The Crunch in 2010
Recent musings on The Economist, Reuters, VoxEU, Prudent Bear, Seeking Alpha et al:
March 1, 2009: A Game of Confidence
Basic economics tells us that:
(1) Confidence levels will impact on the economy via decisions by households, firms and foreign lenders and borrowers as to how they dispose their income and assets.
(2) Confidence is impacted by events in the real economy.
This article looks mainly at some aspects of (1) but pays little attention to (2).
Confidence (or lack thereof) is an attempt to look ahead and adjust behaviour accordingly; e.g. if house prices will continue to rise at 10% per annum, then I can continue to borrow lots of money.
A lot of chat suggests that if we could just restore confidence levels, then all would be well. So, over to you, Mr President.
But the fact is that confidence for much of the decade has been running too high - leading to the problems we know only too well of excess asset prices, debt, and over investment in capacity. So, the reduction in confidence is a necessary adjustment. The problem for us all is finding the right level, when a great deal of government action is likely to make matters worse in the longer term.
Feb 15, 2009: What Eight Central Bankers Think
Follow the link to the Bank for International Settlements web site and you will see that there are numerous recent papers by central bankers and many of them are sensible and thoughtful pieces - though inevitably tending toward the technical end of the spectrum. Common points (without having read them all):
- Confidence that in terms of liquidity, the central banks have got it sorted.
- No indication of much inflation concern.
- To get through this the central banks have used a wider array of techniques than usual; the problem is how to wind back from these extra supports so that the financial sector does not become dependent upon them.
- Maybe asset price inflation is a problem(!)
- Smarter regulation needed.
- Combination of loose monetary policy and light handed regulation in the U.S. created the conditions for the bubble (i.e. thank you Dr Greenspan).
Given they're central banks, they can't comment much (publicly) on their various governments' fiscal positions. So, the big message is they can keep the financial system working. In which case why not get tough with weaker commercial banks and generally focus in on the underlying national and governmental debt issues.
Feb 8, 2009: This Is Just the Beginning
I took two critical points from Schiff's article:
First, that a decline in the U.S. $ will trigger inflationary pressures. Second, (though he doesn't quite put it this way) the big increases in money supply are currently being offset by hoarding / saving by banks and consumers. A movement upward in prices could unravel that fast and lead to huge inflationary pressure.
So, everything depends on the rest of the world accepting increasing U.S. debt and dollars. They have so far but at some point unknown the costs of existing U.S. assets will be less than the increasing incredibility of U.S. commitment to repay in non-hyper inflated $s.
The present situation is v convenient for those seeking a staged withdrawal from the U.S. $.
Contra expatsp, there are plenty of countries (including some of the big Euro members) with much better fundamentals than the U.S. and most will be issuing plenty of bonds to fund their own stimulus and rescue packages. Place your bets...
Jan 29, 2009: Take-aways from Greenspan's time at the Fed
One more take-away: Don't expect professionals to behave well.
Throughout his time at the Fed, Greenspan encapsulated a narrow view of "homo oeconomicus." He repeatedly insisted that professionals in the financial arena knew what they were doing, and should be subject to minimal (if any) regulation. After all, it was not in their best interests to fail, and who knew better than they what the risks were. For example, ""Regulation of derivatives transactions that are privately negotiated by professionals is unnecessary," (Greenspan at Senate Agriculture Committee hearing, July 30, 1998).
That is like saying that drivers of big rigs shouldn't be regulated because they are professionals and they don't want to have an accident.
I suppose Thain (Merrill Lynch) and Fuld (Lehmanns) were very polite and respectful towards Greenspan. But many in the industry were aware of the character of some of their leaders.
A tranche of major writings in economics has looked at how individual behaviour is often short sighted, poorly informed, opportunistic and self-interested; i.e. don't be naive about trusting truck drivers or bankers.
But, even amidst the bust, Greenspan still didn't quite get it. At a Georgetown University speech in October 2008, Greenspan said that the problem is that people "got greedy. A lack of integrity spawned the crisis."
Notice the "got greedy". Greenspan is astonished to find greed lurking on Wall St! Gordon Gecko must be a surprise 21st C phenomenon.
Jan 24, 2009: Geithner on Yuan: Misstep or Warning Shot?
China is dependent on the U.S. for trade. But the U.S. also benefits in that it gets cheap goods.
The U.S. is dependent on China to fund its debt. But China also benefits in that it funds the U.S. purchases of its goods and finds a "safe" home for its money.
Without access to Chinese goods, the U.S. would become uncompetitive on world markets. Without access to Chinese cash, the U.S. is bankrupt.
Without access to U.S. markets, China faces a severe economic downturn and social disorder. Without lending to the U.S., China would undermine its key market and, in weakening the dollar, undermine world trade and its own savings in the U.S.
That is a heavy set of inter-dependencies. So, let's hope the two governments can keep it cool.
Over time, it will be easier for China to reduce its dependency on the U.S. than vice-versa. China can redeploy to other markets and investment areas and build domestic markets. It's moving to do so already.
The U.S. is building its mountain of debt and thus becoming more dependent on creditors, notably China, all the time.
Therefore, at some stage, if needled enough, China will cash in the U.S.'s chips. What's holding them back is: