Daily Commentary: On collapsing money supply and Chinese and Japanese current account deficits
This daily commentary is a bronze level members-only post. I saw a number of commentaries this past weekend and late in the week that were gloomier than one would have expected. In the US, consumer credit is expanding as are jobs and most of the data has been robust of late. Yet, the worries about recession continue – with good reason, I might add.
Topic du Jour: Double dip recession or not
I saw a number of commentaries this past weekend and late in the week that were gloomier than one would have expected. In the US, consumer credit is expanding as are jobs and most of the data has been robust of late. Yet, the worries about recession continue – with good reason, I might add.
First, there is the ECRI, which went out on a limb to call a double dip late last year. They have been getting beat up a lot recently because of the better than expected economic data. Henry Blodget was particularly merciless on Friday:
In recent months, as ECRI’s September call has appeared more and more wrong–again, GDP growth has improved since September–ECRI has done what many Wall Street forecasters do when their calls don’t materialize: Explain that their call didn’t mean what everyone thinks it meant and extend the time frame for their prediction. Some economic indicators are deteriorating, Mr. Achuthan told CNN recently, and the recession will begin soon.
And there’s no doubt that a recession will begin sometime.
But it seems highly unlikely that what ECRI meant when it told clients last September that "the economy is tipping into recession" was that GDP would immediately improve and then stay solid for 6 months, even in the face of startlingly high oil prices.
In fact, if the economy does tip into recession by the fall, it will almost certainly be because of those oil prices, not anything that was visible in ECRI’s Weekly Leading Indicator last September when ECRI made its recession call.
There’s no shame in being wrong about the future. On Wall Street, everyone’s often wrong.
What’s shameful is to deny that you are wrong, even when confronted with evidence that proves it–especially when you are selling a "black-box" forecasting tool that you market as never being wrong.
So, instead of finding ever more tortured ways to explain what it really meant last September and how events are unfolding exactly as it predicted, we think it’s time for ECRI to issue a new report, one that is three simple words long:
"We Were Wrong."
They are sticking to their guns at ECRI though. Here are three data points from the links on why and one against:
- China: that economy is slowing considerably. Two years ago, I wrote about two economists who observed that a labour shortage could spell inflation and trade deficits for China. And this is what we have got. First there was the inflation. But this has been largely brought to heel by the collapsing property bubble. Meanwhile wage rates do continue to rise, adding to some residual cost-push inflation and to a worsening current account. Bloomberg noted last week that China had the biggest trade shortfall in over two decades last month. And Michael Pettis is talking hard landing. Bottom line: China looks weak.
- Japan: the Japanese have also moved into record current account deficit territory. They saw the worst month since record-keeping began in 1985. "[F]ears are intensifying that the country is rapidly moving towards a lasting current-account deficit, which could lead to a reliance on foreigners buying government bonds." To me, this points to not just trade flows but consumer spending weakness and therefore suspect demand for US trade. In my view it shows that the US cannot export its way to sustained recovery. But it also shows that weakness is all around under the surface. It’s not just Europe.
- Money Supply: Ambrose Evans-Pritchard argues "M1 money supply growth in the big G7 economies and leading E7 emerging powers buckled over the winter. The gauge – known as six-month real narrow money – peaked at 5.1pc in November. It dropped to 3.6pc in January, and to 2.1pc in February. This is comparable to falls seen in mid-2008 in the months leading up to the Great Recession, and which caught central banks so badly off guard." AEP is a monetarist. So in his view this is a sign that the global economy is rolling over without enough policy support. I am no monetarist so I don’t see this in the same light but I can say that falling money supply is a negative sign.
- Consumer Debt: Household debt rose for the first time since the crisis during the fourth quarter. And that is a good thing (from a cyclical perspective). My argument is that consumer demand growth should be expected to follow a normal uptick pattern with the business cycle but in a more muted way. So it’s no surprise to me. The question is how much kick will this have and what happens at the end of the cycle. I anticipate that the cycle ends early i.e. in 2013, and that the result is an intense deleveraging from still-indebted households. This increase is only cyclical but it does work against a double dip. The secular trend is deleveraging though.
That’s it for today. Here are the links.
Household debt rose for the first time in three and a half years during the fourth quarter, suggesting Americans were more comfortable borrowing money and potentially laying the groundwork for higher consumer spending.
The shortfall was $31.5 billion, the customs bureau said yesterday. Imports rose 39.6 percent from a year earlier, after a 15.3 percent slump in January, while exports increased 18.4 percent, the bureau said. Data in the first two months are distorted by the timing of the Lunar New Year holiday, which fell in January this year and February in 2011.
Die Rettung der Krisenbank HRE wird für den Steuerzahler noch viel teurer als befürchtet. Ein internes Papier offenbart eine Milliarden-Lücke.
Charles Dumas, chairman and chief economist at Lombard Street Research, told CNBC, "Holland has had a rotten time in the euro so far, the growth rate which was three percent has dropped to just over one percent and the growth rate of consumer spending has dropped to one quarter of one percent in the last ten years."
Iceland appears to be increasingly open to adopting the Canadian dollar as its official currency, with Prime Minister Johanna Sigurdardottir warning over the weekend that the country’s own extremely volatile currency system "can’t remain unchanged." "The choice is between surrendering the sovereignty of Iceland in monetary policy by unilaterally adopting the currency of another country, or become a member of the EU," Ms. Sigurdardottir said in a speech delivered at a Social Democrat Alliance party convention Saturday in Reykjavik.
this deal is between the trustee, Bank of New York, and Bank of America. The investors are NOT party to it and their consent has not been obtained, either properly, via amendments to the PSA, or by any other means. You might say, "Weren’t there 22 big investors who originally signed a letter that led to this deal?" Yes, and that happens to be irrelevant. Those 22 investors didn’t have even as much as 25% in most of the 530 trusts (the necessary percentage to take action against a trustee); there are many trusts in this settlement where these 22 investors have NO interest at all. So Bank of New York can’t pretend it has enough in the way of investors via the investor letter to give it the authority to ignore the PSA.
Vi studerar för att vi vill bidra till samhället, men den som slutar studera efter kanske tio år inser att det är omöjligt att hitta ett jobb på grund av krisen. Vi är förlorade, vi vet inte vad vi ska förändra och hur vi ska förändra samhället, vad vi vill göra
Pero si De Guindos "no convence" a sus socios de que España respetará sus compromisos, el Eurogrupo dejará vía libre al vicepresidente de la Comisión y responsable de Asuntos Económicos, Olli Rehn, para que reactive el procedimiento sancionador por déficit excesivo, que podría acabar en una multa de hasta el 0,2% del PIB (alrededor de 2.000 millones de euros en el caso español).
Timothy had people to talk to in all his languages – not just native speakers, but also people like himself, who were interested in language for its own sake, a small but vibrant subculture of language geeks, one made possible only by the Internet.
Lockerung des Kündigungsschutzes und Kürzungen gesetzlicher Abfertigungen sind geplant
old ‘metallist’ view of money is superstitious, and Dr. Bendixen trounces it with the vigour of a convert. Money is the creation of the State; it is not true to say that gold is international currency, for international contracts are never made in terms of gold, but always in terms of some national monetary unit; there is no essential or important distinction between notes and metallic money; money is the measure of value, but to regard it as having value itself is a relic of the view that the value of money is regulated by the value of the substance of which it is made, and is like confusing a theatre ticket with the performance.
The global liquidity cycle has already rolled over. Assuming that no fresh action is taken, world economic growth will peak within a couple of months and then fade in the second half of the year – with grim implications for Europe’s Latin bloc.
As they have before in the aftermath of financial crises or wars, governments and central banks are increasingly resorting to a form of "taxation" that helps liquidate the huge overhang of public and private debt and eases the burden of servicing that debt. Such policies, known as financial repression, usually involve a strong connection between the government, the central bank and the financial sector. In the U.S., as in Europe, at present, this means consistent negative real interest rates (yielding less than the rate of inflation) that are equivalent to a tax on bondholders and, more generally, savers.
Who, then, should default? Let’s take a tour of the most likely candidates. Portugal is the prime one. Estimates of interest rates and economic growth from the International Monetary Fund suggest that, in order to keep its debt burden stable, the government would need to run a primary budget surplus (excluding debt payments) of nearly 2 percent of gross domestic product — a feat it has achieved in only three of the past 17 years. If it wrote down its debts by 40 percent, the required surplus would be a much more manageable 1 percent of GDP. Markets seem amply prepared for such an outcome: As of Friday, Portugal’s 10-year bonds were trading at a 47 percent discount to face value.
French President Nicolas Sarkozy delivered a stern ultimatum to the European Union at an election rally Sunday, saying he will withdraw France from the Schengen accords, which allow free circulation within most of the bloc’s borders, unless the E.U. hardens its immigration policy.
I am deeply troubled by the Koch brothers’ recent lawsuit, which I regard as a threat to Cato’s ability to continue the fine and important work it has been doing for so many years.