Archive for the ‘Germany’ Category
… the pain of Stagnation in the West (incl Japan) [via de-leveraging, balance-sheet recession, deep structural change, re-balancing of the global economy, surplus labor, ...]
Today, fears are growing that China and India are about to be the next victims of the ongoing global economic carnage. This would have enormous consequences. Asia’s developing and newly industrialized economies grew at an 8.5% average annual rate over 2010-11 – nearly triple the 3% growth elsewhere in the world. If China and India are next to fall, Asia would be at risk, and it would be hard to avoid a global recession.
In one important sense, these concerns are understandable: both economies depend heavily on the broader global climate. China is sensitive to downside risks to external demand – more relevant than ever since crisis-torn Europe and the United States collectively accounted for 38% of total exports in 2010. But India, with its large current-account deficit and external funding needs, is more exposed to tough conditions in global financial markets.
Yet fears of hard landings for both economies are overblown, especially regarding China.
While China is in better shape than India, neither economy is likely to implode on its own. It would take another shock to trigger a hard landing in Asia.
One obvious possibility today would be a disruptive breakup of the European Monetary Union. In that case, both China and India, like most of the world’s economies, could find themselves in serious difficulty – with an outright contraction of Chinese exports, as in late 2008 and early 2009, and heightened external funding pressures for India.
While I remain a euro-skeptic, I believe that the political will to advance European integration will prevail. Consequently, I attach a low probability to the currency union’s disintegration. Barring such a worst-case outcome for Europe, the odds of a hard landing in either India or China should remain low.
Seduced by the political economy of false prosperity, the West has squandered its might. Driven by strategy and stability, Asia has built on its newfound strength. But now it must reinvent itself. Japanese-like stagnation in the developed world is challenging externally dependent Asia to shift its focus to internal demand. Downside pressures currently squeezing China and India underscore that challenge. Asia’s defining moment could be hand.
Without any commentary. A collection of accounts and descriptions of the situation WE are in.
Jul 29th 2011, 8:45 by Buttonwood
PERHAPS the oddest thing about the debt ceiling debate to an observer from the east side of the Atlantic is the process itself. In Britain (and in the rest of Europe, as far as I am aware), the government proposes a Budget, the opposition votes against it and that is it. If the government is defeated on a key issue of financing (which the debt ceiling surely represents), then the administration resigns, an election is held and a new government comes to power. Finance is so essential to the nature of government that the idea of separating the budgeting power from the executive branch seems no way to run a country. Yesterday’s shenanigans, where the House spent all day trying and failing to pass a bill that faced automatic rejection in the Senate, resemble a Dickensian satire featuring the Circumlocution Office, a body designed to ensure that nothing gets done.
Anyway, it seems that US may soon have a problem that featured in a column a few weeks ago, running out of money. In the modern world, debt is money and money is debt; the ability to issue debt is essential to the state.
From a historian’s point of view, what is fascinating is that these problems are re-emerging after 40 years of a shift to fiat money, a change that seemed to remove all constraints on money creation. I have argued before that this shift drove most of the developments of the last 40 years from the rise of the finance sector to asset bubbles, and that the 2007/2008 crisis was a watershed moment (like the 1930s and 1970s) from which a new system will emerge. I assumed it would take a decade or so for the ramifications to work through, but the US Congress seems determined to accelerate the process.
Finance and Economics. Jul 30th 2011 | from the print edition
ECONOMIC policy in the developed world over the past 25 years has followed one overriding principle: the avoidance of recession at all costs. For much of this period monetary policy was the weapon of choice. When markets wobbled, central banks slashed interest rates. A by-product of this policy was a series of debt-financed asset bubbles. When the last of those bubbles burst in 2007 and 2008, the authorities had to add fiscal stimulus and quantitative easing (QE) to the policy mix.
The subsequent huge rise in budget deficits was largely the result of a collapse in tax revenues that had been artificially inflated by the debt-financed boom. Britain and America ended up with deficits of more than 10% of GDP, shortfalls that were unprecedented in peacetime.
Those deficits may have been necessary to avoid a repeat of the Depression. Economists will probably still be debating this issue in 75 years’ time, just as they still discuss whether Franklin Roosevelt’s New Deal programme was effective in the 1930s. But the “shock and awe” approach to Keynesian stimulus has an unfortunate consequence. Any decline in the deficit, even to a still whopping 8% of GDP, acts as a contractionary force on the economy: either the government is spending less or taxing more.
As a result governments are reluctant to cut the deficit too quickly for fear of sending their economies back into recession. But unless there is a rapid recovery, the debt will keep piling on, making the ultimate problem harder to solve.
Turning to monetary policy, interest rates are 1.5% or below in most of the developed world and are negative in real terms (the Bank of England kept rates at 2% or more for the first 300 years of its existence). In a normal recovery central banks would be looking to increase rates from crisis levels by now. But high debt ratios (particularly in the household sector) make central banks very uneasy about raising interest rates for fear of ushering in another round of the credit crunch. With the big exception of the European Central Bank, most have repeatedly postponed the moment at which monetary policy is tightened. The parallels with Japan, where interest rates have been at rock-bottom for a decade, are striking.
As for QE, it is hard to tell how successful it has been as a strategy in reviving the economy although it certainly seems to have helped to prop up equity markets. Central banks seem reluctant to push it much further at the moment. But there is no suggestion that the economy is strong enough for them actively to unwind the policy by selling assets back to the markets.
In all three cases the story is the same. Governments and central banks have thrown a lot of stimulus at the economy and the result has been a fairly sluggish recovery. They have painted themselves into a corner. They cannot go forward, in the sense that there is little political or market appetite for more stimulus. But it is also hard for them to go back.
Withdrawing stimulus is not just risky economically, but hard politically, too. In Britain a sluggish second-quarter growth rate of 0.2% has led to talk that the coalition government needs to slow the pace of its austerity programme. But if you actually look at the data, the government has barely begun its deficit-cutting work. In the first three months of the fiscal year public spending is £5.2 billion ($8.5 billion) higher than in the same period of 2010-11, or £3.6 billion higher if interest payments are excluded. An increase in joblessness, leading to higher benefit payments, is not the cause: the unemployment rate is lower than it was a year ago. A rise in value-added tax may have eaten into consumer demand (tax revenues are £5.3 billion higher than in the same period of 2010-11) but VAT also rose in January 2010 and GDP jumped by 1.1% in the second quarter of that year.
The danger for Britain is not just that its deficit-cutting strategy may have an adverse effect on growth. It is also that sluggish growth may prevent it from cutting its deficit significantly. Tim Morgan of Tullett Prebon, a broker, calculates that if the British economy grows at 1.4% annually, half the expected rate, the budget deficit will still be more than 8% of GDP in 2015.
In a sense, the bill has come due for the past 25 years. A policy of avoiding small recessions has resulted in the biggest downturn since the 1930s. Public finances turned out to be weaker than politicians thought. As a result, they have used up all their ammunition tackling the current crisis. Governments in the rich world will have very few options left if the economy weakens again.
Non-independent investment research (Saxo Bank)
STEEN’S CHRONICLE – Another step towards Crisis 2.0? by Steen Jakobsen
The Keynesian endpoint
Since the crisis hit in 2008, world policy makers have basically operated on the idea that creating more debt could create more growth – the basic tenet of classic Keynesian policy. I am increasingly convinced that we are reaching what some have dubbed the “Keynesian endpoint”, where the failure of this Keynesian approach to turn the economic ship yields to a more balanced approach to monetary- and fiscal policies (rather than bail everything out all the time). This turn will occur not because it makes sense, but because circumstances simply leave no alternative.
Time is up
The second point is the increased likelihood that “time is up”. This idea came from my friend and hedge fund manager Dan Arbess of Xerion Capital : “Here’s the thing. Every politician likes to spend, that’s how they get elected. Republicans don’t like taxes, but boy can they borrow. That game is ending so now, there are no more options for spending without taxing. It’s going to get interesting with two totally different worldviews: Democrats tax and spend, Republicans cut taxes and spend…Democrats tend to think government is the solution, Republicans think it’s the problem”. Well put and time is up for the US spending juggernaut, regardless of how it will be stopped.
If we look at key indicators for the EU and the US there is increasingly clear evidence, to which the market has been paying insufficient attention , that time is indeed up and the alarm bells are ringing:
The real risk to Italy, Belgium, Spain, Denmark and other countries remains their internal domestic economic- and political agenda: zero growth means by definition that the debt burden will increase when you are running a budget deficit. This you can live with in transition periods, but we are well into the 10th year of below long-term trend growth and in many countries barely even making it to positive growth. There is a price for this: downgrades, increased yields to finance the debt and a desperate need to keep a primary balance at zero or positive (the budget deficit before interest expenses = primary deficit).
The next few days are important as political events, but the most likely long-term impact is…surprise, surprise: more of the same:
The US dollar will continue to weaken 3-5% per year, the politicians will buy some time into the next election cycle, yields will creep higher and higher for non-core countries, equities will be over-bid relative to bonds as investors are losing faith in governments, and the disparity between the rich and poor will only yawn wider as the latter suffer on the inevitable standard of living declines that are forced upon them by wages that fail to keep pace with cost of living increases.
We have dealt with bigger crises than this before – you only need to go back to your own grandparents – they lived through wars, booms and a depression, and still created wealth beyond anyone’s dream. The big difference? They grew up respecting and expecting hard times, hard work and each other. Today we all want to believe that the last thirty years will be extended by another five to ten years before we start the rebuilding. We are now definitely in Crisis 2.0 early stages, I constantly meet clients and investors who keep complaining I’m too negative – but am I really negative, or am I merely trying to make you aware that the light at the end of the tunnel is not the exit but an approaching freight train? I hope I am wrong. I really do (and I often am) but a touch more reality would help us all.
currencythoughts.com – by Larry Greenberg
Debt Problems and the Currencies July 29, 2011
The U.S. debt crisis has been framed by analysts and investors around the political stalemate that is real and in everyone’s face day after day. The markets wonder how close to the August 2 deadline will officials delay making a deal, and the possibility of no deal until closer to mid-August emerged this week. Expectations have been lowered regarding the composition of an agreement and how much time it will buy before the next fabricated crisis surfaces as has occurred time and again in the euro area.
But a less discussed dimension of the problem is now pushing its way into the spotlight, and this concerns the tolerance of the advanced economies against fiscal and monetary restraint. Sufficient deficit reduction might not be possible under either an all-partisan Democrat plan or an all-partisan Tea Party plan. These strategies need adequate economic growth to succeed, but the U.S. economy is more crippled than generally realized.
- Real GDP expanded just 0.8% annualized in the first half of 2011 when the bulk of QE2 was provided. A year ago, the FOMC was forecasting a real GDP growth range in 2011 of 3.5-4.2%, and private-sector projections were centered somewhat above 3.0%. The optimism of these estimates highlights that the economy’s usual resilience isn’t as strong as such was.
- U.S. real GDP expanded only 1.6% in the year between 2Q10 and 2Q11 and managed only a 0.2% annualized pace during the four years between the second quarter of 2007 (just before the financial crisis began) and the second quarter of this year.
- Anemic U.S. growth is part of a fairly universal phenomenon among advanced economies. Japan’s “lost decade” between 1Q91 and 1Q01 saw real GDP there climb at a 1.1% annualized rate. In the ensuing decade between 1Q01 and 1Q11, real GDP rose even more slowly, 0.5% per annum. The 20-year growth rate between 1Q91 and 1Q11 was 0.8% per annum. In Britain where a Conservative-led government has begun massive fiscal restraint, real GDP rose less than 1.5% annualized in the first half of 2011 and 0.7% over the four quarters between 2Q10 and 2Q11. Growth since the onset of the global financial crisis four years ago has averaged negative 0.4% per year in Britain. Euroland GDP rose by a decent 2.5% over the latest four reported quarters to 1Q11, but the distribution of results among members was highly diverse and included a drop in Greek output of 4.8%. Moreover, euro area GDP during the past four years averaged just 0.1% per year.
I take away three lessons from Japan’s experience. First, the hangover from a financial system can endure more than a generation. Second, the bigger one is, the harder one can fall, and third, reining in public debt requires more than a will to act. One needs an economy that is sufficiently repaired to tolerate austerity. Otherwise, macroeconomic restraint just digs a deeper hole. The Bank of Japan has wanted to normalize rates for fifteen years but is still stymied against doing so, and Finance Ministry officials were looking for an exit strategy when debt was approaching 100% of GDP and are still waiting for the right opportunity as debt hovers near 200% of GDP now.
The U.K. experience offers more warnings to be heeded. British July purchasing manager survey results will be published next week, but recent trends through June portray a difficult time coping with fiscal austerity. The manufacturing PMI fell from 61.5 in January to 51.3 in May, while the service-sector reading declined from 57.1 at the end of the first quarter to 53.9 in June. Slow growth hampers public-sector revenues, and Britain’s budget deficit was no smaller in the first quarter of the current fiscal year than it had been in the first quarter of the previous financial year.
Economic circumstances in the euro area’s peripheral nations have been very difficult as well. Market players love to mock the “clowns” who decide policy in Europe and America but fail to fully comprehend that in representative democracies, policymakers tend to be sounding boards of viewpoints found in the rank and file citizenry, only they hold such positions more extremely. Excessive household and corporate debt tend to be a pre-existing condition for excessive government debt, and Keynesian economic theory suggests that it’s best that balance sheet reductions not be undertaken on a massive scale simultaneously in all three areas.
Another lesson for the United States from Europe is that whatever is done to cauterize the debt problem proves insufficient in the eyes of market players, who pass judgement with their money. To be sure, euro zone leaders have offered up a series of packages that treat symptoms rather than causes of the region’s fiscal mess. It has been said that if half of the concessions made eventually had been taken early in the crisis, market order would have been restored, meaning reduced peripheral bond yield spreads. I suspect not and believe also that nothing the Congress and Obama Administration undertake in the next week or two will manage to correct America’s structural problems or satisfy investors for more than a transitory while.
- Time works against you in environments of crisis, fear, uncertainty and contagion effects.
- Public bickering about possible solutions is not helping, is unproductive.
- Solution needs to be European for a European problem through and through. They have to take ownership. All have to be in the same boat.
In early May I quoted Nouriel Roubini and his description (“challenging policy framework”) for England’s economy and its monetary and fical policy decisions it took.
Now BNP Paribas is backing him up and joining the guard of economists who see a decade of sub-par growth for the developed world (exclude Germany and other export and resource based nations like Scandinavians or Australia) while the emerging nations speed ahead in a New Normal (PIMCO) world (aka multi-speed world (IMF)).
[T]he Bank of England will achieve little by raising rates from their record 0.5pc low in a bid to rein in the pace of price rises, they argued.
“We do not believe the Bank of England will raise rates this year or next,” said Paul Mortimer-Lee, global head of market economics at BNP Paribas. “There is no point in hiking rates to slow the economy — it’s too slow already and fiscal consolidation will stop it from overheating.
“The only reason for a rate hike is to keep inflation expectations and wage rises down. [But] unemployment is already subduing wages.”
Mr Mortimer-Lee holds that one-off shocks — rises in the global cost of oil and food, a fall in the pound and the recent rise in VAT — explain away much of the UK’s inflation problem. That should mean CPI inflation will fall quickly next year as these factors ebb away, ending 2012 around the 2pc target.
In the meantime, increasing the cost of borrowing through a rate rise would do little to tackle inflation, since prices are being driven up by global thirst for oil and other commodities, rather than robust domestic demand.
Others counter that a rate rise is needed to stop expectations of ever-rising prices become entrenched, and so becoming self-fulfilling.
The predictions came as economists at Royal Bank of Scotland said economic growth looked on track to come in at just 0.6pc for the second quarter of this year.
Growth was 0.5pc in the first quarter of 2011, but this merely reversed the 0.5pc fall seen as the snow hit in the final three months of 2010 — signalling that the economy had flatlined for six months.
A weak growth figure for April to June would reinforce expectations the Bank will hold rates for a while yet.
And after George Osborne put out his first budget, the OBR raised the concern that the governments growth outlook will only work if private sector stops deleveraging in aggregate and picks up what the public sector is intending to cut in real terms.
The Office for Budget Responsibility has raised its prediction of total household debt in 2015 by a staggering £303bn since late last year, in the belief that families and individuals will respond to straitened times by extra borrowing. Average household debt based on the OBR figures is forecast to rise to £77,309 by 2015, rather than the £66,291 under previous projections.
Economists say the figures show that George Osborne’s drive to slash the public deficit and his predictions on growth are based on assumptions that debt will switch from the government’s books to private households – undermining his claims to be a debt-slashing chancellor.
Latest mention of OBR figures are here.
[C]ourtesy of the WSJ blog, we learn that, for the first time in history, a spokesman for Jean Claude Juncker, the PM of Luxembourg, and the head of the Eurogroup council of eurozone finance ministers, admits openly to having lied to media outlets.
“There was a very good reason to deny that the meeting was taking place.” It was, he said, “self-preservation.””
“When it becomes serious, you have to lie.” – Luxembourg PM Jean-Claude Juncker
It is a tragedy that politicians have mistaken Economics and Finance with … Politics. But only in latter occupation do you still have a pension even when you were full of c*** during your term-time.
Kotlikoff Forecasts `Bond Market Crash’ on Federal Debt
Laurence Kotlikoff, a professor of economics at Boston University and a Bloomberg columnist, talks about the U.S. budget deficit and federal debt, and the likelihood of a “bond market crash” as a result.
We are really engaged in a long-term ponzi scheme; taking money from young people and giving to old people. [...] And the fight between Republicans and Democrats is really just a side show of what is really going on.
Any indicator shows that we are heading into a crisis. [...] It’s time to get out of US Bonds.
[US] had economic growth over 40 years. And the [debt] situation gotten worse and worse.
Kotlikoff wrote about THIS coming storm since the 90′s, see a search on Amazon and his very first account with “Generational Accounting”
‘It is the Weimar Republic; print your money to coverer your expenses.’
I wrote months ago, that Ministers need to get together and agree on an enforceable short- and long-term plan. So far the situation deteriorates (market nerves) further every week, and the ECB is forced to smooth it out (buy up bonds). Angela Merkel still denies publicly in-front of voters there is and will be no transfer union and Eurobonds. But we have it already; the bailout of G and one I out of the PIIGS, the EFSF and the ESM.
As the ECB’s Athanasios Orphanides told the Wall Street Journal, the eurozone risks another investor panic if it does not get a grip soon. “The longer our political leadership delay in agreeing on a framework that will ensure stability, the greater the threat that we may have another crisis similar to what we experienced in 2010,” he said. Quite.
It is remarkable that this endless eurozone saga should still be going on amid robust global recovery (for now). But then EMU’s dysfunctional system is a remarkable beast, and has a remarkable ability to turn a largely successful and dynamic region into less than the sum of its the parts.
The German economic elites seem more worried about inflation brewing at home than the ups and downs of Club Med bond yields, and these concerns will be even greater after the IFO confidence for February reached the highest since 1969. The PMI manufacturing index also surged to 62.6.
It is a nice problem to have, but German economists looking one step ahead have good reason to be alarmed. As Jörg Kramer from Commerzbank said this morning, the ECB’s 1pc rate (and limitless support for EU banks) is “much too expansionary for a fast-growing Germany”.
Germany is at last becoming a victim of EMU’s one-size-fits-all interest rate. Join the club. It risks doing to them – though to a lesser degree, obviously – what it did to Ireland and Spain during the bubble when real rates (for them) were minus 1pc, minus 2pc, or minus 3pc, for year after year, with calamitous results.
ZIRP does already affect price mechanisms globally in the commodities market because financial markets and capitalism is global and the race for higher rates of return on capital is global. Ben’s printed Dollars are NOT staying within the USA and its low-growth prospect. Keynes did wrote in his works that stimulus works best in closed market, but today’s students attend only the minimum of classes required, and thus we ignore the fact the we have open markets.
In case for Germany; rising prices for property and real estate getting attention from the media. And experts talking about very good two years.
Solidarity is total, we are told. Germany will do whatever it takes to defend the euro and Europe, we are told. It will meekly accept its ECB-driven inflation for the greater good of Greece, Italy, Spain, Portugal, and Ireland, and for the brotherhood of man, of course, of course.
No problem then.
Update 28/02/2011 – Link to rising home prices in Germany, the last 2 years have been up only accroding to numbers from the Deutsche Bundesbank.
German Foreign Minister said in an statement regarding the recent Wikileaks Cable incident; that Wikileaks will make money with the documents, that they got hand of the documents in an unlawful fashion, and that the information in these documents is gossip but endangers informants others. Not pleasant but not important in current dealings.
GTFO you joke.
Minute 6:30. (alternative)
Every word out of his mouth a misrepresentation, lie and belittlement. Westerwelle does not help here to bring more trust into diplomacy, politics, back-room talks and transparency.
Update 11/30/2010; According to Bloomberg, Wikileaks next traget is WallStreet.
Jean-Claude Trichet, President of the ECB: “Confidence is the most important ingredient in the industrialised world.”
EMU – Economic Monetary Union.
Restore confidence to consolidate the recovery: confidence in the household for consumption and investment; confidence in the entrepreneurs and corporate businesses for their own investment and pathing the way for the future; and confidence in the investors. If governments and parliaments can demonstrate that they have the appropriate plan to sustainable pace of fiscal policy, then we are increasing confidence. And it plays for the recovery consolidation.
GDP will be hit by fiscal squeeze. Low Euro will off-set some pain due to exports.
Growth in the eurozone will be hit by government belt tightening, says the EIU in its latest forecast adding that euro will also hover at a lower level against the US dollar in to 2011. (via Economist Intelligence Unit)