Getting Nervous about Growth
I’m becoming nervy about the global economy again. To be honest as regular readers will know I’ll always been quite nervy.
Giles notes that Brad Delong is getting twitchy too.
In somewhat contradiction of this politics-captured idea, BDL thinks Politics, not economics, will run out of capital first when it comes to the need for another rescue. That is Brad DeLong’s scary verdict when he says the chance of a Great Depression is now 5%. Because the last time we bailed the banks, we got not enough back, and public/congressional impatience is now wearing thin:
the failure of the Fed and the Treasury in the aftermath of Lehman to grab a share of the upside from its capital injection and purchase operations for the public in the form of warrants means that there is no coalition anywhere for a repeat or anything like a repeat of propping-up the banking system:the right thinks it is an unwarranted intervention in the free market, the left thinks that it is a giveaway to the undeserving and feckless superrich, and the center is bewildered because it is an enormous and poorly-structured intervention in the market, it is a giveaway to the undeserving and feckless superrich, and the optics are terrible.
Brad DeLong ought to be counted one of life’s optimists – someone who like Krugman thinks we could afford more stimulus – so this is worrying. The next time we have to do it, we must get more skin in the upside.
It seems that the strategists at SocGen are getting really nervy.
Under the French bank’s “Bear Case” scenario, the dollar would slide further and global equities would retest the March lows. Property prices would tumble again. Oil would fall back to $50 in 2010.
Governments have already shot their fiscal bolts. Even without fresh spending, public debt would explode within two years to 105pc of GDP in the UK, 125pc in the US and the eurozone, and 270pc in Japan. Worldwide state debt would reach $45 trillion, up two-and-a-half times in a decade.
…
The bank said the current crisis displays “compelling similarities” with Japan during its Lost Decade (or two), with a big difference: Japan was able to stay afloat by exporting into a robust global economy and by letting the yen fall. It is not possible for half the world to pursue this strategy at the same time.
SocGen advises bears to sell the dollar and to “short” cyclical equities such as technology, auto, and travel to avoid being caught in the “inherent deflationary spiral”. Emerging markets would not be spared. Paradoxically, they are more leveraged to the US growth than Wall Street itself. Farm commodities would hold up well, led by sugar.
Mr Fermon said junk bonds would lose 31pc of their value in 2010 alone. However, sovereign bonds would “generate turbo-charged returns” mimicking the secular slide in yields seen in Japan as the slump ground on. At one point Japan’s 10-year yield dropped to 0.40pc. The Fed would hold down yields by purchasing more bonds. The European Central Bank would do less, for political reasons.
SocGen’s case for buying sovereign bonds is controversial. A number of funds doubt whether the Japan scenario will be repeated, not least because Tokyo itself may be on the cusp of a debt compound crisis.
The simple facts are that the private sector, in the absence of public support, is still contracting. Europeans, Asians and Americans are all relying on each other to provide final demand. We can’t all export our way to growth. The banking sector is still damaged. Financial flashpoints remain in Central & Eastern Europe, the possibility of a real estate bubble in China, a secondary banking crisis in the US driven by commercial real estate problems, a second housing market dip in the UK and US.
Despite all the worries over inflation I simply don’t see it. I don’t, for reasons I’ve been making clear for months, see any functioning transmission mechanism between money growth and prices in the near future. My real concern remains deflation. SocGen’s advice – buy sovereign bonds, may not be a bad idea.
Politics in the Next Five Years
A quick political post.
Bob Piper, promoted by occasional commentator here Newmania, is speculating about whether there will be two general elections. This got me thinking.
The following is from an email I received a few days before June’s Euro elections – sent from a friend whose views are always interesting.
I’d be curious for people’s thoughts:
Also this, which everyone on Saturday said was mad, but I increasingly
think while unlikely, isn’t impossible:UKIP do well on Thursday. Not brilliantly, but well. They hold their
number of MEPs despite a falling number overall, beat the Lib Dems
convincingly, and at least run Labour close.At the general election their vote share doubles again to around 4.5%,
and they save over 100 deposits (45 last time). They take some second
places in the South-East and rural parts of the South-West.Cameron becomes Prime Minister, the Lib Dems end up with fewer seats
than at present, and Labour are broken, turning to infighting between
the Blairites and the left, and more importantly unforgiven for the
current crisis by the vast majority of voters.The W-shaped recession kicks in, as the Conservative government cuts
spending savagely, and encourages higher interest rates to protect
savers – this fails to bring in any new tax revenue, and taxes have to
rise to cover the growing cost of the government deficit.UKIP keep ‘getting serious’ as Farage’s personal power is strengthened
by electoral results. By mid-term, Cameron’s Conservatives are polling
around the 30% mark, and some ‘rogue polls’ show UKIP hitting 10%. The
BNP are rudderless and disillusioned as they fail to make the promised
advance, and lose their London assembly member.Needing to curry favour in the EU to get the freedom of manoeuvre
required on economic policy, Cameron gives in to his civil servants and
signs the next Treaty, without a referendum. He says it gives the EU no
new powers, and calls it “game, set and match to Britain”, in reference
to Andy Murray’s success at Wimbledon 2012.Disillusioned by Parliament and impoverished by the new allowances
system, Crispin Blunt leaves Parliament to take up a vacancy as
Britain’s European Commissioner, vacated by Ken Livingstone’s return to
the UK campaign trail for the London mayoralty. A by-election is pending
in Reigate. Result 2010 as follows:Conservative: 48%
UKIP: 16%
Lib Dem: 15%
Labour: 10%The Conservatives select a Cameron A-list clone, committed to forcing
the treaty through Parliament. UKIP select the telegenic grandson of
former local MP and whipless Maastricht rebel George Gardiner. The
by-election is fought as a referendum on the tax-raising,
service-cutting budget, and a proxy referendum on the treaty.UKIP win their first elected member of Parliament, beating the
Conservatives narrowly by 36% to 35%, and making a small fortune for
punters on Politicalbetting who were appraised of the possibility in a
post shortly before the markets went up. Their poll ratings are
transformed, and they are now regularly trading third place with the Lib
Dems, depending on the pollster. A string of other by-elections across
the south of England in the next 18 months see them beat, or come close
to beating, the Tories, on the march in the way the Lib Dems were in
1993-7. In the 2014 Euro elections they top the poll, albeit with only
27% of the vote.The 2015 General election is a messy campaign, with Cameron making all
sorts of promises on renegotiating European treaties in an attempt to
regain his core voters, but alienating a number of his Europhile MPs in
the process – Ken Clarke resigns from the cabinet and delivers a
devastating speech, but Cameron hangs on. General election day rolls
round, and the exit polls say:Labour: 30%
Conservatives: 28%
UKIP: 18%
Lib Dem: 15%Despite a clear win for ‘parties of the right’, the distribution of UKIP
vote and the effect of relative turnout returns a Labour Party,
fractious and unprepared for government, with a majority of 30 seats.
Some Good Reading
My workload (in my actual job) is piling up. My workload for the blog (two half finished posts on ‘capital’ and a long overdue note on ‘Hobson’) is piling up too.
But in the meantime, and I hope things will calm down enough to finish some posts soon!, a few things worth reading:
Giles on ‘Politics and Economics’.
Paul S on the left and economics.
Chris considers some on my capital proposals.
Social Europe on the left and growth.
Vino on the misallocation of capital.
And finally Paul C on Labour and campaigning. As someone who’s been doing a fair bit of canvassing recently, I found this interesting.
Hopefully that’ll keep you all busy for a day or two.
US Healthcare & the Global Economy
Look suffering readers will be pleased to hear that I now putting the finishing touches to the next post in my series on ‘capital’.
But today I want to share just one chart. It’s a chart which I think fundamentally changes how people perceive the Global macro-economy.
(And annoyingly enough – the two lines are mislabeled, reverse them).
The headline figures of US consumption as a share of GDP rising from 60% in the late 1960s to over 70% today are crucial to the ‘global imbalances’ theory. The US consumer has been on a credit fuelled binge – buying SUVs and plasma screen TVs and under saving, whilst Asia has saved too much. The world economy is unbalanced.
But what this chart suggests is that this is not the case. Excessive US consumption is not driven by what we typically think of as consumption – but by rising healthcare costs.
This should be viewed alongside John Ross’s article on China.org:
Equally striking, the level of US investment (14.7 percent of GDP) is scarcely above its calculated rate of capital consumption (12.9 percent of GDP)–which means that, in net terms, the US is scarcely accumulating capital.
Such an extraordinarily low investment rate precludes a rapid rate of recovery from the economic downturn. US economic growth following the recession will therefore be relatively anaemic compared to previous downturns.
Could it be the case that excessive healthcare costs are squeezing out US investment?
Oil
I’m still very busy. But I’m nearing completion of my next piece on capital/banks/interest rates. I bet you’re all thrilled.
In the meantime, this is causing me some concern:
LONDON (Reuters) – The world is closer to a peak in oil supply than International Energy Agency estimates admit, UK newspaper The Guardian reported in its Tuesday edition, citing an unidentified “whistleblower” at the IEA.
The IEA, which advises 28 industrialized countries on energy policy, is scheduled to release its World Energy Outlook on Tuesday. It 2008 Outlook forecasts world oil supply will rise to 106 million barrels per day in 2030.
“Many inside the organization believe that maintaining oil supplies at even 90 million to 95 million barrels a day would be impossible but there are fears that panic could spread on the financial markets if the figures were brought down further,” the Guardian quoted the IEA source as saying.
Fatih Birol, the IEA’s chief economist, could not immediately be reached by Reuters for comment on the Guardian article, which appeared on the newspaper’s front page.
While the Paris-based IEA has repeatedly warned that a lack of investment could lead to a strain on supply, it maintains that there is enough oil in the ground.
Its 2008 World Energy Outlook said global oil output was “not expected to peak before 2030.”
The peak oil theory — that supply has reached or will soon reach a high point and then fall — has long been confined to the fringes of informed opinion within the industry.
We would in effect experience the worst of both deflation and inflation. Falling goods and services prices driving down corporate profits and leading to increasing unemployment but rising fuel and food prices which would hit the poorest the hardest.
US Unemployment & Banks
The US Bank Stress Tests conducted by the Fed back in May:
Unemployment — in their negative scenario, the stress tests assumed a year-round average unemployment rate of 8.9 percent for the 2009 and 10.3 percent for 2010.
US unemployment just hit 10.2%. The highest since 1983. The average for the year so far is 9.1%. If it stays at the current level (and I think it will go higher) the average will be 9.3%.
US under-employment (i.e. counting those working part time who want to work full time) now stands at 17.5%.
In other words things are much worse than the ‘worst case’ Scenario from only six months ago. And yet talk is still of withdrawing support, monetary policy exit strategies and fiscal tightening.
Update & another excellent link
I’m snowed under with my actual day job, but still working on the next posts on interest rates, money and capital. They’ll be up next week. Sorry for the delay!
In the meantime, Tony Dolphin has an excellent economic round up over at Left Foot Forward.
Interest Rates
Last night I started planning the three posts I promised yesterday. I think I may have to scale back my ambitions – but at least I didn’t make a ‘cast-iron guarantee’.
So rather than covering the issues raised in three (what would be very long posts) I shall instead cover them in a few more shorter posts.
What I’m arguing is that Government can control long term (as well as short term) interest rates and that through this they can increase investment levels in the economy. This has the short term economic effect of making the economy more stable, the long term economic effect of higher growth and the ‘political/social’ effects of reducing both inequality and the power of financial capital.
On reflection I intend to proceed as follows (probably with the odd post on other issues to break the tedium for those not at all interested): starting to today with a couple of definitional issues on interest rate policy, I will then discuss Keynes’ liquidity preference theory, the mechanics of how interest rates can be controlled, the history of monetary reform and finally some policy implications for now.
What I’m advocating is a secular cheap money policy – i.e. not just using low rates to combat depression but having them as a permanent part of our economy.
The first thing we must do is distinguish between ‘easy money’ and ‘cheap money’.
One objection that I expect to be raised to my proposal is that we already have a ‘cheap money’ policy – that interest rates have been held too low for too long causing asset price bubbles, global imbalances and excessive consumer debt . This is incorrect – a misunderstanding driven by economists’ (in many cases) poor knowledge of economic history.
In the past year much of the West has had a cheaper money policy (ultra-low rates at the short term and QE on longer term rates) but the real yield (adjusted for CPI inflation) on UK ten year bonds is still 2.6%. That sounds low. But from 1870 until 1913 it averaged 2.4% and in the 1930s 2.7% (not much higher).
Greenspan spoke of the ‘conundrum’ of low long term real rates earlier in this decade. In reality the period of the 1980s until last year was the real conundrum. As an IMF paper of 2006 noted:
We show that current levels of real interest rates on long-term bonds in advanced economies are not low by historical standards and that it is the real long bond rates of the early 1980s through much of the 1990s that look anomalous.
…
In short, current levels of long-term real interest rates of around 2 percent among advanced countries appear low from the vantage point of the 1980s and 1990s, but not so low when compared with earlier epochs. In addition, periods when long-term real interest rates are below the economy’s growth rate—as they have been recently in some advanced economies (notably the United States)—are not exceptional. This was clearly the case in the last two decades of the classical gold standard, the interwar period as a whole, and the early postwar period through the 1960s.
I define ‘cheap money’ as a policy of low real long-term rates. By this definition the period from the mid 1970s until very recently can be considered a period of ‘dear money’. And policymakers globally are already discussing a return to this policy.
It is noticeable that long term periods of cheap money are associated with long term booms.
If ‘dear’/’cheap’ money can be defined by price (the rate) then ‘easy’/’tight’ money can be defined by availability & supply. Since financial liberalisation in the 1970s – money has certainly been ‘easy’. Credit availability increased and personal borrowing in particular soared.
The period from the mid 1970s until very recently then represents a time of ‘dear’ but ‘easy’ money. We are currently (with the policy response of low rates and QE but a broken banking system) in a period of ‘cheap’ but ‘tight’ money. The long term aim of policymakers appears to be a return to ‘dear’ but ‘easy’ money. This is misguided.
A workplan and an excellent link
Yesterday’s post seems to have got a fair bit of interest and attracted some interesting comments. Jolly good.
Lots of questions to answer – and it’ll take more than the comments box to satisfy them.
So the plan is three more posts on this subject this week – starting tomorrow.
I’ll briefly cover Dalton’s ‘Cheaper Money’ policy of 1945-47: the aims, what worked and what went wrong.
On Thursday I’ll answer Luis (and Giles) more theoretical points. And on Friday I’ll try and update the Keynesian debt and interest rate management policies of the 1940s to modern financial markets.
It’s going to be a busy week…
In the meantime Giles has produced an excellent spreadsheet that lets you play with GDP assumptions: have a try. The link is at the bottom of the page – and whilst you’re there have a read of Giles’ ‘Slash and Grow’ report on Osborne’s plans.
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