Economics News

December 8, 2010

The French Revolution made the rich poor,
but not the poor rich.
Fisher Ames—European Monetary Union has done something rather similar.

Economics growth is moderating . . .
It’s significant that economics forecasters in most parts of the world have been raising their estimates of growth in 2010 and lowering them for 2011 and 2012. The changes are an acknowledgement of the cyclical condition of activity. They recognise that growth rates are likely to have peaked in mid-summer and are set to fall away progressively in the next two or three years. What is not clear is whether there’ll be a recession; and, if so, how severe it’ll be.

. . . even the forecasters are saying so.
In the UK, the Office for Budget Responsibility lifted growth expectations for the current year quite substantially, but reduced those for the next couple relatively little. In Germany, the Bundesbank did much the same. In China, however, the proportions were reversed: estimates for the future being cut back by rather more than those for the present had been raised.

The next recovery is a long way off.
What’s being rejected just about everywhere is the facile proposition of an accelerating recovery: one that would “deepen and broaden” during the early years of the decade. It’s finally being admitted that, if conditions are to return to “normal,” they’ll not do so until well into the next upturn. Spring 2014 may be the earliest date for a full blown recovery. Between now and then, anxiety levels are likely to remain high.

US labour markets are a key indicator.
Reminding everybody of the fragility of current conditions, the US labour market report for November was a little disappointing. Jobs had been created, but insufficiently quickly to keep up with the work-force. Accordingly, the unemployment rate (a lagging indicator) crept up. That risked depressing the levels of consumption in the months ahead.

And Bernanke is worried about lies ahead.
Fed Chairman Bernanke recognised the problem. The economy, he noted, was not yet operating in a “self-sustaining” mode. Left alone, it’d decelerate. His programme of bond purchases was expected to help, but wouldn’t necessarily be sufficient.

Trichet also. But he daren’t say it.
ECB President Trichet probably also recognised the problem, but had to pretend otherwise. That was because the EZ found itself in a highly polarised condition—economically and politically. In some countries, GDP was growing briskly; in others, collapsing. In some, the national authorities wanted money policy to be loosened; in others, tightened. The ECB itself was in an impossible position. It could say nothing, nor do anything, without causing offence to part of its constituency!

How are the weak to be saved?
It was the outlook for the weaker members of the EZ that was most worrying. Data showed that their economies had been contracting when growth in the rest of the world was fastest. So how would they fare in a global slowdown? Might there be a danger of systemic failure, of political revolution?

Will the strong come to their aid?
Or would Europe’s successful countries be prepared to bail out its unsuccessful ones? More importantly perhaps, did the former have the resources to do so? The questions hadn’t been posed properly. But initial indications were negative. Voters in Germany and England were sceptical. And the costs huge: high enough, even if the political will existed, to render the task impossible.

Will the people be asked?
Chancellor Merkel in Germany seemed to be aware of the views of her constituents and was shifting her stance on the EZ a little. Prime Minister Cameron in Britain was not. His actions since taking office had been disappointing. He had upped the Budget for the Brussels bureaucrats, and contributed generously to the fund to help Irish banks. Would he ever say “No” to anything for which Europeans asked? Probably not.

In Britain, the commitment to spending cuts is fading.
His policies played into the hands of those who opposed public spending cuts, of course. What, it was being asked, were the priorities of the Coalition? How could it be so mean to the poor at home but so generous to the rich overseas?

Cameron doesn’t know what to think . . .
The Government was even losing the initiative on the issue of University fees. Neither Cameron nor Clegg seemed to be able to explain the virtues of the system they’d proposed. It was the student who, though unashamedly wanting to rip off the taxpayer, was getting the sympathetic hearing.

. . . and Clegg doesn’t know how to.
But for the slightly better tone of the economy recently, the incumbents’ poll ratings would have been very depressed. A year hence, they might be! If, by then, the world has slipped into embarrassingly slow growth, the Coalition will be deeply unpopular. And there’ll no longer be any prospect of radical reform. If it’s not been done in the first twelve months of the Parliament, it’ll not be done at all!

Market valuations to rise nevertheless.
Though the economics and politics are likely to be difficult in this period, the securities markets may be strong. Credit policies will become less expansive in a number of regions, but are unlikely to be restrictive anywhere. Couple that with slowing inflation and better corporate profits, and valuations will rise.


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