The Bennett Newsletter
Many economies are failing to recover. Moreover, governments have used up their options and really have few ideas, and certainly no funding, for what to do next. Events seem to be confirming my 2008 prediction that we would not have a “v” bounce-back recovery, as most pundits asserted, but an “L”, a fall followed by grim attempts to get growth.
Politicians will never accept that wholesome growth cannot occur until deleveraging has finished, assets have been re-priced and consumers are again confident. The British and American leadership have been resolute in stabilizing the financial sector, and then spending billions to stimulate the economy. New Zealand, for example, continues to borrow $300 million a week to follow similar policies. These measures have relieved pain but not restored robust growth.
But Hey! Growth is around the corner? Take a look at treasury in NZ, UK and USA: the optimistic future is unabated. They had not predicted a “soft-patch” in 2011 but they are all confident that things are getting better, next year is good, and 2013-15 are brilliant. The economies will be better, so much so that budget deficits will start to disappear and debt reduction will be on the agenda. Wow!
Actually, Nouriel Roubini is talking about a perfect storm hitting the world economy in 2013 as Europe’s debt crisis peaks, the Chinese economy has a hard landing, and Japanese and US fiscal problems appear insurmountable.
But Roubini aside, there is no coherent explanation in the US and UK on why a “soft-patch” suddenly appeared in their tracks. The UK has slashed government expenditure, and inflation would be a problem, but its government brims with confident projections. Even Germany had falling exports and industrial production last month.
The US has hit the wall rather than a soft-patch. The situation is so severe that many people are demanding a revival of massive QE2-type spending which had flooded markets with energizing newly printed money. As will be discussed, the markets are shrivelling without the stimulus and the bond-market has committed hara-kiri by accepting yields of less than 3% for 10-year bonds because it believed that Ben Bernanke would deliver even more quantitive easing.
This is a moment of truth. Should the US and other governments continue to reinforce failure? Should they continue to borrow large amounts of money in order to try to maintain markets in positive territory and to increase demand and therefore employment? The leadership has tried Neo-Keynesianism. They have fired their bullets and debt is the major outcome.
There has been an insatiable demand for liquidity. Liquidity for everything from paying out benefits, stimulating employment to giving banks enough funding to operate, to start munted car-companies and to recover banks. The Federal Reserve is traumatised by failure and has signalled that its QE2 experiment is over. “Monetary policy cannot be a panacea”, Dr. Bernanke admits.
US problems
The economy is stagnating and the joblessness increasing. Energy and food costs are crucial short-term contributors to the malaise, but the housing problem is the sickness behind the US slump. House prices rose 131% 1997-2006, or approximately 10% p.a.--long enough for people to assume that getting a mortgage was the way to wealth. But the market fell by 34% 2006-2011 and is still falling.
US authorities have made job-creation their major task but the present official unemployment rate is 9.1%; and the US needs to boost payrolls by at least 100,000 a month to prevent unemployment growing. Only 54,000 jobs were created in May despite a confident government prediction that the late spring month would see four times that number of new jobs. Officials now talk about “choppiness” (caused by petrol prices) in a rising trend.
Obviously massive spending by the administration cannot create the jobs they confidently expected from an unprecedented economic stimulus package.
It is politically impossible to say “we do not know how to create more jobs”. So politicians are reduced to grasping at phantoms. One phantom is the “export-led growth” concept. The lower dollar will increase exports. It has. But US manufactures have hollowed out and US needs in this area are satisfied by imports. A lower dollar has made imports more expensive.
So what happened in US trade last month? Higher exports added 1% to GDP but this was swamped by much higher import costs. It will take a long time to build a trade surplus.
The other phantom dear to Republican hearts is the stimulus of tax cuts. According to WSJ, they are again pressing to cut the top rate “so that small businesses and large corporations will have the cash to add workers”.
This argument is clearly fallacious as US business is awash with cash. It has combined record profits with staff layoffs. Rather than make the rich richer, the Republics ought to work out how to put money into the less well-paid hands as they would spend extra money and stimulate growth. But that also weakens revenue and worsens the budget deficit and adds to the national debt which has been capped at US$14.3 trillion. Tax cuts for the rich also adds to the US’s massive income inequality: at present the top 1% gets more than 20% of total incomes. In comparison the top 1% in Germany gets 11% of all income.
With strapped and restricted finances, US Treasury has warned that it will have to stop some spending; either interest on debt, or pensions. Both were unthinkable in the past, and any default on interest would downgrade the US’s credit rating from AAA to junk. The republicans say prioritize; pay interest first, other bills later but Treasury says prioritization would be an ‘operational nightmare” and might scare the bond-holders at a time when $500 billion has to be rolled over.
The Economist says the US has “policy fatigue”. That trivialises the US’s fundamental problems.
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