Paul Krugman has noticed that trade has absolutely collapsed with this economic downturn. It is worse than the Great Depression.

Question: is this aiding global re-balancing?

Here are two data points from Europe today which lead to that question.

The BBC reports on Germany:

Germany’s trade surplus fell 43% in August after a drop in exports from Europe’s biggest economy, according to the national statistics office.

Germany exported 8.1bn euros (£7.45bn;$11.95bn) more goods than it imported in August, down from 14.1bn euros in July.

The fall in exports was the first for four months and had not been expected.

Most focused on whether this trade reduction, especially the decline in export from export-powerhouse Germany meant that recovery has stalled.  I think the more important question is whether the trade flows are representative of re-balancing.

On that same subject, we get data from debtor Britain via the Guardian saying the current account imbalance is also narrowing:

The trade deficit has narrowed during the financial crisis from £8bn to £6.2bn in the year to August, while the tentative global recovery is also helping exporters.

Britain’s trade deficit with the rest of the world narrowed modestly in August to £6.2bn as exporters sought to capitalise on the sliding pound, and the recovery in overseas markets.

Yawning trade deficits have been a symptom of Britain’s out-of-kilter economy over the past decade. Mervyn King, the Bank of England governor, has repeatedly said he would like the weakness of sterling to bring about a "rebalancing" in the economy, by boosting exports.

The trade deficit in goods has been narrowing since the crisis began, and official figures released this morning showed that it was £6.2bn in August, down from £6.4bn in July, and more than £8bn in August 2008.

The ONS said exports actually fell, by £100m over the month, but imports fell faster, by £300m, as consumers tightened their belts. However, Vicky Redwood, of Capital Economics, pointed out that exports rose by 1.6% in the three months to August – the first quarterly rise in over a year.

It certainly helps that the pound has fallen apart, but the decrease in Britain’s current account deficit is mirrored in debtor America as well.  So, while trade flows are diminishing, so too are trade imbalances.

Related posts:

• European-Asian trade falls off a cliff
• The Euro and Baltic currency overvaluation
• When will Sterling hit Euro parity?
• The Cult of Zero Imbalances
• Germany: Inflation tames retail sales

Earlier today we learned that the Singapore PMI was much weaker than expected for September 2009, coming in at 50.6 versus 54.4 for August. While this demonstrates that the manufacturing sector there is still rising, it is doing so just barely.  This was the lowest reading since April and should be seen as a clear indication that export-led growth in Asia is stalling.

When I searched the Internet for further word on this development and what other analysts were saying, I came up empty-handed. I am relatively bullish about the prospects of a multi-year recovery given my negative longer-term outlook.  A double-sip recession is not my baseline view, but it is certainly a strong possibility. We should watch the data flow from Asia as a canary in the coal mine suggesting a less robust near-term outlook.

Related posts:

• Rosenberg: ’Asia Revival May Be For Real’
• Consumer confidence sinking
• Stephen Roach is still bearish, no recovery until 2010
• Will Goldman’s Jim O’Neill change his bullish outlook?
• Industrial production implodes

For the last few months I have been casting around looking for bullish data points as counterfactuals to my more bearish long-term outlook. I have found some, but not enough. If you recall, early this year, I stated that we are in depression, making the case for the ongoing downturn as a depression with a small ‘d.’ Nevertheless, I was quite optimistic about the ability of policymakers to engineer a fake recovery predicated on stimulus and asset price reflation and I certainly saw this as bullish for financial shares if not the broader stock market. But, I saw these events as temporary salves for a deeper structural problem.

As a result, I have been on a quest to find data which disproves my original thesis – signs that the green shoots that everyone keeps talking about (and a term I had banned from my site) are part of a sustainable economic recovery. Unfortunately, I have concluded that they are not. This post will discuss why we are in a depression, not a recession and what this means about likely future economic and investing paths. I will try to pull together a number of threads from previous posts, add some context via Wikipedia links and draw in some good discussion via recent posts by Prieur du Plessis on balance sheet recessions and Marshall Auerback on the sector financial balances model of economics which completed the picture for me.

This post is very long and I have had to shorten it in order to pull all of the ideas into one post. Please do read the linked posts for background as I left out some of the detail in order to create this narrative.

Let’s start here then with the crux of the issue: debt.

Deep recession rooted in structural issues

Back in my very first post in March of 2008, I said that the U.S. was already in a recession, the only question being how deep and how long – a question I answered in the next post saying “we are definitely in recession. And according to Gary Shilling, this recession is going to be a big one. Worse than 2001, 1990-91 or the double dip recession of 1980-82.” This has certainly turned out to be true.  The issue was and still is overconsumption i.e. levels of consumption supported only by increase in debt levels and not by future earnings. This is the core of our problem – debt.

I see the debt problem as an outgrowth of pro-growth, anti-recession macroeconomic policy which developed as a reaction to the trauma of the lost decade in the U.S. and the U.K.. This was a period of low growth, high inflation and poor market returns, in which the U.K. became the sick man of Europe and labor strife brought that economy to its knees.  It is a period that saw the resignation of an American President and the humiliation of the Iran Hostage Crisis.

In essence, after the inflationary outcome that many saw as an outgrowth of the Samuelson-Keynesianism of the 1960s and 1970s, the Reagan-Thatcher era of the 1990s ushered in a more ‘free-market’ orientation in macroeconomic policy. The key issue was government intervention. Policy makers following Samuelson (more so than Keynes himself) have stressed the positive effect of government intervention, pointing to the Great Depression as animus, and the New Deal, and World War II as proof. Other economists (notably Milton Friedman, and later Robert Lucas) have stressed the primacy of markets, pointing to the end of Bretton Woods, the Nixon Shock and stagflation as counterfactuals. They point to the Great Moderation and secular bull market of 1982-2000 as proof. This is a divisive and extremely political issue, in which the two sides have been labelled Freshwater and Saltwater economists (see my post “Freshwater versus saltwater circa 1988”).

However, just as the policy of the 1950s to the 1970s was not really Keynesian (read Keynes’ General Theory as Richard Posner did and you will see why), the 1980s-2000 was not really an era of true ‘free markets.’ I call it deregulation as crony capitalism.  What this has meant in practice is that the well-connected, particularly in the financial services industry, have won out over the middle classes (a view I take up in “A populist interpretation of the latest boom-bust cycle”). In fact, hourly earnings peaked over 35 years ago in the United States when adjusting for inflation.

Remember, the 1970s was a difficult period in which the U.K. and the U.S. saw jobs vanish in key industrial sectors. To stop the rot and effectively mask the lack of income growth by average workers, a new engine of growth had to be found. Enter the financial sector. The financialization of the American and British economies began in the 1980s, greatly increasing the size and impact of the financial sector (see Kevin Phillips’ book “Bad Money”). The result was an enormous increase in debt, especially in the financial sector.

This debt problem was made manifest repeatedly during financial crises of the era. Not all of these crises were American – most were abroad and merely facilitated by an increase in credit, liquidity, and international capital movement. In March 2008, I wrote in my third post on the US economy in 2008:

From the very beginning, the excess liquidity created by the U.S. Federal Reserve created an excess supply of money, which repeatedly found its way through hot money flows to a mis-allocation of investment capital and an asset bubble somewhere in the global economy. In my opinion, the global economy continued to grow above trend through to the new millennium because these hot money flows created bubbles only in less central parts of the global economy (Mexico in 1994-95, Thailand and southeast Asia in 1997, Russia and Brazil in 1998, and Argentina, Uruguay, and Brazil in 2001-03). But, this growth was unsustainable as the global imbalances mounted.

Eventually, the debt burdens became too large and resulted in the housing meltdown and the concomitant collapse of the financial sector, a looming problem that our policymakers should have seen. This is why my blog is named Credit Writedowns. But, make no mistake, the housing and writedown problems are only symptoms. The real problem is the debt – specifically an overly indebted private sector (note the phrase ‘private sector’ as I will return to this topic).

This is a depression, not a recession

When debt is the real issue underlying an economic downturn, the result is a period of stagnation and short business cycles as we have seen in Japan over the last two decades.  This is what a modern-day depression looks like – a series of W’s where uneven economic growth is punctuated by fits of recession. A recession is merely a period of recalibration after businesses get ahead of themselves by overestimating consumption demand and are then forced to cut back by making staff redundant, paring back inventories and cutting capacity. Recessions can be overcome with the help of automatic stabilzers like unemployment insurance to cushion the blow. Depression is another event entirely. Back in February, I highlighted a blurb from David Rosenberg which summed up the differences between recession and depression quite well.

Depressions marked by balance sheet compression
Recessions are typically characterized by inventory cycles – 80% of the decline in GDP is typically due to the de-stocking in the manufacturing sector. Traditional policy stimulus almost always works to absorb the excess by stimulating domestic demand. Depressions often are marked by balance sheet compression and deleveraging: debt elimination, asset liquidation and rising savings rates. When the credit expansion reaches bubble proportions, the distance to the mean is longer and deeper. Unfortunately, as our former investment strategist Bob Farrell’s Rule #3 points out, excesses in one direction lead to excesses in the opposite direction.

The next day, I highlighted Ray Dalio’s version of this story because it takes a historical view and rightly emphasizes the debtor instead of the lender as the crux of the problem. Notice the part about printing money and devaluing the currency if the debt is in your own currency.

… economies go through a long-term debt cycle — a dynamic that is self-reinforcing, in which people finance their spending by borrowing and debts rise relative to incomes and, more accurately, debt-service payments rise relative to incomes. At cycle peaks, assets are bought on leverage at high-enough prices that the cash flows they produce aren’t adequate to service the debt. The incomes aren’t adequate to service the debt. Then begins the reversal process, and that becomes self-reinforcing, too. In the simplest sense, the country reaches the point when it needs a debt restructuring…

This has happened in Latin America regularly. Emerging countries default, and then restructure. It is an essential process to get them economically healthy.

We will go through a giant debt-restructuring, because we either have to bring debt-service payments down so they are low relative to incomes — the cash flows that are being produced to service them — or we are going to have to raise incomes by printing a lot of money.

It isn’t complicated. It is the same as all bankruptcies, but when it happens pervasively to a country, and the country has a lot of foreign debt denominated in its own currency, it is preferable to print money and devalue…

The Federal Reserve went out and bought or lent against a lot of the debt. That has had the effect of reducing the risk of that debt defaulting, so that is good in a sense. And because the risk of default has gone down, it has forced the interest rate on the debt to go down, and that is good, too.

However, the reason it hasn’t actually produced increased credit activity is because the debtors are still too indebted and not able to properly service the debt. Only when those debts are actually written down will we get to the point where we will have credit growth. There is a mortgage debt piece that will need to be restructured. There is a giant financial-sector piece — banks and investment banks and whatever is left of the financial sector — that will need to be restructured. There is a corporate piece that will need to be restructured, and then there is a commercial-real-estate piece that will need to be restructured.

Commence the fake recovery

So where are we, then?  We have left the fake recovery and are entering a new era of growth that could last as long as three or four years or could peter out very quickly in a double dip recession. By now, you have seen my post on the fake recovery, so I won’t cover that ground here.  However, I do want to highlight how I came to believe in the fake recovery and how asset prices have played into this period (the S&L crisis played out nearly the same way).  I see writedowns as core to the transmission mechanism of debt and credit problems to the real economy via reduced supply and demand for credit. Again, this is why my site is called Credit Writedowns.

In March, at the depths of the downturn I wrote:

The problem is the writedowns. You see, if you get $30 billion in capital from the government, but lose another $40 billion because of credit writedowns and loan losses, you aren’t going to be lending any money. To me, that says the downturn will only end when the massive writedowns end, not before.

The U.S. government has finally realized this and is now moving to stem the tide. Their efforts point in four directions:

1. Increase asset prices. If the assets on the balance sheets of banks are falling, then why not buy them at higher prices and stop the bloodletting? This is the purpose of the TALF, Obama’s mortgage relief program and the original purpose of the TARP.
2. Increase asset prices. If assets on the balance sheet are falling, why not eliminate the accounting rules that are making them fall? Get rid of marking-to-market. This is the purpose of the newly proposed FASB accounting rule change.
3. Increase asset prices. If asset prices on the balance sheet are falling, why not reduce interest rates so that the debt payments which are crushing debtors ability to finance those assets are reduced? This is why short-term interest rates are near zero.
4. Increase asset prices. If asset prices on the balance sheet are falling, why not create Public-Private partnerships to buy up those assets at prices which reflect their longer-term value? This is what Geithner’s Capital Assistance Program is designed to do.

So I lied, there is only one direction the government is headed: increase asset prices (or, at least keep them from falling). Read White House Economic Advisor Larry Summers’ recent prepared remarks to see what I mean. (Summers on How to Deal With a ‘Rarer Kind of Recession’ – WSJ)

I was more on target in my thinking here than I could have known. Within two weeks, the mark-to-market model was dead and mark-to-make believe had begun. It was then that I knew a recovery was likely to take hold. And it was going to be bullish for bank stocks and the broader market. What you should realize is that, despite the remaining problems in credit cards, commercial real estate or high yield loans, limiting credit growth, the changes instituted by government definitely have meant 1. that banks will earn a shed load of money and 2. that house price declines have stalled, underpinning the asset base of lenders. This necessarily means an end to massive writedowns, a firming of banks’ capital base, and a reduction in private sector deleveraging.

As an aside, I should mention that this dynamic called the asset-based economy, where economic well-being is dependent on asset prices, is far more pronounced in Anglo-Saxon countries like the U.S. and the U.K. (and Australia, Ireland, and Canada to a degree). While the free market ideal has gained sway globally, it is viewed with much more skepticism elsewhere. In Germany, for example, the term Anglo-Saxon is often bandied about as an epithet for political demagoguery to represent free market ideology. These cultural differences are something I explored in my post “Cultural attitudes on work, leisure and wealth in Europe and America.”

As for the recent asset-based economic reflation, be under no illusion that these measures ‘solve’ the problem. The toxic assets are still impaired and banks are still under-capitalized. But the increased asset value and the end of huge writedowns has underpinned the banks and led to a rise in the broader market in a feedback loop that has been far greater than I could have imagined at this stage in the economic cycle.

The double dip or the economic boom?

So what’s next?  A lot of the economic cycle is self-reinforcing (the change in inventories is one example). So it is not completely out of the question that we see a multi-year economic boom.  Higher asset prices, lower inventories, fewer writedowns all lead to higher lending capacity, higher cyclical output, more employment opportunities and greater business and consumer confidence. If employment turns up appreciably before these cyclical agents lose steam, you have the makings of a multi-year recovery. This is how every economic cycle develops. This one is no different in this regard.

However, longer-term things depend entirely on government because we are in a balance sheet recession. Ray Dalio and David Rosenberg make this case well in the previous quotes I supplied, but it was a recent post about Richard Koo from Prieur du Plessis which got me to write this post. His post, “Koo: Government fulfilling necessary function” reads as follows:

According to Koo, American consumers are suffering from a balance sheet problem and will not increase consumption until their personal finances are back in order. The banks are not lending mainly because nobody wants to borrow and, furthermore, the banks want to build their own balance sheets (raise cash) and get rid of toxic garbage…

Again, when asked what would happen if the government cuts back on its fiscal stimulus, Koo replies: “Until the private sector is finished repairing its balance sheets, if the government tries to cut its spending, we’re going to fall into the same trap Franklin Roosevelt fell into in 1937 (a crushing bear market) and Prime Minister Hashimoto fell into in 1997, exactly 70 years later.

“The economy will collapse again and the second collapse is usually far worse than the first. And the reason is that, after the first collapse, people tend to blame themselves. They say, ‘I shouldn’t have played the bubble. I shouldn’t have borrowed money to invest – to speculate on these things.’

This view of a second, more serious downturn mirrors the one I wrote of when I wrote about high structural unemployment last week. And, again, it is predicated on what government does.  I wrote last November that if government stops the support, recession is going to happen.

The U.S. economy cannot possibly work itself out of the greatest financial crisis in some 70-odd years in a mere 4 years and then expect to raise taxes on the middle class without a major recessionary relapse.

So, when you hear policy makers talking about reducing the deficit as soon as possible, what you should think is 1938 and continued depression.

Right now, if you listen to what President Obama is likely to do when we see more economic growth, you know that the government prop for the economy is going to be taken away. Koo again:

So the fact that Larry Summers was talking about ‘temporary’ fiscal stimulus had me very, very worried. That whole Larry Summers idea that one big injection of fiscal stimulus will get the US out of the recession, and everything will be fine thereafter, probably led to President Obama’s saying he’s going to cut his budget deficit in half in four years.”

Get ready because the second dip will occur. It will be nasty: unemployment will be higher and stocks will go lower than in 2009. I am convinced that it is politically unacceptable to have the government propping up the economy as Koo suggests it should. The question now is one of timing: when will the government stop propping up the economy? The more robust the recovery, the quicker the prop ends and the sooner we get a second leg down.

So to recap:

1. A depression was borne out of high levels of private sector debt, the unsustainability of which became apparent after a financial crisis.
2. The effects of this depression have been lessened by economic stimulus and government support.
3. Government intervention led to a reduction in asset price declines, which led to stock market increases, which led to asset price stabilization and more stock market increases and eventually to asset price increases. This has led to a false sense that green shoots are leading to a sustainable recovery.
4. In reality, the problems of high debt levels in the private sector and an undercapitalized financial system are still lurking, waiting for the government to withdraw its economic support to become realized
5. Because large scale government deficit spending is politically impossible, expect a second economic dip within three to four years at the latest.

Why is government spending necessary?

The government plays a crucial role here because of the huge private sector indebtedness.  In the U.S. and the U.K., the public sector is not nearly as indebted. So while, the private sector rebuilds its savings and reduces debt, the public sector must pick up the slack.  Why do I say must? It’s because of an accounting identity which comes from the financial sector balances model. Marshall Auerback says it best in a recent post:

We’ve said it before and we’ll say it again. As a matter of national accounting, the domestic private sector cannot increase savings unless and until foreign or government sectors increase deficits. Call this the tyranny of double entry bookkeeping: the government’s deficit equals by identity the non-government’s surplus.

So, if the US private sector is to rebuild its balance sheet by spending less than its income, the government will have to spend more than its tax revenue. The only other possibility is that the rest of the world stops saving on a massive scale — letting the US run a current account surplus. But that is highly implausible and socially undesirable, since it means we export our economic output, rather than consume it domestically. And if the government deficit does not grow fast enough to meet the saving needs of the private domestic sector, national income will decline, which, given the size of the private sector’s debt problem, will generate a huge debt deflation.

This is the foundation of modern monetary theory. Would that the IMF and the G20 understood these basic facts.

If the private sector is a net saver, the public sector must, I repeat must, run a deficit. That’s the law of double entry book-keeping. The only other way to prevent the government from running a deficit when the private sector is net saving is to run huge current account surpluses by exporting your way out of recession – what Germany and Japan tried in the 1990s and in this decade. But, of course, the G20 and the IMF are all talking about global re-balancing. This cult of zero imbalances is something Marshall first brought forward back in April. And it ignores the accounting identity inherent in the financial sector balances model. I highlighted this model in my post, “Minsky: Turning neoclassical economics on its head.” However, I must admit to having a preternatural disaffection for large deficits and big government which is what Koo and Minsky advise respectively – a recent cartoon shows why.  It is this knee-jerk aversion to what is viewed as fiscal profligacy which is at the core of the cult of zero imbalances.

So, what does this mean for the American and global economy?

1. The private sector (particularly households) is overly indebted. The level of debt households now carry cannot be supported by income at the present levels of consumption. The natural tendency, therefore, is toward more saving and less spending in the private sector (although asset price appreciation can attenuate this through the Wealth Effect).  That necessarily means the public sector must run a deficit or the import-export sector must run a surplus.
2. Most countries are in a state of economic weakness. That means consumption demand is constrained globally. There is no chance that the U.S. can export its way out of recession without a collapse in the value of the U.S. dollar. That leaves the government as the sole way to pick up the slack.
3. Since state and local governments are constrained by falling tax revenue (see WSJ article) and the inability to print money, only the Federal Government can run large deficits.
4. Deficit spending on this scale is politically unacceptable and will come to an end as soon as the economy shows any signs of life (say 2 to 3% growth for one year). Therefore, at the first sign of economic strength, the Federal Government will raise taxes and/or cut spending. The result will be a deep recession with higher unemployment and lower stock prices.
5. Meanwhile, all countries which issue the vast majority of debt in their own currency (U.S, Eurozone, U.K., Switzerland, Japan) will inflate. They will print as much money as they can reasonably get away with.  While the economy is in an upswing, this will create a false boom, predicated on asset price increases. This will be a huge bonus for hard assets like gold, platinum or silver.  However, when the prop of government spending is taken away, the global economy will relapse into recession.
6. As a result there will be a Scylla and Charybdis of inflationary and deflationary forces, which will force the hands of central bankers in adding and withdrawing liquidity. Add in the likely volatility in government spending and taxation and you have the makings of a depression shaped like a series of W’s consisting of short and uneven business cycles. The secular force is the D-process and the deleveraging, so I expect deflation to be the resulting secular trend more than inflation.
7. Needless to say, this kind of volatility will induce a wave of populist sentiment, leading to an unpredictable and violent geopolitical climate and the likelihood of more muscular forms of government.
8. From an investing standpoint, consider this a secular bear market for stocks then.  Play the rallies, but be cognizant that the secular trend for the time being is down. The Japanese example which we are now tracking is a best case scenario.

Not particularly uplifting, but hopefully well-documented. Your comments are very greatly appreciated.

Related posts:

• We are in depression
• Household debt as an indicator of secular bull and bear markets
• What is an economic depression?
• Some tidbits about stimulus, recovery, and the Great Depression
• What’s different about 2008?

Marshall Auerback here. This is a cross-post from an article I wrote at the finance site New Deal 2.0, a one-stop-shop for current news, sharp analysis and potential solutions of the country’s fiscal crisis.

We’ve said it before and we’ll say it again. As a matter of national accounting, the domestic private sector cannot increase savings unless and until foreign or government sectors increase deficits. Call this the tyranny of double entry bookkeeping: the government’s deficit equals by identity the non-government’s surplus.

So, if the US private sector is to rebuild its balance sheet by spending less than its income, the government will have to spend more than its tax revenue. The only other possibility is that the rest of the world stops saving on a massive scale — letting the US run a current account surplus. But that is highly implausible and socially undesirable, since it means we export our economic output, rather than consume it domestically. And if the government deficit does not grow fast enough to meet the saving needs of the private domestic sector, national income will decline, which, given the size of the private sector’s debt problem, will generate a huge debt deflation.

This is the foundation of modern monetary theory. Would that the IMF and the G20 understood these basic facts. The anodyne communiqué from last weekend’s Pittsburgh summit makes clear that this is not the case. Western policy makers appear determined to consign us to years of additional economic misery because of the continued embrace of a flawed market fundamentalist economic paradigm.

So far, instead of trying to revive the productive economy, most of the G20’s resources have consisted of mouth-to-mouth resuscitation for a dying financial sector. This has not “worked” to the extent that last weekend’s communiqué advertised. The best analogy to describe the current state of our financial system is that we have placed scaffolding over a decaying building, but done little to repair the underlying structure. What happens when the economic scaffolding is removed via “exit strategies”, as the G20 participants have advocated?

For many generations, we didn’t face the unprecedented financial fragility we are experiencing today. But there are good reasons why we avoided this until recently. We have spent the past quarter century eviscerating what was fundamentally a robust structured originally devised during New Deal, a system which basically saved the US capitalist system and served the interests of its citizens very well until it was hijacked by a bunch of corporate predators under the guise of deregulation and neo-liberalism.

To read the communiqué from the Pittsburgh summit is to gain insight into an ideology which views government, not as a stabilizing influence protecting us from private sector rent seeking monopolists. Rather it’s an unwanted stepchild, brought out on display as a necessary evil, and destined to be shoved away as soon as we get back to a “normal” economic state of affairs, where the government minds its own business and lets the magic of the “free market” operate. Hence, the emphasis by the Pittsburgh summiteers on “sustained, strong and balanced growth“, the usual code words designed to encourage budget surpluses, more private sector savings and shift from public to private sources of demand.

There is little understanding that if households and firms try to net save (save more out of income flows than they tangibly invest) incomes collapse, and desired private net saving is thwarted. The private “excess saving” cannot exist without a budget deficit or a trade surplus. Many people make this mistake. At best, we can talk about planned private saving being in excess of planned private investment, but other than that, we are violating double entry book keeping principles.

And consider this: in 1998, 1999 and 2000 (increasing each year), the US government “virtuously” ran budget surpluses. And guess what happened? The private sector became more heavily indebted than before as the fiscal drag squeezed liquidity and destroyed aggregate demand and incomes. Along with our misconceived embrace of financial deregulation, the combined result was sharply rising unemployment and a major recession in 2001-02 with unemployment rising sharply and the automatic stabilizers pushing the budget back into deficit.

Unfortunately, that was the yellow flag for what was to follow, a warning signal blithely ignored by our economically illiterate policy makers. Instead, we perpetuated a massively leveraged financial system via Frankenstein financial products such as collateralized debt obligations, and credit default swaps. We squeezed private sector incomes via constrictive fiscal policy, thereby inducing the debt-fueled consumption that is now regularly decried by our officialdom and the commentariat.

The bottom line is that if we want habitual private sector savings, we need habitual government deficits.

And government deficits are not an aberration; they are the norm. Our first (and possibly greatest) Treasury Secretary, Alexander Hamilton, called the national debt a “national blessing”. Similarly, Paul Krugman and L Randall Wray have argued that it was World War II and the subsequent cold war that ended the depression, which created the foundations for a significant expansion of government debt, which in turn set the stage for the “Golden Age.” The government deficit reached 25 percent of GDP during the war, providing a massive amount of private sector saving in the form of safe financial assets that strengthened balance sheets. From 1960 onward, the baby boom drove rapid growth of state and local government spending, so that even though federal government spending remained relatively constant as a percent of GDP, total government spending grew rapidly until the 1970s. This pulled up aggregate demand and private sector incomes, and thus consumption.

This is unsurprising: The private sector cannot create “net nominal wealth” because every private financial asset is offset by a private financial liability. Over the long term, the maximum that a government can hope to collect in the form of taxes is equal to its purchases of goods of services. There is no hope of running long-term budget surpluses because the government cannot possibly collect more than the income it has created as it paid out dollars. When the government attempts this, as it did during the Clinton Administration, the public finds that its net financial assets would be less than its tax liability, requiring households to dip into its “reserves” of accumulated savings, which gradually become depleted. In the absence of other factors, demand slows and the government almost invariably falls back into deficit.

If an external creditor is added (such as China or Japan) it merely delays or extends the process, since for a time, countries running current account surpluses with the US can use their surplus dollars to accumulate additional US dollar financial claims. But in the absence of any increase in US government spending (which is the only source of NEW NET FINANCIAL ASSETS), the end result is still a massive accumulation of private sector debt, which is what got us into this mess in the first place. By contrast, assuming a non-convertible, freely floating fiat currency, a government can never be insolvent even if its tax revenue declines significantly. Its balance sheet can never become precarious in the same way that a household balance sheet can.

In the abstract, this always sounds controversial to those uncomfortable viewing the world within a financial balances construct. It also helps to explain the intellectual incoherence at the heart of the G20 communiqué and the Obama Administration’s economic policies, which has been dominated by Wall Street interests.

So it’s worthwhile considering some historic examples, which illustrate the point better. During WWII, the US government generated huge deficits and bond issues. The record expansion of government deficits not only facilitated the war effort, but created full employment. (As an aside, it is always interesting to pose the following question to “deficit terrorists “: if government budget deficits are so awful, and so egregious for the long term performance of an economy, then why run them at all during wartime, when presumably we need the economy to be functioning in an optimal manner?) After the war, the Fed was concerned with potential inflationary pressures and raised interest rates. President Truman, a hard money man par excellence, drastically cut defense spending from $90.9bn to $10.3bn and the US accumulated huge fiscal surpluses. Post war surpluses, combined with Fed tightening, contributed to a recession in 1949. Unfortunately, it took the “military Keynesianism” brought on by the Korean War to shift Truman away from his aversion to deficit spending, which was continued by Eisenhower, and sustained via his national highways building program. During that period, unemployment decreased. Similarly benign effects on unemployment were manifested in the wake of the Kennedy tax cuts and those of Reagan in the early 1980s.

Today, budget deficits are the highest as a percentage of GDP, but they are overstated to some degree, because they include the TARP measures to stabilize the financial system which brought the global economy to its knees in 2007/08. Classic Treasury expenditures deal with the purchase of real goods and services; Federal Reserve functions deal with the purchase and sale of financial assets. And yet, the focus of policy makers is quickly reverting to “exit strategies” and a reduction of budget deficits, where the Pittsburgh communiqué pledged to “prepare our exit strategies and, when the time is right, withdraw our extraordinary policy support in a co-operative and co-ordinated way, maintaining our commitment to fiscal responsibility.”

If only that were true. The only way one could politically justify a government running a sustained surplus would be to make the case that unemployment created a more functional way of ensuring high profits (via wage discipline) than full employment. Put in those terms, it’s not a particularly compelling message, but it has the virtue of being consistent with modern monetary theory.

Oddly enough, the G20 communiqué devotes considerable attention to the government’s “exit strategies”, which came in response to the destructive private sector financial practices which created this catastrophe. There has been less attention directed to the underlying causes themselves. Thus the IMF, in its latest “Global Financial Stability Report”, suggests that restarting securitization markets is “critical” to a wider economic recovery, and that current US and European proposals to force banks that originate loans to hold on to the first 5% of losses in all securitizations, were not sufficiently flexible and might backfire. In the words of Credit Lyonnais Asia strategist, Christopher Wood:

“[The IMF] is yet again doing the world a disservice by acting as a lobbying group for the securitised debt peddlers. It is clearly fundamentally correct that the agents of securitisation should be made to retain some ’skin in the game’ after the terrible damage they have inflicted. It is true that the collapse of securitisation represents a massive deflationary risk for the global economy. But that does not mean that the answer is to allow a new free-for-all in securitisation assuming, charitably, there is demand for the securitised product.” (”Greed and Fear”, 24 Sept. 2009, CLSA, Asia Pacific Markets)

The IMF, the G20, indeed virtually all policy makers — including the Obama Administration — will make themselves far more relevant when they emphasize that full employment and prosperity can only be achieved to the extent that governments are prepared to spend up to a level justified by non-government saving. That does not mean unconstrained government spending. But the spending ought to be set with regard to results desired and competencies to execute plans — not out of some pre-conceived notion of what is “affordable”. Our federal government can afford anything that is for sale in terms of its own currency. And if it spends too much after getting us to a state of full output, it can get inflationary. But let’s get to that state of affairs first before we start worrying about perpetuating the flawed model of the past. That got us transitory prosperity and wage gains. And it promises years of economic misery if we do not move beyond neo-liberal economic fairy tales.

Related posts:

• Minsky: Turning neoclassical economics on its head
• The Cult of Zero Imbalances
• Low savings, high debt and interest rate policy
• Stephen Roach: Americans’ abandonment of overconsumption is a good thing
• UK consumers don’t save

This is how the famed investor and Chairman of Tiger Management began an interview with CNBC yesterday. Yes, the recession is probably over, he says.  But, in his view there is likely to be problems going forward because the U.S. has so much debt.

The money quote: “It’s almost Armageddon if the Chinese and Japanese don’t buy our debt.”

I am not sure I agree because a recession caused by a fall in the dollar’s value will almost certainly mean a reduction in imports and an increase in savings and domestic purchases of government bonds, something we are already witnessing.

As to inflation versus deflation, consider Robertson an inflationista. He is betting on inflation going higher in his investments. “We could easily see 15 to 20” percent inflation if the Chinese and Japanese go on strike, Robertson says.

Below are both the short video, which runs for the first eight minutes of his interview, and a longer full 30-minute version beneath it.

Related posts:

• China cuts holding of U.S. Treasury securities
• Japanese defend dollar’s status while China tears it down
• Mea culpa on the need for a new currency
• China sovereign wealth fund diversifies into a massive loss
• Faber: Gloom, Boom or Doom?

In what is shaping up to be a common occurrence at these global meetings, protesters are shaking things up.  My understanding, however, is that there are more police on hand than protesters.  Rubber bullets, pepper spray and tear gas have been used.

Below is a five-minute video showing the mood surrounding the G-20 summit in Pittsburgh.

Related articles

Trouble breaks out at G20 summit – BBC News

The G20 Summit in Pittsburgh: Should You Care? – Simon Johnson

Related posts:

• Violence erupts in Iceland
• Simon Johnson: Too big to fail is “too big to exist”
• Baltics: Violence from an Argentina-style collapse
• Ahead of G-20, China blames west and west blames China for meltdown
• Violence erupts in Latvia

I just finished reading a Financial Times article about the likely coordinated global policy solutions to emerge from the upcoming G-20 meeting in Pittsburgh.  It does not sound like there is a huge amount of consensus. Indeed, it sounds like there is a lot of finger pointing regarding what the true causes of the financial crisis were.

China expressed scepticism on Thursday about a US and European push to launch an effort to tackle global economic imbalances at next week’s G20 summit in Pittsburgh.

Zhou Wenzhong, China’s ambassador in Washington, said: “People should not focus on only one thing, that is balancing the economy.” The International Monetary Fund should concentrate on doing a better job of monitoring the build-up of financial risks.

Translation: You lot in the West created a house of cards in the financial sector to fund a drunken binge of excess consumption. Your guy Stephen Roach even says so. Clearly, this is where we need to focus future reforms.

Edward here.  Don’t take my word for it that this is what the Chinese are saying.  Later in the same article, we get the following from Ambassador Zhou:

Imbalances were “certainly not the root cause of the problem”, Mr Zhou said. “The root cause of the crisis is the lack of supervision and abuse of the openness of the market, very risky levels of leverage and too much speculation.”

Unfortunately for Zhou, this is not the interpretation of events being drawn in the West.  Western officials are more interested in correcting ‘global imbalances.’

“Global imbalances have to add up to zero, so if the US is going to be less the consumer and importer of last resort then other countries are going to need to be in different positions as well,” a senior administration official told the Financial Times recently.

Britain, France and other European nations are backing a push on global imbalances at the G20 summit. Gordon Brown, the UK prime minister, said this week: “When I attend the G20, I will be putting the case for a global compact for growth and stability for now and for the future.”

Brown and the other Western leaders are not denying responsibility for the global meltdown as directly as Zhou seems to.  Nevertheless, you must realise that this is a coordinated effort to re-focus the policy debate on China, its pegged currency, trade surplus and huge accumulation of foreign currency reserves.  I call this the Blame Asia meme. I would be curious to hear what the Brazilians, Indians and Russians are saying about all of this.

The question is whether this tiff over who caused the crisis in the first place will impede consensus about coordinated global policy going forward.  No one country or set of policy makers covered themselves in glory in the lead up to this panic.  Yet, because the same set of individuals is still at the table, we now see greater interest in putting a positive spin on past events than on moving forward in a constructive way.

Correct me if I am wrong.  It sure looks like we shouldn’t expect anything substantive to result from the G-20 meeting in Pittsburgh.

Source

China scorns focus on imbalances – FT

Related posts:

• Tear gas and rubber bullets at G-20 Protests
• China wants to get rid of the dollar
• Japanese defend dollar’s status while China tears it down
• G-20: China is clearly looking for a new world order
• China slams U.S. for inflating global asset prices via carry trade

It has been my thesis for some time that we are seeing a secular change in consumption patterns in the United States.  This will have grave implications for a world economy used to seeing the American consumer as an economic growth engine and consumer of first choice. Retail sales in the United States have fallen 10% since peaking in November 2007. Much of this decline represents a permanent fall in consumption by overly indebted American consumers.

Having finally had a chance to dissect the retail sales data from last week, I wanted to show you a few graphs which indicate how much consumption has fallen in the present downturn and what the implication is for the future global economy. But, first, I want to start with a broader discussion as to why the fall in US consumption is a longer-term change and not a cyclical one.

The Balance Sheet Recession

Numerous economies seem on the way to recovery: Germany and France, Singapore, and Hong Kong, to name a few, have all posted positive economic growth.  China looks likely to hit its 2009 growth target of 8%. But, the U.S., generally assumed to be a leader in recovery, is looking like a laggard.  Mind you, there are other laggards like Spain and Ireland too.  Why are these countries lagging?  The Balance Sheet Recession.

Nomura’s Chief Economist Richard Koo wrote a book last year called “The Holy Grail of Macroeconomics” which introduced the concept of a balance sheet recession, which explains economic behaviour in the United States during the Great Depression and Japan during its Lost Decade.  He explains the factor connecting those two episodes was a consistent desire of economic agents (in this case, businesses) to reduce debt even in the face of massive monetary accommodation.

When debt levels are enormous, as they are right now in the United States, an economic downturn becomes existential for a great many forcing people to reduce debt. Recession lowers asset prices (think houses and shares) while the debt used to buy those assets remains. Because the debt levels are so high, suddenly everyone is over-indebted. Many are technically insolvent, their assets now worth less than their debts.  And the three D’s come into play:  a downturn leads to debt deflation, deleveraging, and ultimately depression.  The D-Process is what truly separates depression from recession and why I have said we are living through a depression with a small ‘d’ right now.

Secular inflation will be non-existent

Therefore, the problem is a lack of demand for loans not a lack of supply. The Federal Reserve can print all the money it wants. But, if there is little demand for more indebtedness, it is not going to have the desired effect of permanently reflating the economy – although it can create bubbles.

The corollary of this is that inflation will be non-existent on a secular basis. For the increase in liquidity to feed into consumer price inflation, people have to actually buy more stuff.  And that’s not what happens in a balance sheet recession because people are concentrated on reducing debt and increasing savings.

Moreover, there is a huge glut of excess capacity globally now that we have had a major fall in consumption. Producers are waiting for demand to catch up with supply – not exactly the sort of situation that makes for inflation. I should point out that capacity is not fixed – it grows obsolete if unused. So, much of the investment in manufacturing capacity in China and property in America is going to have to be liquidated eventually.

But, the economy doesn’t move in a straight line. It courses through cycles. Just as we could be entering a cyclical recovery in the middle of a depression, it is altogether possible that the Federal Reserve can produce high cyclical levels of inflation despite the secular trend toward disinflation. A lot of this is likely to come through commodity prices or destruction of the currency.

For example, while the change in consumer prices has gone negative in the United States since the downturn began…

when one strips out food and energy, it has declined much less than even during the last deflation scare of 2001-2003, which caused Alan Greenspan to panic and reduce interest rates to 1%.

The discrepancy above is due wholly to changes in commodity prices.  So, if commodity prices re-assert themselves going forward, we could see a major uptick in inflation. Moreover, a fall in the value of the dollar could precipitate inflation as well.  And, finally, there is asset prices.  It is clear the Federal Reserve and the Obama Administration are targeting asset prices in order to reflate the economy. All of that stimulus can and will create cyclical inflationary forces which could be large. Nevertheless, the underlying level of demand is slack and that means secular inflation levels will remain subdued.  See my post “Central banks will face a Scylla and Charybdis flation challenge for years” for more on this concept.

This means the consumer will be under pressure

High debt and low inflation mean lower consumption growth.  It’s hard to spend more when you have a mountain of debt staring you in the face and its not getting reduced in real terms through inflation.

Look at the charts to the left.  They come from a story in Barron’s this weekend called They Shopped ‘Til They Dropped. They depict a tsunami of debt in the U.S. economy that has been building for four decades.  Even debt service levels have been inching inexorably higher since the 1980s. Clearly, the U.S. consumer is tapped out. And they are cutting consumption and reducing debt as a result.

So, for America, it is not business but consumers which are going to suffer a balance sheet recession.  In looking for evidence on Koo’s thesis, we need to look at consumption and retail sales.

Michael Shedlock recently reported on the horrible back to school sales numbers.  And Patty Edwards, a well-known Seattle-based retail analyst, was recently on Bloomberg radio with sobering anecdotal detail regarding the retail sector.  She sees no sign of an impending uptick in US retail sales and is very worried about the Christmas selling season. The audio of her conversation with Tom Keene is below (not available in the RSS feed).  It is very much in line with the balance sheet recession argument.

Shedlock’s post and Edwards’ view are very much in line with the retail sales numbers we saw late last week.  A lot of people had been looking for good retail sales numbers because they see recovery at hand.  But, the numbers disappointed, falling 0.1% from the previous month.

This puts retail sales 8.3% below year-ago levels and a full 10% below peak levels in November 2007. This is much more severe a decline than we witnessed in the shallow recession of 2001. When retail sales numbers hardly declined. In fact, on a nominal basis, they fell on a year-on-year basis only during September 2001 because of September 11th.

If one uses data both the present data series (1992 – present) and the previous data series (1967-2001), this downturn looks much more inline with the steep downturns of the 1970s and 1980s.

The key difference between then and now is the debt levels I showed you from the Barron’s article.  Let’s not forget low savings as well.

Macro Themes

One can only conclude that the asset-based economy of the last quarter century is over. It was based not just on a dubious productivity miracle but also on mountains of debt and over-consumption.  The new normal is debt reduction and savings.

What does this mean for the economy?  Here are a few macro themes:

1. Retailers are in a world of hurt, not just cyclically, but on a secular basis.  Listen to the Patty Edwards interview.  America has double the amount of retail space per capita that it did a generation ago. This is the definition of over-capacity. When a glut of supply meets a deficit of demand, you have the makings of a very bad outcome for the stocks in that sector. This is the same conclusion that the Barron’s article comes to.  The uptick in retail shares like JC Penney (JCP), Ann Taylor (ANN), and Macy’s (M) is all due to beating low earnings estimates. As a result, Abercrombie (ANF) has almost doubled. Nordstrom (JWN) is up 141% and Ann Taylor is up a massive 350%. Investors like George Soros are selling retail (Wal-Mart, Walgreen and Lowe’s).
2. Commercial Real Estate will feel the pain too. The Patty Edwards interview not only shows huge excess capacity in retail, but it shows that retailers are trying to re-negotiate contracts down.  They have Commercial REITS over a barrel because they can just threaten to close down outlets if they don’t get the contract price concessions they seek.  Back in January, I mentioned the fact that bankrupt anchor tenants like Circuit City  destroy the economics of malls for other tenants and create a domino effect.  So, if anchor retailers do not get the price concessions they want, they will shut down stores, creating a huge loss in income for all the other stores. Obviously, this will drive down the price of commercial real estate as there will be a huge glut of supply.
3. Export-oriented economies need to foster internal demand growth. Here I am talking about Germany, Japan, and China amongst the major economies.  The US consumer is out of gas and these countries are too dependent on exporting to US consumers. It is not clear who can replace her.  Certainly, the Chinese government and companies are doing their level best to foster domestic demand in China, even conspicuous consumption.  But, the Chinese are unlikely to replace Americans as the new global growth engine anytime soon.
4. The new normal is lower US and global growth. This all suggests that we are likely to see lower growth in the US and globally as a result – at least until the American consumer gets out of a hole or someone else picks up the slack.  That will likely mean we will see low-growth, short business cycles punctuated by fits of recession, all complicated by the three D’s (debt deflation, deflation, and depression).
5. One should fear a 1937-style relapse. If you recall, the Great Depression saw a major economic uptick in the years after 1932. No one would call this a boom (see the section called “recovery does not mean recovery” in my post “Economic recovery and the perverse math of GDP reporting.”) This was only a statistical recovery in the midst of a greater downturn. Eventually, stimulus was withdrawn and the economy tanked again. Richard Koo argues that Japan did not go into a 1929-style depression because it maintained much more stimulus than the US did in the Great Depression. If this stimulus is removed before the deleveraging and balance sheet repair is complete, you get a major relapse. So, beware of deficit hawks telling us that fiscal stimulus must end to eliminate deficits.  If anything, the government’s long-term deficit outlook should be eliminated via reigning in skyrocketing health care costs.
6. Banks will be in a permanent state of crisis. If we learn anything from Japan, it’s that time does not heal all wounds.  The Japanese tried to recapitalise their banking system by propping up zombie institutions.  That didn’t work.  It didn’t work in Japan in the 1990s and it didn’t work with Savings & Loans in the US in the 1980s. Why should we expect it is going to work now? But, team Obama has decided this is the way forward.  If and when an economic relapse occurs, the fragility of the banking system will be made manifest. Much of the so-called toxic assets is still on the balance sheet of American financial institutions. The same is true in countries like Germany, Spain and Ireland, to name a few. When another downturn hits, those assets will go bad and writedowns will drag down the weakest institutions.  This is the lesson of Japan.
7. Liquidate zombies while providing counter-cyclical stimulus. The banking example gives a hint to the correct policy response.  It is not a return to the bubble days of the asset-based economy.  It is not creating deficits as far as the eye can see while perpetuating overcapacity.  What policymakers need to do is allow bankrupt organizations to fail and reduce excess capacity, all the while providing enough stimulus to prevent worst-case outcomes.

When it comes to US consumers, weak spending growth will last for years. Ultimately, debt levels in the US economy must return to a sustainable level. This can happen over time, which would mean a decade-long low-growth, muddle-through economy – not a terrible outcome either for the economy or for asset prices.

Or it could happen overnight through default, bankruptcy, and liquidation – a Great Depression II scenario. The policy response in the US and elsewhere will make the difference. Right now, we are headed for a statistical recovery at best. If policymakers think we are off to the races and try to normalize policy, they will be making a heinous mistake.

Related posts:

• UK retail sales drop most in 22 years
• Data on past consumer deleveraging during recessions
• U.S. consumer spending down 1% in December
• Avoid consumer stocks
• Looking beyond the fake recovery

I have been taking a bit of a break as my trip to the Ontario’s Lake Country winds down.  It’s a beautiful place.  But, as Marshall Auerback and I were lamenting, it has become the Hamptons of Canada as everyone from Toronto is up here for the summer holidays.

But, it has been relaxing. Since I came here, I have had a chance to get away and re-charge. The news in the world economy has been getting a lot better during my hiatus.  Just this morning, data showed economic growth in Q2 in both Germany and France.

As far back as April, the data did point to a potential recovery in the US this summer. Here are two mid-June posts explaining how Paul Krugman, Richard Berner, and David Grenlaw saw this:

• Krugman sees recovery by end of Summer
• Morgan Stanley: Recession will ‘end by mid-to-late summer’

So, a lot more people are now saying recovery is at hand. Of course, it is not a done deal and I am still holding to Q4 or Q1.  But, I did want to remind you all how bearish people were just two months ago (and feel free to comment):

• When will the U.S. recover?

Now we should take this opportunity to look through the present data and onto the longer-term future. We might have a recovery so what? What does the situation look like over the medium or long term?

As I see it, any recovery now will be somewhat incomplete given high consumer debt levels and the associated weak consumer demand. Structural issue remain in the property markets and banks are systemically weak. Nevertheless, with recovery at hand or coming, here are a few posts that attempt to look beyond the immediate reflation trade.

• Bernstein: What kind of recovery are we going to get? (May 2009)
• Green Shoots or Smoking Weed? (May 2009)
• Why the personal consumption data is important to the stock market (Jun 2009)

Don’t underestimate the power of printing money – or government stimulus.  We have seen a herculean effort to stave off depression and this has clearly had a great impact across the global economy.  But, stimulus does not solve the problem of structural weakness.  The excess consumption in the U.S., the savings glut in Asia, the huge debt and leverage in Anglo-Saxon countries and the weak banking systems in America and Europe must be addressed during any recovery or…

To be continued…

Related posts:

• Discerning a real from a fake, technical, statistical, or partial recovery
• More thoughts on the fake recovery
• When will the U.S. recover?
• Morgan Stanley: Recession will ‘end by mid-to-late summer’
• Revisiting employment indicators for signs of recovery

I have highlighted comments by famed Columbia University economist Jagdish Bhagwati before (see “Jagdish Bhagwati: Obama is a protectionist”).  Bhagwati has since gotten with the program and sees Obama in a much more favourable light.  However, he is sceptical because Obama has not said boo about free trade.

Now Bhagwati is turning his attention away from trade, his specialty and talking inflation.  He’s not saying he’s 100% sure the U.S. will go into hyperinflation like some pundits.  But, in talks with the Financial Times Deutschland, he did make clear that he is worried about inflation. Nevertheless, he too warns of a 1937-style Armageddon if stimulus is withdrawn too quickly.  He goes into a lot of other topics as well, including the cozy relationship between Wall Street and Washington (singling out Tim Geithner in particular) and the lack of regulatory reform.

My translation of the German-language article is below.

The world renowned Economist Jagdish Bhagwati is not worried about financial markets – but he is worried about the risk of inflation.

The world renowned economist Jagdish Bhagwati has warned the governments in Germany and the United States about an erroneous assessment of inflation risks in their respective countries. Angela Merkel’s fears are "excessive", while the Americans have been reckless regarding the future risk of rising prices, said the Columbia University professor and Globalisation guru to FTD. "In the U.S., they underestimate the inflation threat: There are enormous amounts of money in circulation, but there have been no announcements for a clear exit strategy."

The Indian is world renowned for his defence of free trade and globalisation. Following the crisis, he argued that globalization in trade was a success, but, in the financial markets, it had failed.

Germany tends to be too cautious when it comes to supporting the economy, said Bhagwati. It is certainly "too early, now or in the next few months," to roll back stimulative measures just because medium inflation risks are present. A premature withdrawal would have disastrous consequences, according to Bhagwati, as we have seen in the past. "For a reversal, 18 to 24 months seems an appropriate time frame."

Bhagwati classified it as basically correct that Merkel is reacting to the fears of the population. "In the U.S., a concrete plan of how the stimulus will be taken back is completely lacking," the economics professor criticised. Even if the date for the withdrawal cannot yet be set, the government should demonstrate how they will proceed "as concretely as possible.”

The macro-economist showed scepticism about a third stimulus package. Laura Tyson, a key adviser to U.S. President Barack Obama, among others, has called for such a program. "As yet, not even all the money from the first package has been spent," said Bhagwati. Thus, spending more makes little sense. "The next delayed instalment of the first package will act like a third stimulus." The discussion underscored the lack of sensitivity to inflation risks. Much of the spending would be appropriated wrongly anyway, and corruption would creep in, the Columbia economist criticized. "The bulk of the money will be wasted."

The U.S. economic measure are less reason for hope for the world economy, according to estimates given by Bhagwati, than the recent signals from Asia: "In China and India huge bottlenecks in the infrastructure provide for substantial additional demand," said Bhagwati. That would help the rest of the world out of the crisis, including the United States. "In this respect I am optimistic that the crisis will no longer last for years."

In regards to the financial markets, the economist now has no more worries: "I would not step onto an aircraft carrier and declare that the war was over like George W. Bush once did – but I think we are on the right track."

Nothing has changed, in Bhagwati’s view, regarding the close link between Wall Street and politics. There is a lack of critical distance, which was one of the main causes of the financial crisis. "The reform of rating agencies is, thus, an urgent need," said Bhagwati. Moreover, he again called for the establishment of a financial market supervisory body of independent experts. Possible candidates [to head the body] would be Harvard economist Kenneth Rogoff, Fed Chairman Ben Bernanke and Deutsche Bank Chief Economist Norbert Walter.

Therefore, Bhagwati was critical about the new U.S. Treasury Secretary Timothy Geithner. He is considered closely allied with Wall Street. "I was not too excited about this staff selection," said the economist.

Source

"USA unterschätzen Inflationsgefahr" – FTD

Related posts:

• Jagdish Bhagwati: Obama is a protectionist
• GDP: imports, inflation and local government are the story
• Kasriel: ‘greater risk for the global economy…is inflation’
• Does the US need a second stimulus package?
• Morgan Stanley warns of a new inflationary period

A few days ago I wrote a post “Japanese defend dollar’s status while China tears it down” in which I defended the Japanese support of the dollar, saying it was in no one’s interest to see a change in the currency markets right now.  I have to admit this was wrong-headed and short-sighted.  In truth, the currency market, with the U.S. dollar as the principal reserve currency is in great need of an overhaul.

When I wrote the post last Friday I said: “it makes no sense to talk the dollar down here and now and risk a disorderly fall.  It certainly is not in China’s best interest as all their U.S. dollar assets will lose value.”  But, if we are to move to a more stable world financial system, when is the right time?  There probably is no ‘right’ time. So, in retrospect, I would say the Chinese are probably taking the right approach by aiming to at a minimum discuss the currency issue here and now – something I had advocated in the past.

I see the U.S. dollar as a weak currency due to the excess consumption in the United States. Meanwhile, the Chinese currency, the Renminbi, is controlled by the State, leading to distortions in trade that most pundits believe create severe trade imbalances. While discussions about a new currency regime would probably not lead to any major changes in the short-term, making preparations now would lead to more stability in the medium-term.

Related posts:

• China “serious about the plan to internationalise” Yuan
• Japanese defend dollar’s status while China tears it down
• US angling to get Chinese to revalue renminbi
• China launches retaliatory investigation into U.S auto subsidies
• Chinese to start settling trade in Yuan

Laura Tyson, an advisor to President Barack Obama, said in a speech to day in the lead up to the –8 conference that the ground work for a potential second stimulus bill must be laid now. To be sure, the G-8 leaders are expected to recommend continued policy accommodation worldwide. However, Vice President Joe Biden recently suggested that the Obama Administration has no plans for a second stimulus bill on the political TV show Meet the Press (transcript here).  So, which is it – stimulus or no stimulus?

The U.S. should consider drafting a second stimulus package focusing on infrastructure projects because the $787 billion approved in February was “a bit too small,” said Laura Tyson, an adviser to President Barack Obama.

The current plan “will have a positive effect, but the real economy is a sicker patient,” Tyson said in a speech in Singapore today. The package will have a more pronounced impact in the third and fourth quarters, she added, stressing that she was speaking for herself and not the administration.

Tyson’s comments contrast with remarks made two days ago by Vice President Joe Biden and fellow Obama adviser Austan Goolsbee, who said it was premature to discuss crafting another stimulus because the current measures have yet to fully take effect. The government is facing criticism that the first package was rolled out too slowly and failed to stop unemployment from soaring to the highest in almost 26 years.

Obama said last month that a second package isn’t needed yet, though he expects the jobless rate will exceed 10 percent this year. When Obama signed the first stimulus bill in February, his chief economic advisers forecast it would help hold the rate below 8 percent.

Unemployment increased to 9.5 percent in June, the highest since August 1983. The world’s largest economy has lost about 6.5 million jobs since December 2007.

Clearly, the economic situation is much worse than Obama’s team predicted back in January.  It is leading to rising unemployment and grim statistics on things like consumer default rates.  So, if the $787 billion stimulus package was based on a rosy economic scenario that never happened, it goes to reason that this stimulus bill was too small, as Laura Tyson argues.

Yet, some economists like Mark Zandi of Economy.com agree with Biden that we should take a wait and see approach (video below).

Of course, the wait and see modus could be a disaster as stimulus should take six to nine months to kick in.  If the economy falters in Q4, say, a stimulus might be forthcoming in Q1 2010 with effects coming on line late in 2010 – not a very good scenario for politicians in Congress looking to get re-elected.

So, which is it: stimulus or no stimulus?

Below are two takes on this question.

• The Failure of the Mainstream Model – Stephanie Kelton
• Will Obama go for a second stimulus? No … - James Pethokoukis

And, for the record, I don’t think Obama could get a second stimulus bill through Congress if he tried.

Source

Obama Adviser Says U.S. Should Mull Second Stimulus – Bloomberg

Related posts:

• Congress ready with second stimulus package
• Galbraith and Buffett think a second stimulus is necessary
• Obama’s stimulus bill is a tough sell so far
• Obama takes middle road on stimulus and taxes that leads nowhere
• Bhagwati: The U.S. is underestimating inflation risk

Here is a Marc Faber interview from March. It is well worth watching because he calls things perfectly through June: economic news, equity markets, and commodity markets.

This is billed as a Czech TV interview.  But the audio is pretty bad. So, the interviewer may be a Czech with halting English, but this is hardly a TV spot (notice the cigarette in Faber’s hand). Given the photo flashes, it may be for a newspaper or magazine. What you get is fifty minutes of Marc Faber unfiltered.

I call it Marc Faber Raw.

Enjoy.

Related posts:

• Marc Faber: “I am 100% sure that the U.S. will go into hyperinflation”
• Marc Faber says avoid financials and buy gold
• Marc Faber on CNBC: bearish on oil and India
• Marc Faber: “A huge move is coming in the dollar, in bonds and in equities” but…
• Marc Faber makes bullish comments on Bloomberg

In the lead-up to next week’s G8 summit, the Chinese have been making yet more noises about setting up a new monetary system without the dollar as its anchor and leading reserve currency.  The Chinese, who have maintained a export orientation which has made them the largest holder of U.S. government bonds, are concerned that they are holding depreciating assets. As the U.S. economic and fiscal position deteriorates, the likelihood for a disorderly decline in the U.S. dollar increases.  So, China wants a change.

The Japanese, who also have the same export orientation, making them the second largest holder of U.S. treasury assets, have come America’s defense.

Major countries should support the dollar as the key international currency, although emerging nations may discuss a new global reserve currency on the sidelines of the G8 summit next week, a Japanese official said on Friday.

China has asked for debate on a new global reserve currency when leaders from the Group of Eight (G8) meet with the G5 emerging economies next week in Italy, G8 sources told Reuters. News of the Chinese request pushed the dollar down to a three-week low on Wednesday.

But Japan thinks it would be difficult for another currency to replace the dollar as the world’s global reserve currency and it is against any move that would unnecessarily weaken the status of the dollar, said Yoichi Suzuki, director-general of it is against any move that would unnecessarily weaken the status of the dollar, said Yoichi Suzuki, director-general of the Japanese foreign ministry’s economic affairs bureau and one of the country’s main coordinators for the G8 summit.

"Japan’s stance is that major countries should support the dollar," Suzuki told Reuters in an interview.

"It won’t benefit any country to talk about ideas of a new global key currency, which would weaken the dollar," he added.

And Suzuki is right.  Yes, I believe the dollar is a weak currency over the long-term due to structural imbalances.  But, there is no currency to replace it as a reserve currency right now.  The Euro is a new and artificial construct. It is facing its first real test as signs of tension are rising in the Eurozone due to the global downturn.  The economies supporting the Yen, the Pound Sterling, and the Swiss Franc are all too small. And the Renminbi is not fully convertible.  George Soros has said “the dollar is a very weak currency except all the others.”

So, it makes no sense to talk the dollar down here and now and risk a disorderly fall.  It certainly is not in China’s best interest as all their U.S. dollar assets will lose value.  But, the Chinese have been talking down the dollar as a reserve currency for months now – and their tone seems ever more shrill on this topic.  Perhaps the Chinese see their dollar holdings as a sunk cost.  Perhaps the Chinese have moved on and are ready to decouple from an over-indebted America, which cannot continue to run massive deficits now that crisis has hit.

Next week, we will get hints because G-8 members will have every opportunity to make this an issue at the upcoming summit.

Source

Major nations should back dollar as key currency: Japan – Reuters

Related posts:

• Is China avoiding using US dollars?
• Mea culpa on the need for a new currency
• China slams U.S. for inflating global asset prices via carry trade
• More thoughts on the switch from dollars as reserve currency
• China to diversify out of U.S. dollars

With more and more major economists predicting recovery sometime later this year, many have forgotten that downside risks remain.  Berner, Roubini, Volcker, Krugman and Bernanke have all come out essentially saying they would not be surprised to see a ‘technical’ recovery at some point later this year.  Robert Gordon has gone as far as to suggest we could be in recovery already – at least in the United States. I too have called for a Q4 or Q1 recovery.  So, is it off to the races?

Hardly.  I don’t have to convince many readers at Credit Writedowns or Naked Capitalism that there is a darker scenario which threatens recovery.  Many of you see this according to preliminary results from a recent poll I conducted. Nevertheless, let me use this post as a reminder of that downside scenario with some commentary from economists.  David Rosenberg is not the only major bearish economist that sees a very troubling economic outlook.

First, a post by Wolfgang Munchau in the FT reveals that much of the economic data of late has actually been disappointing despite the rally in shares and corporate bonds.

Last week, the green shoots shrivelled. In South Korea, China and Germany, exports were declining once again. In the US, the Federal Reserve’s Beige Book said “economic conditions remained weak or deteriorated further during the period from mid-April through May”.

The March signs of revival turned out to be little more than a technical inventory correction, with no change in the underlying trend. The world economy is still contracting, though perhaps not quite as fast as at the start of the year.

As an analysis by economists Barry Eichengreen and Kevin O’Rourke* shows, global industrial output is still on the same trajectory as it was during 1930. The only question is whether we can avoid 1931 and 1932.

Munchau argues we can avoid a 1931 and 1932 scenario only if we see a marked change in the present policy response in major economies.  But, Munchau’s analysis makes one wonder why he finds the situation so dire for the global economy.  Why does Wolfgang Munchau think 2009 is tracking 1930?  The answer comes in the Eichengreen – O’Rourke data he references.  It is truly stunning: when one looks at statistics like industrial production, this downturn is looking as bad as the Great Depression. Here is how it is summarized at the economic site Vox.

The 6 April 2009 Vox column by Barry Eichengreen and Kevin O’Rourke shattered all Vox readership records, with 30,000 views in less than 48 hours and over 100,000 within the week. The authors will update the charts as new data emerges; this updated column is the first, presenting monthly data up to April 2009. (The updates and much more will eventually appear in a paper the authors are writing a paper for Economic Policy.)

New findings:

• World industrial production continues to track closely the 1930s fall, with no clear signs of ‘green shoots’.
• World stock markets have rebounded a bit since March, and world trade has stabilised, but these are still following paths far below the ones they followed in the Great Depression.
• There are new charts for individual nations’ industrial output. The big-4 EU nations divide north-south; today’s German and British industrial output are closely tracking their rate of fall in the 1930s, while Italy and France are doing much worse.
• The North Americans (US & Canada) continue to see their industrial output fall approximately in line with what happened in the 1929 crisis, with no clear signs of a turn around.
• Japan’s industrial output in February was 25 percentage points lower than at the equivalent stage in the Great Depression. There was however a sharp rebound in March.

Now I happened to listen to Barry Eichengreen make his case on Tom Keene’s show at Bloomberg Radio this past Thursday.  The interview makes for interesting listening and it gives you greater granularity on his view for the global economy. I have provided the podcast clip below.  (By the way, if you don’t already subscribe to Keene’s podcast, Bloomberg on the Economy, do it.  They have great guests.  Here is the link.)

I recommend you read the Eichengreen – O’Rourke article (the graphs are amazing). With that as background, the Munchau piece will be more powerful.  Afterwards, have a go and  listen to the Bloomberg podcast.  The combination will leave you with a very good understanding of the downside risk for the global economy.

Enjoy.

Sources
A Tale of Two Depressions – Vox
Optimism is not enough for a global recovery – Wolfgang Munchau, FT
Depression Dynamic Ensues as Markets Revisit 1930s – Eichengreen (March), Bloomberg

Related posts:

• Some tidbits about stimulus, recovery, and the Great Depression
• Worse than the Great Depression
• The Great Depression II meme
• Looking beyond the fake recovery
• China is set up for a big fall

Will Hutton has a pretty good interview with Paul Krugman in the Guardian newspaper.  The exchange is quite long, so it gives you a fairly broad understanding of Krugman’s view on the global economy and specific country economies.  What I found especially interesting was Krugman’s admission that we are essentially flying blind.

The Federal Reserve has hit the zero bound just as Japan had done nearly a decade earlier.  At this point, traditional monetary policy has no effect – we are pushing on a string.  What comes next, nobody knows and Krugman has said as much.

The thing about Japan, as with all of these cases, is how much people claim to know what happened, without having any evidence. What we do know is that recessions normally end everywhere because the monetary authority cuts interest rates a lot, and that gets things moving. And what we know in Japan was that eventually they cut their interest rates to zero and that wasn’t enough. And, so far, although we made the cuts faster than they did and cut them all the way to zero, it isn’t enough. We’ve hit that lower bound the same as they did. Now, everything after that is more or less speculation.

Read the rest here.

Related posts:

• Liquidity trap of a different sort
• BoE makes a dramatic 1 1/2 point cut
• Norway makes three
• Paul Krugman on the global economy
• Japan’s easy money policy was the trigger for the tech wreck

Marc Faber participated in a roundtable discussion on CNBC this morning about the dreadful figures coming out of Europe (see articles here and here).
At one point, the German CNBC correspondent made a very good comment about Eastern Europe getting killed by a falloff in internal demand due to a severe banking crisis and this being compounded by a falloff in external demand as Germans and others increase their savings. She asked whether over-indebtedness and excess consumption was what caused the problem. Why should that now be the solution?

Faber used this as an occasion to promote his thesis that much of the geopolitical tension and economic turmoil is associated with a passing of the baton of economic leadership from the west to Emerging economies. Whether you agree with his sentiments, it makes for a lively discussion. The video is below and runs about 7 minutes. Take a look.

There is also an associated blurb from CNBC Europe’s anchor Geoff Cutmore about the discussion that reads:

Prepare for War, the Death of capitalism and Bankruptcy of the US Government (not necessarily in that order)

A vintage performance from the author of “The Gloom, Boom & Doom Report”. This morning – living up to his reputation for bearishness – Marc Faber forecast a litany of unpleasant events ahead.

His key message is: buy real assets. He thinks it will take years for the global economy to recover, but when it does the effect of governments’ printing money will ultimately reignite inflation.

“If you’re in any field, you should own a farm because one day you will be grateful that you are able to grow your own agricultural produce.”

Recovery will be slow because government meddling in the markets will postpone it. He argues that the final low for markets and for growth will only come when the debt and losses have been cleaned out of the system.

Unless the system is cleaned out of losses, “the way communism collapsed, capitalism will collapse.”

“The best way to deal with any economic problem is to let the market work it through.”

The Fed is destabilizing, it’s creating “enormous volatility”.

Marc thinks the yields in government bonds bottomed out in December 2008 – rather than lend money to the US government he suggests buying a portfolio of large, quality blue chip stocks. They will grow and survive – and reposition to take advantage of the rising importance of the emerging economies.

“I think we are living through a major transition in the world… the economic bloc of emerging countries will be more meaningful than before.”

“I think that in Asia we have lots of sectors that are quite attractive. The banks, they don’t have the toxic assets that we have in the rest of the world.”

While not an optimist on the Chinese economy near term – Marc likes Asian currencies, and banks ex-Japan. He also thinks the real estate markets are improving. Both Russia and Turkey get a positive mention.

Cutmore follows this up with a summation of Faber’s market calls related to this view. See the link at the bottom for those calls.

Source
Cutmore: Marc Faber on Armageddon – CNBC

Related posts:

• Marc Faber: Dr. Doom goes bullish
• Marc Faber Raw
• Marc Faber on CNBC: bearish on oil and India
• Marc Faber: “I am 100% sure that the U.S. will go into hyperinflation”
• Marc Faber: I advise every American to hold his gold outside of the United States

China is holding its own in regards to economic growth because the government is pumping massive amounts of government money into the economy in order to make up for the loss in trade.  What does this mean for China, Chinese shares and the global economy?

The Bloomberg video below makes the bullish case for China and Asia more generally.  (Disclosure: I have previously said China’s growth rate would trough at 2%, but this is looking relatively pessimistic at this point – Standard Chartered is calling for 6%.  I am sticking to my view for the time being. But, the bullish case for China is looking better every day.)

Related posts:

• G-20: China is clearly looking for a new world order
• China: Growth on track but at what cost?
• Does the US need a second stimulus package?
• Treasurys are getting killed again
• China slams U.S. profligacy

We are starting to get a sense of who the winners and losers of the Great Unraveling are. Spain is definitely a loser.

Just think, a few years ago Spain was the envy of Western Europe with a dynamic and booming property market and prodigious GDP growth. The country was THE holiday-maker’s paradise, with many buying second homes. It ranked with Ireland as a perennial winner in economic growth in Western Europe.

Today, Spain has 4 million unemployed citizens and 1 million households where every member is unemployed. The overall unemployment rate is now edging ever closer to 20%. Property prices have plummeted. And  In Spain’s version of General Growth Properties‘ bust, two major property companies, Martinsa Fadesa and Drac, have hit the wall. The banking crisis is only just beginning in earnest as Spanish savings banks are weak and only one major savings bank, Caja Castilla-La Mancha has gone under. Just recently, Mexico surpassed Spain as the largest Spanish-speaking economy.

Spain is suffering from, in a word, depression. And this must be a great come-down for a nation once lauded as one of Europe’s most promising economies.

Unfortunately, more humiliation is being dumped on Spain. You see, Spain is NOT in the G-20. Last November, a lot was made of this because John McCain had dissed the Spanish government during the Presidential elections in the United States and Spain was not invited to the G-20 meeting in Washington D.C.  Eventually, Spain – along with the Netherlands – got a hall pass.

Now, another G-20 meeting is coming up – and Spain has not been invited… again. But, to add insult to injury, Brazil is saying that Spain should not ever be invited. After all, it is not a member of this club of the richest, largest economies.

With more economic pain in store for Spain, the country will have to accept its newly diminished status.

Sources
España pide la entrada formal en el grupo de países G-20 – El Pais
Brasil dice que España no estará más en el G-20 – ABC

Related posts:

• Spain avoids negative GDP
• Spain: Bleak forecast puts unemployment at 22% in 2010
• Spain panicked over possible rate hikes
• Spanish property market implosion
• Spain gets deflation

This past week, I caught an article in Wirschaftswoche (WiWo), the German Business Week, which suggested that the South Koreans were very confident about their economy and had learned from the Asian Crisis.

Just today, the South Koreans released GDP numbers that many would find amazing, showing that the economy grew 0.1% in the first quarter compared to Q1 2008 Q4 2008.  Q4 2008 was a 5.1% fall, so that’s a pretty prodigious uptick which comes largely from household and private consumption.  It certainly begs the question as to whether the Asians are ‘de-coupling,’ a term I never though I would use in a positive sense.

What is clear from the reports at a minimum is that intra-Asian trade is increasing and keeping countries like Korea from feeling the full impact of the slow down in the West. (A 30% currency devaluation helps too.)

Below is a Bloomberg video on the Korean economy:

Also, here is what WiWo had to say (my translation):

South Korea wants to present itself at the just opened Hanover Fair as a country with a promising future – and as an unbroken dynamic export nation. The worst is behind the country. But, the Koreans find one development unpleasant.

Like a ballerina, the young lady dances around in front of the black sedan of Mr. Yoo. She leads the heavy but graceful Hyundai into the car park at the Seoul Lotte warehouse and bows so deeply that her little pink hat almost touches the ground. She chirps, that she is sorry for the precious time that had to be wasted by the important Client in the queue. Yoo Jae-Wook, head of consultancy Nemo Partners, sees the ‘parking show,’ as a good sign: “Every day the same large crowd. Officially, we have crisis, but they are all go shopping! ”

South Korea, this year the official partner country at the Hanover Fair, wants to present itself to the world as a haven of stability amid the present global crisis. This is not only outdoor advertising, but is quite the mood in the country itself. The fourth largest economy in Asia has come through the global shock calm. Quite unlike the Asian crisis of 1997/98, when some Koreans even donated their gold to support the economy. “In Seoul, they are not making cuts to their quality of life,” says Kim Nan-Do from the National University in Seoul. The Koreans, according to the local Siemens boss Josef Meilinger, understand the global crisis as an opportunity: “You look at which share of the world pie you can grab now.”

Crisis? What Crisis?

What crisis überhaupt? The Koreans come to Hanover full of self-confidence: “Our economy is overcoming the global crisis faster than other countries,” said Cho Hwan-Eik, president of the trade promotion company Kotra,. “We have high-performance products, sophisticated marketing strategies, and government and businesses have relatively low debt-burdens. Indeed, South Korea with government debt of 38.5 percent of annual gross domestic product is much better than Japan, for example, with almost 185 percent. The country has dealt with the recession from just over a decade ago and it is partially immunized against new problems – at least in many Koreans opinion. “The Asian crisis has made us seem well trained. We have learned to survive,” says business consultant Yoo.

In the areas of information technology, electronics, shipbuilding and auto industries, South Korean firms are forcing their way into the world class tier, but also lately in green technologies. In addition: The banking system is reasonably stable. “In comparison to the great Asian crisis a decade ago, our banking and financial system today is less vulnerable,” says Jong-Goo Yi of the state financial oversight of FSC. At that time, many indebted Korean conglomerates like the car manufacturer Daewoo and KIA, the Hanbo steel producer as well as several banks were forced into bankruptcy or had to give up their independence. Today, however, the liquidity of the 44 major Korean corporations is “so high that these companies have even more months to survive crisis,” says Yi.

Cautious optimism in the boardrooms

It is also reassuring, according to Yi, that the Korean banks, on average, have less than one percent of their loan portfolio in “toxic” assets – they have little invested in complicated derivatives. Accordingly, the financial structure is much healthier than in Europe or the USA.

In the boardrooms of the export-dependent companies, the typical sound is somewhat subdued optimism. In 2008, the export share of the economy was about 55 percent. Now, in the face of the crisis of world trade, sensitive setbacks are threatening. “Until now we have had the rapid depreciation of the won to hold us above water,” said Ko-Yung Sang of Standard Chartered Bank in Seoul. Against the dollar, the exchange rate of the Korean currency fell by almost 30 percent in the past twelve months. So Korea’s largest car manufacturer Hyundai / KIA lost in the U.S. less than one tenth of its turnover, although the total there saw a 40 per cent fall. The worst for Korea could already be behind them. The most difficult month was January, when the Korean exports crashed 34.2 percent. Afterward, the figures have improved. In March, the trade surplus was even at a record high of 4.6 billion U.S. dollars. For 2009, the economy ministry expects an increase of approximately 20 billion U.S. dollars, significantly more than previous estimates.

Even in crisis, South Koreans can rely on their main trading partner China, which at last count bought 23 percent of all Korean exports – 14 percent went to the European Union, and nearly ten to the U.S.. Above all, the shipbuilders were successful: Korean shipbuilders recorded a sales increase of 61 percent in March.

Such export power could ensure that South Korea’s recession in 2009 is relatively mild with a fall of minus two percent, the government previously estimated. Some prognosticators still hold a crash of up to six percent possible. The FKI Industries notes, however, that the mood among business people has improved significantly. “The downturn will lose significant momentum,” said JP Morgan economist Lim Ji-Won Lim. He holds a recovery already this summer for possible.

Need for social consensus is growing

Koreans feel uncomfortable, however, with the development of its labor market – despite the fact that other industrialized countries might be jealous at the figures. The unemployment rate has gone since February 2008 from 3.5 to 3.9 percent. Especially small and medium-sized enterprises should cut some 200,000 further jobs, which would bring the rate upward a further percentage point.

Therefore, the need for social consensus is rising. Entrepreneurs, workers and government have agreed on a program “to share the social pain.” In many companies the employees take up to 30 percent wage cuts. Managers voluntarily reduce their salaries, officials waive ten percent of their salaries and donate the money for the needy. Several unions, in fact notorious for militant strikes, want to work, fighting to forgo wage increases – in exchange for guaranteed jobs and recruitment.

In addition, the government is on a major stimulus program: 25 billion euros – about 2.5 percent of gross domestic product – to keep the economy on track: “The main objective is the preservation of jobs,” President Lee Myung-Bak announced.

The same applies for the job of dancing white car park in the Lotte department store. Strikingly, many customers pay with cash coupons, which the State distributed as part of the economic program to 2.6 million poorer citizens.

Watch developments in Korea. If we do see de-coupling oin the way up, it is going to be in countries like Korea where the upswing will happen first.

Source
Südkorea gibt sich auf der Hannover-Messe krisenresistent – WiWo.de

Related posts:

• South Korea going gangbusters in contrast to UK
• Asia is de-coupling
• Trade flows in flux: is this re-balancing?
• Pesek: Asia is de-coupling
• China warns that the west’s quantitative easing is inflationary

Marshall Auerback here with a few thoughts about this economic cycle, external imbalances, fiscal stimulus, and current account deficits.

This is not the Great Depression. We are going to have “muddle through” here precisely because we lack the courage to deficit spend on the magnitude we did in World War II. We are spending too much time fretting about “external imbalances” (Martin Wolf’s latest piece in the FT, “The Urgency of Now” is an illustration of this:  The resolution of external imbalances is the main problem and should be the policy objective right now.)

We are no longer operating under a fixed exchange rate regime or a quasi gold standard (much as some countries curiously want to recreate this). We have a flexible exchange rate regime, where capital inflows have to equal the current account deficit. Dollars flow out through the trade deficit (which is a large part of the current account deficit) as the US spends more on imports than it earns on exports. Those dollars are net saved by our trading partners and they are reinvested in dollar-denominated assets. If portfolio preferences of foreign net savers shift away from holding US dollar denominated assets, asset prices have to adjust until they are willing holders of the dollars they earn in trade (that is, interest rates must rise, equity prices must fall, until expected returns are attractive enough for foreigners to maintain their US dollar holdings). Also, if foreign net savers of dollars favor particular assets, like US Treasury bonds, for a variety of institutional reasons, then relative US asset prices can also be influenced.

The money that flows out through the current account deficit flows back in through the capital account. For a nation with a flexible exchange rate, there is no change in the money supply from trade activity. This is just the opposite of a fixed exchange rate system, of which gold based systems are one type, and that is why James Grant advocates leaving flexible exchange rate systems in the dustbin of history. In a fixed exchange rate system, money balances of trade deficit nations are drained off to the trade surplus nation, and the trade deficit can only be run until the existing money balances of the trade deficit are exhausted.

Neither foreign private or public entities can create US dollar reserves out of thin air. That is the charge of the US central bank and commercial banks. Foreigners have to earn dollars from sales of goods or assets to US dollar holders. So it seems to me that the imbalances Wolf describes are almost a necessity as far as the US goes.

That means the ultimate source of the credit to support US trade deficit spending could not have come from abroad as some have alleged. Rather, credit was created in the US as households engaged in mortgage equity withdrawal during the housing boom, and spent more than the earned. Neither foreign savings nor foreign capital inflows were required to create this credit. All that was required was a household willing to borrow with identifiable equity in their home, and a bank willing to expand its balance sheet, with new home equity loans creating new deposits out of thin air. The loan is made, which shows up on the banks asset side of the balance sheet, and the homeowner has a credit line it can draw down, which shows up on the liability side of the bank balance sheet. Nobody here or abroad needed to save beforehand for this money deposit and credit loan to be created.

So what happens when the housing bubble bursts? Equity in homes shrinks, mortgage equity withdrawal shrinks, bank balance sheet growth reverses, household deficit spending reverses as they begin to net save, the trade deficit begins to turn, foreign net saving is reduced, and foreign capital inflows to the US are also reduced. The trade deficit is the twin of the household deficit spending, and the household deficit spending was made possible by credit expansion by US financial institutions on the back of the housing bubble.

In other words, foreign saving and capital inflows are at the tail of the dog, not the head. The only way the tail wags the dog is if foreign portfolio preference shift suddenly or persistently against US dollar denominated assets or specific US asset classes, in which case asset prices must adjust to keep foreign investors willing holders of US dollar denominated assets. We must always be careful to distinguish between shifts in preferences with regards to existing holdings, and shifts in saving out of income flows. The two are not the same, but they often get conflated.

That is not to say the threat of foreign investors dumping US assets isn’t a danger, but it may not be the central risk, which as far as I can see remains the concerns of people who fret about today’s imbalances. To me, the central risk is that the US private sector is shifting to a net saving position in a dramatic way for the obvious reasons – loss of wealth, precautionary saving given recession, etc. Arguably, this needs to happen if households are going to pay down debt and reduce debt burdens, and if they are realizing capital gains are not guaranteed.

The risk of this necessary adjustment arises because if the private sector moves to a net saving position – spending less than it earns – the income level in the US will fall unless the trade deficit turns quickly enough, and unless the fiscal deficit expands commensurately. In other words, we should be applauding this increased fiscal deficit because the alternative would be disastrous, not just for the US, but the world as a whole.
For every net saver, there must be a net deficit spender, or else the net saving cannot be accomplished without an adjustment of incomes. This is where the so called paradox of thrift comes from, as you well know. If incomes fall, debt defaults and delinquencies will increase more dramatically, and there is a good chance of heading into a debt deflation spiral, a la Irving Fisher.

In Q4 2008, US nominal GDP fell. Incomes have started to fall. That indicates the private sector is trying to net save more than is feasible given the shrinkage of the trade deficit and the expansion of the fiscal deficit, largely through so called automatic stabilizers, to date.

I suppose you could argue that from a US only perspective, ideally all of the increase in the private sector net saving position would come from a reversal of the trade deficit, but this isn’t going to happen. China earns about 10 times as much on its external sector than the domestic market, so its decision to become an export juggernaut, taken in isolation, was perfectly understandable. But in a world where global trade is collapsing, in part because export dependent economies have just had the rug pulled out from underneath them as US consumers (and others) try to save, it is a fantasy to think the adjustment process can be done entirely through trade. The only way to avoid a debt deflation outcome, as long as the private sector is trying to increase its net saving, is through an expanding fiscal deficit. And the reality is that we don’t need a G20 summit to accomplish this. The US can do this on its own, as can Japan (as PM Aso indicated on the front page of your paper today). As the government spends more than it earns in tax revenue, private sector incomes are boosted, and the private sector can earn more than it spends. They are two sides of the same coin. In that sense, if you agree private sector deleveraging is necessary part of the adjustment process, or at least important, it comes at the price of public sector releveraging, barring a heroic reversal in the US trade deficit (which would throw our trading partners into an even more severe recession unless they also pursued domestic demand led polices, a la China).

To illustrate this, the current account deficit has already gone from about 6% of GDP to 4% of GDP. Let’s say further consumer and inventory contraction gets us to 2% of GDP by year end. The CBO suggests the federal fiscal deficit will be out to 12% of GDP. I think that’s a bit high, as it incorporates TARP. But even assuming a trailing deficit of 8% (which is roughly what we’ve got now in the US), the private sector can net save around 7-8% of GDP without nominal incomes falling in the economy. At the depths of the 1973-5 recession, private sector net saving hit a post WWII high of nearly 9% of GDP. Maybe it needs to go higher this time because of the larger shock to household balance sheets with home and equity price deflation. But at least we can say the fiscal deficit is now programmed to scale up fast enough to reduce or contain the risks of US income deflation, and hence a runaway debt deflation process. To me this is crucial.

So can the foreign trade and US household spending imbalances be adjusted? Yes, they can. Does that adjustment process create further challenges? Yes it can, to the extent massive fiscal deficit spending is required to allow the private sector to accomplish its net saving objective without cratering private incomes and setting off a debt deflation spiral.

Then the question really boils down to, can the massive Treasury bond issuance be placed, especially if a smaller US trade deficit means foreign investors have fewer dollars to reinvest in US assets?

Treasury bonds were once 40% of commercial bank balance sheets. They were below 1% last I checked. Default free securities might look attractive to banks these days, especially with a positively sloped yield curve. The Fed used to hold 70-80% of its assets in Treasuries, now down to 20%. The Fed will want to have plenty of Treasuries to sell into the market once the eventual recovery comes and private investor liquidity preferences fall.. Remember, the Fed has no budget constraint.

Does this imply an increase in liquid assets in the economy? Yes it can, but we are also undergoing a large financial sector deleveraging, and we have begun a household sector deleveraging as well for the first time in the post WWII period. As loans are paid backed, deposits are cancelled out, shrinking conventional measures of the money supply. Much of the credit in the shadow banking system has been obliterated, and will not be coming back soon.

Is there nevertheless a risk of a flight from the dollar to the extent the US is willing to be the first mover, and an aggressive one at that, down these paths of quantitative easing? Yes there is. Is there a risk investors seeing the more central banks pursing the quantitative easing path will take flight into precious metals and other real assets as prospective inflation hedges, even if product price deflation is showing up in more countries? Yes there is. Could that complicate the policy exit strategy to the extent some of these commodities, like oil, are inputs to production, and so higher commodity prices could lead to an adverse shift in supply curves (to the left in price/quantity space, as in stagflationary periods)? Yes it could. But I think the alternative of focusing first on the external imbalances between China and the US is the wrong way to go about it. Look at what happened to budget deficits during W.W. II: at its peak, the US budget deficit as a percentage of GDP went to 30.3% in 1943. Yet by the end of the war, US households and the private sector were once again in a position of massive savings surplus. This is the financial correlative to those huge government deficits on the side of the ledger.
Remember, there is no ‘cost’ to a federal deficit.  It’s not a free lunch, it’s a free tool to prevent loss of output.

One last point about “muddling through.”  Here are some graphs to illustrate the differences between now and the Great Depression (hat tip Warren Mosler).

Nothing remotely like this is currently in the cards. It was the last gold standard collapse. The US gold standard was abandoned domestically in 1934.

Nothing remotely like this will happen this time around. World War II deficits exceeded 20% of GDP annually. Currently Personal Income is muddling through with flat to modestly positive gains month over month. This is not the Great Depression.

Related posts:

• What are the consequences of the huge U.S. deficit?
• The dollar is rising against floating currencies
• The US Dollar – don’t just do something, stand there!
• The G20 Summit: Hijacked by neo-liberalism
• Why I am bearish on the U.S. Dollar

I don’t want to beat a dead horse here, but the Chinese have been making a lot of muscular moves diplomatically. While shifts in balance of power often take decades, it is increasingly apparent that China is making a strategic move in that direction right now.

We have been chronicling these moves here in a series of posts at Credit Writedowns:

• China’s Premier concern about U.S. Treasuries not good news (March 13)
• A few thoughts about China and their bluff on treasuries (March 14)
• China wants to get rid of the dollar (March 23)
• More thoughts on the switch from dollars as reserve currency (March 24)
• Is China avoiding using US dollars? (March 31)

It is hard not to get the impression from this lead-in to the G20 conference that China is making a strategic move of huge consequence here.

Let’s be clear: the U.S. has overspent. It is a debtor nation, dependent on the kindness of foreigners. Somehow it believes it can still lead the world and is trying to strong-arm the rest of the G-20 into believing that stimulus must be the order of the day when the Europeans clearly want regulation.

Yes, stimulus is important, but outside of the United States and the U.K., most see this depression as one caused by Anglo-American-style laissez-faire capitalism and the need now is for more regulation. French President Nicholas Sarkozy has threatened to walk out of part of the summit unless the U.S. abandons its calls for reflating the unbalanced old world order.

China on the other hand wants a new world order. The latest story leads me to believe that China is not bluffing. They are deadly serious about knocking the U.S. down a peg. This comes from the French daily Figaro:

Beijing wants to challenge U.S. leadership

A few days before the G20, China has mounted an offensive on the role of the dollar and the reform of the IMF.

Even if they like subtle strategic concepts, the Chinese also know that sometimes the best defense is offense. Tired of constantly being attacked on the yuan and trade policy, Beijing has mounted a frontal assault by attacking the power of the dollar a few days before the G20. The offensive comes in the form of a proposal to establish a new international reserve currency which could be organized around the “special drawing rights” of the IMF.

The Governor of the Central Bank of China, Zhou Xiaochuan, called twice in one week, for a necessary reform of the world monetary system, without which “fiscal and monetary measures are useless.” In just a few months, the change in posture is spectacular. “In November, the Chinese went to the G20 in Washington with a rather low profile, using passive cooperation, playing their role as one of many,” points out a Pekingese observer. And what’s more, all this despite a natural role as challenger to U.S. leadership.

Obama meeting Hu Jintao
The proposal, moreover, seems to have been long prepared and coordinated with a number of other countries, including Russia. That said, even if it is legitimate, Beijing is under no illusions about its feasibility in the short term. The monetary issue is not at the heart of the G20. Regardless, China has made it an item of interest. And the presidents Hu Jintao and Barack Obama are to speak at their first meeting tomorrow on the sidelines of the summit.

On the issue of reform for voting rights in the IMF, Beijing is once again strong enough. In a long article published in the Times of London Friday, the Vice-Premier Wang Qishan has clearly explained the situation. China wants more weight in the IMF, but has no desire to engage its huge reserves in the Fund as it has been invited to do. Again, officially, the discreet Chinese have still not confirmed their position. Beijing would require profound reforms before making any further efforts. Meanwhile, the contribution would continue to be “defined by the present allotment.” China will not become a bilateral creditor of the IMF. It will not be the “banker of the world” as some hoped.

These things don’t happen overnight, but we are certainly now witnessing the end of American hegemony.

Source
Pékin veut contester le leadership américain – Figaro

Related articles
Les ambitions de Nicolas Sarkozy pour le G20 – Le Monde
La France met la pression avant le G20 à Londres – Figaro

Related posts:

• China to diversify out of U.S. dollars
• Is China avoiding using US dollars?
• China “serious about the plan to internationalise” Yuan
• Japanese defend dollar’s status while China tears it down
• China issues bonds to “promote the RMB in neighbouring countries”

The following post is up on Morgan Stanley’s website and highlights the degree to which money printing has become the policy tool of choice used by central bankers with which to fight this deflationary threat.  I have highlighted the whole paragraph on the inflationary risk of all of this.

Central banks that have adopted QE have used very different strategies, except for one which they have all shared – they have managed to surprise markets with almost every announcement. Since our last write-up (see “QE2”, The Global Monetary Analyst, March 4, 2009), monetary authorities in the UK, Switzerland and the US have delivered hefty surprises to the market by introducing larger-than-expected or significantly enhanced programmes. The Bank of England put £75 billion of the £150 billion tranche approved by the Treasury to use on March 5, most of it to be used to purchase gilts. The Swiss National Bank announced on March 12 that it would buy corporate bonds as well as foreign currency – specifically the euro. Finally, at its meeting on March 18, the FOMC delivered a hefty increase in its MBS purchase programmes (from US$500 billion to US$1.25 trillion) and introduced a US$300 billion programme to buy Treasury securities.

We are optimistic about the traction from QE… QE is not a panacea for economic ills, but we believe that it can work in conjunction with the many other programmes that are attacking the problem from various angles. These actions from major central banks are a continuation of their earlier aggressive easing of policy rates and their willingness to use any and all available means to pull economic growth up by its bootstraps. The size of these programmes to purchase assets outright as well as the demonstrated commitment of central banks to persevere with unconventional measures are integral parts of the policy package.

…but we also see higher risks now. The increase in the size of the active QE programme directly increases the potential policy traction in much the same sense that pushing policy rates lower increases the monetary stimulus. However, the size of these programmes also raises risks in two ways. First, it increases the potential size of losses that the central bank and its guarantor (the government) may have to bear. Second, unwinding such massive purchases of assets will act like a sizeable contractionary monetary policy shock. While the chances of QE making a significant impact on the economy have increased, so have the risks associated with managing and correctly unwinding these programmes…

QE in the G10. The G10 aggregate policy rate is already close to zero. It is therefore not surprising that QE is being either considered or implemented here, depending on the need for further policy action. The Swiss National Bank announced its active QE package (purchases of corporate bonds and FX) only on March 12, but it has been using passive QE since November 2008. Both Norway and Sweden have allowed their monetary base to grow since September and October 2008, respectively, in sync with increases of the monetary bases of the G4 central banks. The Bank of Canada, having cut its policy rate to 0.5%, seems to be readying itself to use “credit and quantitative easing”. Our strategists believe that QE could be in action there sooner than markets expect.

Perhaps the most crucial decision on the adoption of QE clearly lies with the ECB. The ECB, like the other major central banks, has instituted a passive QE regime since September 2008. Our ECB watcher, Elga Bartsch, believes that the ECB is unlikely to go down the path of active QE, but would be quite willing to extend the term on repo operations. These facilities were put in place at an early stage in the crisis, have worked well and have been copied by other central banks around the world. Also, the ECB may widen the pool of eligible collateral yet again by lowering further the required minimum rating for eligible assets. There is still room to cut rates, and our forecasts project the refi rate at 0.5% in 2Q09. However, given the downside risks to growth, the adoption of active QE can clearly not be ruled out. If the ECB does decide to purchase assets on an outright basis, it is likely to prefer corporate securities to government bonds in order to ease credit conditions (for more details, see QE or Not QE? by Laurence Mutkin, March 20, 2009).

Now, I am going to stop there because I want to introduce a few words by Ambrose Evans-Pritchard of the Telegraph regarding the ECB’s quantitative easing strategy. Do read the rest of Morgan Stanley’s research at the link in sources.

ECB is clearly alarmed by the outright contraction of credit. Loans to non-financial corporations fell in February (minus €4bn).

Yes, the M3 money supply is still up 5.9pc year-on-year, but that is backward-looking. M3 growth has collapsed. The credit crunch that was not supposed to exist in the eurozone is already well advanced.

The bank’s vice-president Lucas Papademos (ex-MIT, a heavy-weight) said: “It may be warranted that the central bank purchases private sector bonds to enhance liquidity. No decision has been taken, but it is a possibility that could improve the markets”.

“Potential measures could include an extension of the maturity of the central bank liquidity provided to banks and purchases of private debt securities in the secondary market”.

Hallelujah.

Nout Wellink, governor of the Dutch central bank, in turn said there is now “an increasing risk of deflation”.

Thank you Mr Wellink.

ECB president Jean-Claude Trichet has been insisting for month after month that there is no risk whatsover of deflation. At least a million workers are going to lose their jobs over coming months unneccesarily because of this blind refusal to face the reality of what is happening in the world.

(Or perhaps that is unfair to Mr Trichet’s boss – Bundesbank chief Axel Weber. One suspects that Mr Weber does indeed understand what is happening but knows that once the ECB starts buying bonds, it is on the slippery slope to an EU debt union – at German expense. The pressure to bail out Club Med governments may become unstoppable. He is right about that.)

Mr Wellink went on to admit that the ECB had screwed up royally by raising rates last July in response to a phoney inflation scare (oil futures speculation) at a time when much of the eurozone was already in recession.

“In hindsight, this measure was based on a faulty estimate of inflationary risks and real growth prospects.”

Bravo, Mr Wellink. This is the first time – to my knowledge – that any ECB governor has admitted any fault in what must be described as the most remarkable act of monetary primitivism in modern times, or indeed admitted any error on anything. One was beginning to think they were incapable of self-criticism.

Thank goodness for Dutch honesty. The ECB will be much stronger for it. Chippy central banks do not command respect.

It has taken a long time to get here: a lot of damage has been done. A German contraction of 6pc to 7pc (Commerzbank forecast) is already baked into the pie this year. German unemployment may reach 5m in 2010 (RWI Institute).

Ireland’s GDP has already dropped 7.5pc (year-on-year to Q4). Eurozone Industrial output fell 17.3pc in January (y/y). It was down 31pc in Spain. This is a greater fall than anything suffered in Spain over a 12-month period during the 1930s.

Now, I am not going to take a view here, but I think you know my unease with printing money. And I do think the excess liquidity in the system will not be mopped up in due course when the global economy recovers.

What I want to focus on is the importance of the ECB’s move to a more explicit QE policy. In my view, this puts every major central bank into the same category i.e. printing money to ward off deflation. Irrespective of one’s ideological bent, one must this should mean recovery sooner rather than later. Whether this anticipated recovery is inflationary or ephemeral remains to be seen.

As for Evans-Pritchard’s piece, he does go on to say:

Sadly I have little confidence that the ECB will undertake QE with adequate dispatch, but at least they seem willing to swallow their pride and start to do their part to mitigate the global depression that we are already in.

If they move fast enough they may even prevent the eurozone breaking. Big if.

We all know he has an anti-Euro bias (one I often share), so you have to take his comments with a pinch of salt.

My conclusion is that we mustn’t discount the very real possibility of a cyclical upturn in 2009. While my base case view sees weakness through the end of the year, signs of reflation in asset prices, commodity prices, plateauing claims numbers, and consumer spending are certainly already evident.

Certainly, I still foresee some major writedowns and heavy challenges in stoking credit growth in North America and Europe. But, I will keep an open mind and look for evidence on both sides of this argument.

Sources
QE2 – Size Matters – Morgan Stanley
Europe fetches the monetary helicopters, at long last – Ambrose Evans-Pritchard, Telegraph

Related posts:

• Quantitative easing in the U.K.
• Nouriel Roubini: Will massive stimulus ward off stag-deflation?
• Is Japan next on the road to quantitative easing?
• Plosser: The Fed must stop qualitative easing
• Is quantitative easing really inflationary?

Recently, I have highlighted the comments of a number of investing gurus, most of whom are fairly positive on the market. This includes Jeremy Grantham, Marc Faber, Bill Fleckenstein, Fred Hickey, Marty Fridson and Steven Leuthold (Louise Yamada is a notable exception).  However, when it comes to the global economy, the situation is much murkier, the likes of David Rosenberg at Merrill Lynch/BofA have made the case for continued economic weakness in the United States.

The standard bearer of the global-economy-is-weak-and-needs-rebalancing theme is Morgan Stanley Asia head Stephen Roach. And he is not a tad bullish on the global economy.

The world is moving into the second wave of the financial crisis, which will be symbolized more by the deterioration in the global business cycle than the financial market itself, said Stephen Roach, chairman of the Hong Kong-based Morgan Stanley Asia.

“I think the second wave will be driven by the weakening of profitability of corporations around the world and that will have a negative impact on their ability to pay back loans to banks and other financial institutions,” said Roach in an exclusive interview with Xinhua at Morgan Stanley Asia’s headquarters.

The first wave came about through the so-called subprime crisis, sparking a broadly based and severe recession in the world economy, he said.

Out of the recession, now comes further weakness in loans outstandings by financial institutions, which will have further negative impact on the earnings of the financial institutions.

“So I think the second wave is just beginning, which reflects more the impact of global business cycle than the credit market contagion itself,” said the chairman.

GRIM OUTLOOK FOR WORLD ECONOMY IN 2009

Roach noted that the world economic recession is not bottoming. “I think there’s more to come in terms of the weakness of the world economy.”

“When the year is finished, I think 2009 will represent the first decline for an entire year in world GDP we have see since the end of World War II,” he said.

Roach said that the drops of the global economy in the last three quarters of the year may not be as severe as in the early months of 2009, but the global economy is going to keep declining.

“There is weakness across the world. Every major developed economy is in recession. We’ve never seen that before,” he said.

And most large developing countries, including China, are either slowing very sharply or they are too in recession.

“This is a synchronous downturn in the global economy. There is quite a great deal further to go in my opinion,” he said, adding that unemployment will keep increasing for the better part of the final three quarters of 2009.

The world economy may bounce up a while by the end of the year, as there had been very steep decline in most economies in the fourth quarter of 2008 and equally steep drop in first quarter of 2009, he said.

“So statistically, you can get a positive increase in some point in the remaining three quarters, but that will be short-lived,” he said.

In large part, the global economy will be in a contraction mode through the end of this year, possibly, in the early of next year, he said.

The article goes on to present Roach’s view on major risks for 2009, as well as the Chinese growth story. But, the long and short of Roach’s view is that a weak global recovery will not begin until 2010.

Details at the link below.

Source
Stephen Roach: World moving into second wave of financial crisis – Xinhua

Related posts:

• Stephen Roach: Downturn in Asia less severe, but recovery later
• Stephen Roach sees a W-shaped recovery for China
• Stephen Roach and Jim Grant: Video of credit crisis thoughts
• Stephen Roach is talking double dip again
• Stephen Roach has a bone to pick with Congress

I give Obama high marks for much of what he has accomplished in such a short span and the tone he has set. However, on the economic policy front, there have been lapses. This video suggests there have been many.

Related article
Obama, Geithner Get Low Grades From Economists – WSJ

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