Credit Writedowns

Daily comments on finance, economic and market news for 6 Jun 2013

The Daily Telegraph produced this chart based on OECD data on housing markets around the world. It shows which markets are most undervalued and which are most overvalued on a price to rent and price to income ratio basis. Take a look and see how this compares to a similar analysis The Economist did.

I have two topics I want to highlight this morning. First, there are the US housing inflation numbers from Case Shiller, which are at a 7-year high. Then there is the fiscal drag in the US, Denmark, the UK, the Euro Zone and Canada. What I see everywhere here is continued faith in monetary policy and a lack of faith in fiscal policy. And I believe this is important in terms of predicting policy and economic outcomes.

So QE cannot possibly offset the effects of fiscal tightening in the lives of ordinary working people – the largest part of the population. In fact because it seems to discourage productive corporate investment, it may even reinforce downwards pressure on real incomes. And when the real incomes of most people fall, so does demand for goods and services, which puts downward pressure on prices, driving companies to reduce costs by cutting hours, wages and jobs. This form of deflation is a vicious feedback loop between incomes, sales and consumer prices, which in my view propping up asset prices can do little to prevent.

I see that Paul Krugman has shifted his rhetoric in a recent post on British government economic policy. Let me explain how in this post so that I can make a point as to how bond market vigilantes actually work.

This is a second daily commentary today to give some weight to what’s happening in the US after a slew of European-themed posts. I have three or four topics to cover here and I want to begin with the US economy including some thoughts on the housing market, demand for credit, and the Fed’s policies and regulations. I also want to connect this back to the 2013 variant of the global growth slowdown where Europe is leading the way. I have a bunch of links at the end that highlight most of these issues.

Actually this post isn’t about fiat currency despite the title. It’s really more about what is occurring outside the eurozone and most of the links I have concern the US, UK and Japan. Nevertheless, the three countries do pose a good trio in terms of understanding the effects of macroeconomic policy on economic performance in fiat currency regimes.

Osborne has said in the past that his austerity approach is the right one and has pointed to a 2010 paper on government debt and growth by Carmen Reinhart and Kenneth Rogoff as evidence his approach is the right one. Given the recent furore over errors in the data used in that influential Reinhart-Rogoff paper, the British data and Osborne’s conclusions based on that data take on more significance internationally.

I hate to sound like a broken record here, but I believe the anti-austerians have it all wrong about the politics of austerity. Everywhere I look, there is some analysis that takes the statements of policy makers and big investors as evidence that we are seeing a paradigm shift away from austerity. Don’t believe it. It isn’t true. The only thing we are seeing is the move from front-loaded to back-loaded austerity. It is an attempt to meet the facts on the ground within the existing economic paradigm, nothing more.

The yen bears have been frustrated by a series of developments. They were unpleasantly surprised by news that the Japanese themselves were large sellers, not buyers, of foreign bonds in the first full week of the new fiscal year. In addition, more often than not, since the BOJ’s announcement, the yen has strengthened, not weakened, in the Tokyo trading session. And the yen bears were unable to absorb the yen buying that capped the US dollar just below the psychologically important, JPY100 level.

Quick note here on the US and the UK to change things up a bit from the Cyprus obsession.

Despite calls from the junior coalition partner the Lib Dems, some businesses and the IMF, we expect Osborne and the Tory-led UK government to maintain the fiscal strategy of austerity. The austerity is counter-intuitively (for some), generating larger rather than smaller deficits and Osborne will have to postpone its deficit reduction targets again.