As ordinary citizens with no power over the levers of policy, we watch from the sidelines, and weep. The whole global economy has tipped into a downward spiral. Trade and output are contracting at rates that outstrip the leisurely depression of the 1930s. Debt deflation has simply washed over the drastic measures taken by governments everywhere.
Judging by the latest Merrill Lynch survey of fund managers, investors have a touching faith that China is going to rescue us all and re-ignite the commodity boom. How can this be? Taiwan's exports to China fell 55pc in January, Japan's fell 45pc. These exports are links in the supply chain for China's industry. Manufacturing output in the Shanghai region fell 12pc in January.
My favourite China guru, Michael Pettis from Beijing University, is in despair – as you can see on his blog (http://mpettis.com). The property bubble is bursting. Developers have built more offices in Beijing since 2006 than the entire stock in Manhattan. There is a 14-year supply glut. We have seen this movie before.
Factory output is collapsing at the fastest pace everywhere. The figures for the most recent month available are, year-on-year: Taiwan (-43pc), Ukraine (-34pc), Japan (-30pc), Singapore (-29pc), Hungary (-23pc), Sweden (-20pc), Korea (-19pc), Turkey (-18pc), Russia (-16pc), Spain (-15pc), Poland (-15pc), Brazil (-15pc), Italy (-14pc), Germany (-12pc), France (-11pc), US (-10pc) and Britain (-9pc). Norway sails blissfully on (+4pc). What do they drink up there?
This terrifying fall has been concentrated in the last five months. The job slaughter has barely begun. Social mayhem comes with a 12-month lag. By comparison, industrial output in core-Europe fell 2.8pc in 1930, 5.1pc in 1931 and 3.9pc in 1932, according to RBS.
Stephen Lewis, from Monument Securities, says we have been lulled into a false sense of security by the lack of "soup kitchens". The visual cues from Steinbeck's America are missing. "The temptation for investors is to see this as just another recession, over by the end of the year. But this is not a normal cycle. It is a cataclysmic structural breakdown," he said.
Fiscal stimulus is reaching its global limits. The lowest interest rates in history are failing to gain traction. The Fed seems paralyzed. It first talked of buying US Treasuries three months ago, but cannot seem to bring itself to hit the nuclear button.
As the Fed dithers, a flood of bond issues from the US Treasury is swamping the debt market. The yield on 10-year Treasuries has climbed from 2pc to 3.04pc in eight weeks. The real cost of money is rising as deflation gathers pace.
US house prices have fallen 27pc (Case-Shiller index). The pace of descent is accelerating. The 2.2pc fall in December was the worst month ever. January looks just as bad. Delinquenc-ies on prime mortgages were 1.72pc in September, 1.89pc in October, 2.13pc on November and 2.42pc in December. This is the trajectory eating away at the banking system.
Graham Turner, from GFC Economics, fears the Dow could crash to 4,000 by summer unless there is a "quantum reduction" in mortgage rates. The Fed should swoop in to the market – armed with Ben Bernanke's "printing press" – and mop up enough Treasuries to force 10-year yields down to 1pc and mortgage rates to 2.5pc. Monetary shock and awe.
This remedy is fraught with risk, but all options are ghastly at this point. That is the legacy we have been left by the Greenspan doctrine. We are at the moment of extreme danger in Irving Fisher's "Debt Deflation Theory" (1933) where the ship fails to right itself by natural buoyancy, and capsizes instead.
From all accounts, the Fed was ready to launch its bond blitz in January. Something happened. Perhaps the hawks awoke in cold sweats at night, fretting about Weimar.
Perhaps they feared that China and the world will pull the plug on the US bond market. If so, it is time for Washington to get a grip. America remains the hegemonic global power. The Obama team should let it be known – and perhaps Hillary Clinton did just that on her trip to Asia – that any country playing games with the US bond market in this crisis will be treated as an enemy and pay a crushing price.
Pacific allies already know that they cannot take the US security blanket for granted. As for China – and others pursuing a mercantilist strategy of export-led growth – they must know that the US can shut off its market and wreak havoc to their economy.
To Europe, they might make it clearer that unless the European Central Bank is brought to heel by the Continent's leaders (whatever Maastricht says) and forced to play its full part in emergency efforts to save the global economy, the NATO military alliance will wither and the region will be left to fend for itself against a revanchist Russia.
Should the main threat come from an exodus of private wealth, Washington may have to impose temporary capital controls. Never forget, America is the one country with enough strategic depth to go it alone, if necessary. The US is not going to let foreigners keep it trapped in a depression.
I doubt matters will ever come to this. Japan is already in dire straits. Exports crashed 46pc in January, year-on-year. The Bank of Japan may soon start buying US Treasuries for its own reasons – just as it did from 2003 to 2004 – in order to reverse the 30pc rise of the yen over the last 18 months. If it helps preserve the Sino-US defence alliance in the face of Chinese naval expansion, so much the better.
In any case, the storm has shifted across the Atlantic to Europe. Germany faces 5pc contraction this year (Deutsche Bank). The bill has come from the burst bubble in the ex-Soviet bloc. Europe's banks are on the hook for $1.6 trillion (£1.1 trillion). For the first time since the launch of monetary union, Europe's leaders are speaking openly about the risk of EMU break-up.
A run on the US dollar looks a remote threat as the euro drama unfolds. The Fed may soon have all the room for manoeuvre it needs. Small comfort.
ORIGINAL LINK
Sunday, March 1, 2009
Rediscovering history
As economic activity around the world shrinks at a pace that few expected, the obligatory amnesia of bull markets is now being replaced by a new respect for the past.Bull markets inevitably lead to the arrogant and ignorant belief that the old rules can be swept away and that economic history is irrelevant. And wiser people who warn that grief has inevitably followed earlier bubbles are scoffed at.
Historian Niall Ferguson recounts a telling episode in his new book, The Ascent of Money. He was invited to speak to a group of bankers at an expensive conference held in the Bahamas in November 2006. “The theme of my speech was that it would not take much to cause a drastic decline in the liquidity that was cascading through the global financial system and that we should be cautious about expecting the good times to last indefinitely. My audience was distinctly unimpressed. I was dismissed as an alarmist,” writes Ferguson.
The tendency to dismiss what happened in the past is less common these days. In fact, as the intensity of the recession in the rich nations increases, the urge to dig deeper into history rises in tandem. And many old and buried ideas are being resurrected.
The initial trek into the past that started after the first credit shock in September 2007 did not go too deep into history. Most economists and analysts were content comparing the downturn—and speculating about the revival—by looking at the mild recessions of the 1990s and the early part of the current decade in the US and Europe. This one was expected to be a repeat of the immediate past.
But they started travelling further back in time when the initial hopes of a quick dip and rebound evaporated. After jumping to the sharp and painful recession of the early 1980s, the debate has now settled into the 1930s: What caused the Great Depression and how can a repeat be avoided in these times?
The D-word has already got an airing in recent weeks. British Prime Minister Gordon Brown said earlier this month that the world needed to agree on monetary and fiscal stimulus to get out of depression. His opponents pounced on him while his media managers dismissed it as a slip of the tongue. But the International Monetary Fund said a few days later that the rich nations are already in depression.
Memories of the gloomy 1930s and greater attention to Japan’s economic stagnation over the past two decades have also helped resurrect economists who provided unconventional explanations for what happened during these two episodes. The old consensus has crumbled.
We have already seen the Keynes revival, as economists have scrambled to learn from the insights of the most influential economist of the interwar years. But others have also got a new prominence. I will just mention two economists here: an American who lived during the Great Depression and a Japanese who has a refreshingly different take on why his country’s economy has stagnated.
Irving Fisher has been the target of several barbs because he made one of the worst market calls ever. He said mere days before the US shares fell off a cliff in the crash of 1929: “Stock prices have reached what looks like a permanently high plateau.”
But Fisher also later came up with an explanation about the depression that followed. This is the debt deflation theory, which essentially says that indebtedness forces families and businesses to sell collateral that pushes down their prices even more and further raises the threat of insolvency. I doubt Fisher is taught to economics students these days. In an article in VoxEU.org, Enrique G. Mendoza of the University of Michigan offers some advice to government around the world: Hire Irving Fisher.
Meanwhile, many are taking a closer look at what Richard Koo of the Nomura Research Institute described earlier this decade as Japan’s balance sheet recession. In an analysis that has striking parallels with Fisher’s prognosis in the 1930s, Koo says over-leveraged Japanese firms trying to reduce debt did not have the stomach for new investment. The fall in the value of pledged shares is creating a milder variant of this problem in India.
The point is not that economists such as Fisher and Koo have the keys to the kingdom. Economists will struggle to explain why economic activity waxes and wanes—and why some recessions can be long, brutish and nasty.One of the few good things to emerge from the current crisis is that it is has partially rehabilitated heterodox economists such as Fisher, Koo, Hyman Minsky and even John Kenneth Galbraith. And there is a greater respect for economic history.
It is easy to pretend that you are living in unique times when the laws of economics are suspended. But that is only till you get ambushed by reality.
Historian Niall Ferguson recounts a telling episode in his new book, The Ascent of Money. He was invited to speak to a group of bankers at an expensive conference held in the Bahamas in November 2006. “The theme of my speech was that it would not take much to cause a drastic decline in the liquidity that was cascading through the global financial system and that we should be cautious about expecting the good times to last indefinitely. My audience was distinctly unimpressed. I was dismissed as an alarmist,” writes Ferguson.
The tendency to dismiss what happened in the past is less common these days. In fact, as the intensity of the recession in the rich nations increases, the urge to dig deeper into history rises in tandem. And many old and buried ideas are being resurrected.
The initial trek into the past that started after the first credit shock in September 2007 did not go too deep into history. Most economists and analysts were content comparing the downturn—and speculating about the revival—by looking at the mild recessions of the 1990s and the early part of the current decade in the US and Europe. This one was expected to be a repeat of the immediate past.
But they started travelling further back in time when the initial hopes of a quick dip and rebound evaporated. After jumping to the sharp and painful recession of the early 1980s, the debate has now settled into the 1930s: What caused the Great Depression and how can a repeat be avoided in these times?
The D-word has already got an airing in recent weeks. British Prime Minister Gordon Brown said earlier this month that the world needed to agree on monetary and fiscal stimulus to get out of depression. His opponents pounced on him while his media managers dismissed it as a slip of the tongue. But the International Monetary Fund said a few days later that the rich nations are already in depression.
Memories of the gloomy 1930s and greater attention to Japan’s economic stagnation over the past two decades have also helped resurrect economists who provided unconventional explanations for what happened during these two episodes. The old consensus has crumbled.
We have already seen the Keynes revival, as economists have scrambled to learn from the insights of the most influential economist of the interwar years. But others have also got a new prominence. I will just mention two economists here: an American who lived during the Great Depression and a Japanese who has a refreshingly different take on why his country’s economy has stagnated.
Irving Fisher has been the target of several barbs because he made one of the worst market calls ever. He said mere days before the US shares fell off a cliff in the crash of 1929: “Stock prices have reached what looks like a permanently high plateau.”
But Fisher also later came up with an explanation about the depression that followed. This is the debt deflation theory, which essentially says that indebtedness forces families and businesses to sell collateral that pushes down their prices even more and further raises the threat of insolvency. I doubt Fisher is taught to economics students these days. In an article in VoxEU.org, Enrique G. Mendoza of the University of Michigan offers some advice to government around the world: Hire Irving Fisher.
Meanwhile, many are taking a closer look at what Richard Koo of the Nomura Research Institute described earlier this decade as Japan’s balance sheet recession. In an analysis that has striking parallels with Fisher’s prognosis in the 1930s, Koo says over-leveraged Japanese firms trying to reduce debt did not have the stomach for new investment. The fall in the value of pledged shares is creating a milder variant of this problem in India.
The point is not that economists such as Fisher and Koo have the keys to the kingdom. Economists will struggle to explain why economic activity waxes and wanes—and why some recessions can be long, brutish and nasty.One of the few good things to emerge from the current crisis is that it is has partially rehabilitated heterodox economists such as Fisher, Koo, Hyman Minsky and even John Kenneth Galbraith. And there is a greater respect for economic history.
It is easy to pretend that you are living in unique times when the laws of economics are suspended. But that is only till you get ambushed by reality.
Wednesday, February 25, 2009
Economic downturn hits Asia as Japanese exports and Hong Kong GDP
HONG KONG: Japanese exports fell by nearly half in January and the Hong Kong government forecast Wednesday that its economy would contract as much as 3 percent this year - further signs that the economic downturn in Asia will intensify this year, despite the numerous stimulus measures being implemented around the world.
Much of the economic growth in Asia in recent years stemmed from strong exports, a dependence that has turned into a liability by transmitting the recessions in the United States and Europe to a region that was otherwise well insulated from the U.S. financial troubles that brought on what is now a global economic crisis.
Japanese exports in January plunged 46 percent from a year earlier and imports dropped 32 percent, echoing sharp declines reported recently by China and Taiwan.
Japan was one of the first countries in the region last year to tip into recession, as weakness stemming from poor domestic demand was compounded by evaporating demand overseas.
During the last quarter of 2008, the Japanese economy shrank an annualized 12.7 percent, and the trade data for January underpinned economists' views that the start of 2009 looks even worse.
Related Articles
"We're looking at several more quarters of negative growth in Japan," said Simon Wong, a regional economist at Standard Chartered in Hong Kong, who expects the Japanese economy, the world's second-largest after the United States, to shrink by 3.2 percent this year.
Asia has not been alone in suffering from the export slowdown. Germany, another of the world's biggest exporters, saw its exports drop 7.3 percent in the fourth quarter of last year from the previous three months, according to data released Wednesday.
And demand for exports in the United States is unlikely to pick up soon. Ben Bernanke, the chairman of the U.S. Federal Reserve, said Tuesday that a full recovery in the United States was potentially at least a year away.
The Japanese export decline was in line with analysts' expectations, and was in part the result of the timing of the Lunar New Year holiday in January. But it indicated a significant worsening from an already grim December, when exports fell 35 percent.
The Japanese yen - whose strength has exacerbated weak overseas demand for Japanese goods by making them relatively more expensive - has weakened in the past three weeks, trading at about ¥97 to the dollar Wednesday, compared with about ¥89 in early February.
But it remains much stronger than levels of about ¥108 a year ago, and is expected to continue to hold down the Japanese economy, analysts say. Almost every big-name Japanese exporter has cited the yen as a main reason for a sharp drop-offs in sales and probable deep losses this year.
Honda, one of the few Japanese exporters still projecting a profit for the business year that ends March 31, on Wednesday provided the latest example of corporate pain, saying its vehicle production had plunged 33.5 percent in January.
In Hong Kong, meanwhile, the government said that it expected the economy to shrink 2 percent to 3 percent in 2009, continuing a deceleration that began last year, when the city recorded growth of 2.5 percent, compared with 6.4 percent in 2007. The last time the Hong Kong economy shrank for a full year was a decade ago, during the Asian financial crisis.
In the last quarter of 2008, the Hong Kong economy contracted 2.5 percent compared with figures for a year earlier, the government said Wednesday.
Like its fellow regional financial centers Singapore and Japan, Hong Kong slipped into recession late last year, in part because of its relative openness and the exposure to the financial sector. Unlike Singapore, which expects its economy to shrink by as much as 5 percent this year, economists say Hong Kong will be somewhat cushioned by mainland China, where the government has announced massive stimulus measures.
Hong Kong also announced a package of measures to support economic growth, including tax cuts and spending on public works projects, in what some economists termed a "conservative" reaction to the challenges at hand.
Shirla Sum and Enoch Fung, economists at Goldman Sachs, commented in a note Wednesday that the plans offered "few policy offsets against the backdrop of a weakening external environment." The two economists expect the Hong Kong economy to shrink 5 percent in 2009.
Elsewhere in the region, South Korea said it would offer a fund of 20 trillion won, or $13.19 billion, to bolster its commercial banks and dispel worries about the stability of its financial sector.
And the Thai central bank cut its major rate for the third time in as many months, by half a percentage point to 1.5 percent.
Much of the economic growth in Asia in recent years stemmed from strong exports, a dependence that has turned into a liability by transmitting the recessions in the United States and Europe to a region that was otherwise well insulated from the U.S. financial troubles that brought on what is now a global economic crisis.
Japanese exports in January plunged 46 percent from a year earlier and imports dropped 32 percent, echoing sharp declines reported recently by China and Taiwan.
Japan was one of the first countries in the region last year to tip into recession, as weakness stemming from poor domestic demand was compounded by evaporating demand overseas.
During the last quarter of 2008, the Japanese economy shrank an annualized 12.7 percent, and the trade data for January underpinned economists' views that the start of 2009 looks even worse.
Related Articles
"We're looking at several more quarters of negative growth in Japan," said Simon Wong, a regional economist at Standard Chartered in Hong Kong, who expects the Japanese economy, the world's second-largest after the United States, to shrink by 3.2 percent this year.
Asia has not been alone in suffering from the export slowdown. Germany, another of the world's biggest exporters, saw its exports drop 7.3 percent in the fourth quarter of last year from the previous three months, according to data released Wednesday.
And demand for exports in the United States is unlikely to pick up soon. Ben Bernanke, the chairman of the U.S. Federal Reserve, said Tuesday that a full recovery in the United States was potentially at least a year away.
The Japanese export decline was in line with analysts' expectations, and was in part the result of the timing of the Lunar New Year holiday in January. But it indicated a significant worsening from an already grim December, when exports fell 35 percent.
The Japanese yen - whose strength has exacerbated weak overseas demand for Japanese goods by making them relatively more expensive - has weakened in the past three weeks, trading at about ¥97 to the dollar Wednesday, compared with about ¥89 in early February.
But it remains much stronger than levels of about ¥108 a year ago, and is expected to continue to hold down the Japanese economy, analysts say. Almost every big-name Japanese exporter has cited the yen as a main reason for a sharp drop-offs in sales and probable deep losses this year.
Honda, one of the few Japanese exporters still projecting a profit for the business year that ends March 31, on Wednesday provided the latest example of corporate pain, saying its vehicle production had plunged 33.5 percent in January.
In Hong Kong, meanwhile, the government said that it expected the economy to shrink 2 percent to 3 percent in 2009, continuing a deceleration that began last year, when the city recorded growth of 2.5 percent, compared with 6.4 percent in 2007. The last time the Hong Kong economy shrank for a full year was a decade ago, during the Asian financial crisis.
In the last quarter of 2008, the Hong Kong economy contracted 2.5 percent compared with figures for a year earlier, the government said Wednesday.
Like its fellow regional financial centers Singapore and Japan, Hong Kong slipped into recession late last year, in part because of its relative openness and the exposure to the financial sector. Unlike Singapore, which expects its economy to shrink by as much as 5 percent this year, economists say Hong Kong will be somewhat cushioned by mainland China, where the government has announced massive stimulus measures.
Hong Kong also announced a package of measures to support economic growth, including tax cuts and spending on public works projects, in what some economists termed a "conservative" reaction to the challenges at hand.
Shirla Sum and Enoch Fung, economists at Goldman Sachs, commented in a note Wednesday that the plans offered "few policy offsets against the backdrop of a weakening external environment." The two economists expect the Hong Kong economy to shrink 5 percent in 2009.
Elsewhere in the region, South Korea said it would offer a fund of 20 trillion won, or $13.19 billion, to bolster its commercial banks and dispel worries about the stability of its financial sector.
And the Thai central bank cut its major rate for the third time in as many months, by half a percentage point to 1.5 percent.
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