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.