? To settle the debts of its feckless neighbours? Chancellor Merkel might be willing to try, but what do the people themselves think? They’ve not been consulted in the past. Do they have an opinion now?

In extremis, they’ll refuse. But probably not for a while.
Perhaps if the burden were thought to be temporary, if it could be expected to get lighter as the years passed, it might be deemed tolerable. But what if recent trends should continue, if the Commission and ECB were allowed to proceed to emasculate the economy, wouldn’t there be a reckoning? Wouldn’t Germans make common cause with Englishmen; sanity being restored? Happy days!

Meanwhile, the economics outlook is not good.
Not yet though. The near-term is going to be dire. Europe will be a disaster and Britain not much better. Growth rates are moderating. They were pathetically slow in the fourth quarter of 2009; they’ll be slower still in the first of 2010. The forecasting consensus is talking still of a quickening, but a growing minority is fretting about a double-dip.

Even the previously happy-clappy Governor is worried.
Significantly, Governor King distanced himself from the optimists last week; pouring cold water on their blue-skies expectations. Activity had barely risen in the context of an extraordinarily powerful monetary stimulus; it had to be expected to slip back whenever credit became tighter. He didn’t make specific reference to the labour market, but it’s likely that he’s worried by its vulnerability. If jobs were to be scaled back in line with output, the chances are that sentiment would crash, taking GDP with it.

He’d like more fiscal discipline.
It may be that the Governor’s remarks were partly inspired by Greece’s tribulations. He’d not like to find Britain in similar circumstances. So, while happy to continue with monetary accommodation, he’s begun to take a tougher line on fiscal laxity.

So would Cameron, if his latest change of mind is to be taken at face value.
Cameron likewise. He’s frequently changed his mind on the issue (and most others), but seems at the moment to be proposing severe public spending cuts. Rightly so. The economy won’t recover its poise until resources are allocated sensibly. Civil servants and local authority workers have to be culled (their retirement age increased to 70); quangos downsized; and political advisers all but abolished.

Let the asset sales begin! Start with the banks.
Most importantly, of course, banks must be reconstructed along Volcker’s recommendations. Any activities in fund management, investment banking and proprietary trading have to be sold off. They must be run in future by those who are competent, not bankers therefore.

Markets will rise as the year progresses. New York looks encouraging.
The outlook for securities markets is troubled. In the near-term, policies are counterproductive and crises are likely to recur. Later on, if the loonies can be restrained, if logic re-imposed, there’s hope. Hitherto, the US has been more sensible than Europe. It’ll be reflected in the valuation of its currency and equity market.

Economics News : 10 Feb

February 10, 2010

Most Governments are “organised hypocrisies;
the ideas of the head at odds with the sensations of the tail.

Walter Bagehot, referring to Robert Peel’s, but applicable to all others, especially in the age of political correctness!

Many of us believe that wrongs aren’t wrong unless committed by others.
Public sector institutions often affect to be advocates of openness and transparency—though rarely when it applies to themselves. Parliament is famously hypocritical: zealous in the pursuit of financial impropriety in others; indulgent in the acceptance of venality in its members. The BBC demonstrates a similar double standard: conscious of the mote in the brother’s eye; unaware of the beam in its own.

The Beeb, for instance.
Last week, some of the broadcasters’ indiscretions were made public: salaries paid to executives, fees to contributors, expenses to both. Eyebrows were raised amongst supporters, and jaws dropped amongst detractors. How, people asked, could these numbers be justified? They’re necessary, came the reply, to attract “talent”!!!

The Corporation is characterised by self-righteousness and greed in equal measure.
The reality is that public sector broadcasters have become almost as degenerate (and therefore as despised) as bankers. They do a bad job, but nevertheless think they’ve a right to taxpayer support. Their salaries are not set by the market, but by a small cabal of insiders. Their judgments are not ratified by the general public, but by a quango of (taxpayer-financed) fellow-travellers. It’s not a system that can last. The economy is in dire straits and resources are limited. For the Government to treat broadcasters and bankers so generously is madness: shades of Marie-Antoinette!

The Europeans Union demonstrates a similar duality.
There’s another strain of hypocrisy, alive and virulent, in the world today: its home, unsurprisingly, in the European Union. Greeks voted a few months ago for a Government that would spend freely and expand the public sector. It was a (probably) foolish decision by the people, but it’s a feature of democracy that people be allowed to be foolish. The decision to return to more sensible policies has to be implemented by the people themselves (probably as a consequence of their appreciation of the foolishness of their prior judgment).

What contempt Commissioners and MEPs must have for democracy!
To impose fiscally orthodox policy from outside is a negation of democracy. It is half-way to an acceptance of fascism. Do European Commissioners agree? Do Strasbourg Parliamentarians? Of course not. They’re blind: they see themselves, not as vicious despots, but as liberal democrats! The hypocrites are eminently qualified, therefore, to work for the BBC or RBS.

Is the recession over? Or merely comatose?
And what, meanwhile, of the economy? In Europe and Japan, it’s very dull; in the States, less so, but hardly resilient. Developing Asia looks stronger and so does much of the commodity producing world, but, even there, the exuberance is not uncontained.

What if activity, even with excess money creating a bubble, couldn’t be revived?
Many countries are toying with the idea of a speedy return to “normal” monetary policies. They fear that too long a period of stimulus will provoke a bubble. Quite right. But, equally, too premature a return to normality might provoke a reversion to recession. How will the authorities judge the time for restraint to be appropriate? Their track record in the past has been poor. Why should it be better in the future? And what if there were to be no golden mean? No timing that avoided both extremes? Ouch!

Economics News : 5 Feb

February 5, 2010

Behavioral psychology is the science of pulling
habits out of rats.

Douglas Busch, if only it could be done!   Trouble is, these days, there’s a moderate excess of habits and a huge excess of rats!

Security prices are plunging . . .
When asset prices fall steeply and broadly, it’s nearly always because monetary conditions are being tightened. Is that what’s happening now? Almost certainly. The Australians may have begun the process at the end of 2009, but it’s been the Chinese who’ve made the big difference in recent weeks.

. . . in response to China’s credit squeeze.
All round the world, stock markets have felt the consequences. Where previously there’d been an excess of cash, there’s now a deficiency. Towards the end of 2009, investors had been impelled, almost against their better judgment, to buy assets to absorb liquidity. Today, they’re being pressured, almost against their better judgment, to sell them to restore it.

It’ll probably get worse before it gets better.
In the weeks ahead, it’s possible that the squeeze will be intensified. The Americans, conscious of the strength of GDP in the final quarter of 2009, will feel that the threat of inflation has risen, while that of recession has receded. The Fed is bound to moderate the stimulus; it may reverse it.

The US will also tighten. India and Brazil likewise.
The Brazilians and Indians will probably follow suit. They’ve reported brisk real growth in the recent past, and quickening rates of inflation. That poses risks, they’ll say. Better that demand burns slowly for longer than that it flares brilliantly for an instant.

Europe and Japan will fiddle, ineffectively.
The only sizeable economics blocs that might feel inclined to pull in the opposite direction are Europe and Japan. Both are experiencing negligible growth and decelerating inflation. Both would benefit from an ongoing stimulus, but it’s doubtful that either will be prepared to take the initiative. Both, instead, are stoically predisposed to failure.

Asset prices continuing to slide.
Accordingly, it looks as if financial austerity will continue for some while. It may not be until economics debility returns that there’ll be any respite. Arguably, that’ll not be until late spring.

Not until the spring . . .
US developments will be critical. The fourth quarter’s GDP estimate was strong in aggregate, but unimpressive in composition. It owed a great deal to inventory accumulation. That could turn on a sixpence. If it should do so, if jobs were to start to disappear again, assessments of the outlook would change for the worse. The Fed would start to ease again.

. . . is there likely to be any respite.
Between now and then, markets are likely to disappoint; equity indices retreating significantly. Corporate profits will rise satisfactorily and balance sheets will improve steadily, but that’ll be ignored until liquidity starts to relent. Perhaps the profile of 2010’s price action will replicate 2009’s: weakness in the first three months; recovery in the subsequent nine.

London’s equities will be shunned.
It’s unlikely that the London market will be favoured in either period. Economics activity is proving slow to respond to the stimulus and the authorities no faster to respond to the need to cut public spending. Tweddledum is hopeless and Tweddledee just as bad. Not content with reneging on the promise to hold a referendum on Europe, the latter’s become an enthusiastic spender of taxpayer funds. Greece, apparently, is the model to which he aspires!

Economics being bad; politics worse.
Voters no longer see any difference between the major parties: both having demonstrated moral degeneracy in relation to Middle Eastern wars and financial degeneracy in relation to expenses. It’s not been a case of an occasional bad apple, but of wholesale rottenness. Like their chums in banking, MPs on both sides of the aisle seem no longer to understand right from wrong. They’re spongers: they demand, however bad their performance, to be bailed out by the poor taxpayer.

Remedies were more salutary in 1648.
It can’t go on indefinitely. At some stage, the flood tide of anger will inundate Westminster and Whitehall. It’ll leave the reprobates stranded and starving; banks’ board members cowering piteously on their roof tops waiting for the rescue that, this time, won’t come. Who’ll divert the rivers to cleanse the Augean Stables? Who’ll be the latter day Thomas Pride? Who’ll purge Parliament of its festering sores?

In the near term, short the euro!
It may be a long wait. In the meantime, there’ll be fun and games in the currency markets. The dollar will be strong, the yen moderate, sterling indeterminate and the euro weak. The EZ’s economy is a patchy mess, and Trichet is clueless to resolve the issues. Whatever he does, whether he eases money or not, the international community will avoid the euro like the plague.

Economics Views : 3 Feb

February 3, 2010

Our liberties are more threatened by Banking Institutions,

than Standing Armies.

 Thomas Jefferson, power should be taken from the banks (central as well as commercial) and restored, where it properly belongs, to the people.

 

The world economy is po¬larising: the PRC and US quickening . . .
The Japanese and European economies are probably still advancing, but the rate at which they are doing so is disappointingly slow. There’s been a modest recovery in inventory and exports, but nothing at all in domestic final sales. That doesn’t augur well for the future. If interest rates are shortly to be “normalised” (an essential pre-requisite for longer-term economics stability, claim central bankers), there’s a sizeable risk that activity will retreat again.

. . . the EU and Japan slowing.
The US economy, thankfully, seems to have been performing rather more robustly. In the fourth quarter of 2009, GDP is estimated to have grown at more than 5½% per annum. Why were conditions there so different? Was it the irrepressible optimism of the American consumer? The bolder attitude of the fiscal and monetary autho¬ri¬ties? Or the fortuitous devaluation of the dollar?

What caused the difference?
Nobody knows. But it was much the same in the aftermath of the 2001/02 recession. Americans engaged in a frenzied (albeit short-lived) spending spree in 2003, while Europeans and Japanese barely stirred. The ECB and BoJ were compared unfavourably with the Fed then; and doubtless will be again now.

Might it have been competitive currency?
But it’s the politicians in Europe and Japan who have most to fear. Their nightmare scenario relates to unemployment. Redundancies hitherto have been kept to a minimum by the prospect of an imminent and powerful recovery. If that expectation were to be questioned, if the illusion of near-term redemption were to be shattered, lay-offs might begin in earnest. Unemployment could soar—15 to 20% of workers jobless! It’s possible then that personal sentiment would collapse and a full-scale depression ensue.

Many in Japan and Europe will think so.
To guard against an eventuality of this sort, the ECB and BoJ are likely to be toying with the idea of devaluation. They’ll have noted the bene¬fits it conferred on the US (arguably, on the UK as well) and may wish to share them. But it’s difficult for central bankers to change their spots. In the short term at least, they’ll risk not being taken seriously. Perhaps it’d be better, therefore, if there were to be a change in leader¬ship.

Europe’s monetary union looks unstable.
In any event, there’s the prospect of powerful monetary cross-currents. If the Chinese authorities continue to tighten and the American ones begin to do so, credit whirlpools and currency eddies may become com¬monplace. Anything, in such circumstances, is possible. But most analysts believe the yen will be partially protected by Japan’s negative inflation and strong trade surplus. And they expect that sterling, though vulnerable, will be modestly supported by Britain’s perceived competitiveness. It’s the EU’s euro that’ll probably bear the brunt of the disruption.

Many will regret its foundation!
Germany’s industrial virtuosity may prove insufficient to offset an¬xi¬eties about delinquency elsewhere. The cost of saving Greece will sap the EU’s strength for a generation. But the cost of not saving it will dent the Union’s prestige for even longer. It’s a lose-lose situation. What, one wonders, will future historians say of the dozos who de¬signed the system in the first place? Will they be as dismissive as contemporary critics were?

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