By Simon Grey, on January 30th, 2012
Make no mistake, the problem does not lie with The Fed per-se. The Fed’s “low interest rates” are there to permit the profligacy of the government, yet the longer it goes on and the more the government abuses this deadly embrace the further into the coffin corner The Fed and Congress go. As the debt accumulation rises the maximum interest rate that can be absorbed goes down until finally you reach the boundary where even a slight increase in rates results in instantaneous bankruptcy.
Denninger is a smart man—well-versed in the law, particularly constitutional law, and has an immense knowledge of politics and economics. And yet, here he is once again calling for enforcement of the laws governing The Fed even though history has shown repeatedly and conclusively that it is politically impossible to manage inflation through a central bank. In theory, it is possible that a central bank will act prudently and responsibly, and not inflate the currency. In reality, though, a central bank is nothing more than yet another mechanism by which the government can tax the people.
This is why the solution to inflation is ending the fed, or at least government-mandated fiat currencies, and to allow multiple competing currencies. Relying on the government to properly manage a monopolistic money supply is an exercise in futility. Though it would be theoretically better to do it this way, history has shown quite clearly that a competitive currency market is preferable to a government-controlled currency, and it is therefore better to accept the fluctuations of market-based currency system over the guaranteed degradation of a government monopoly.
By Ajay Shah, on January 27th, 2012
Reportage by Robin Harding and Michael Mackenzie in the Financial Times:
The rate-setting Federal Open Market Committee predicted low interest rates until late 2014 and set a formal inflation objective of 2 per cent, reflecting chairman Ben Bernanke’s long-held goal of providing greater transparency.
The FOMC downgraded its estimate of growth in the coming quarters from “moderate” to “modest” and Mr Bernanke indicated that another monetary boost for the economy – most likely another round of quantitative easing, or QE3 – remained an option.
“We are prepared to take further steps in that direction if we see that the recovery is faltering or if inflation is not moving toward target,” Mr Bernanke said.
The Fed also published its first detailed forecasts of future interest rates.
…
Adopting the 2 per cent objective is a historic move that binds the whole FOMC to a defined goal that will endure after Mr Bernanke leaves. It means the FOMC can easily justify more easing if it wants to because its inflation forecast for 2014, of between 1.6 and 2 per cent, is below target.
The FOMC voted for Wednesday’s decision by 9-1. The only dissenter was Jeffrey Lacker, president of the Richmond Fed, who wanted to leave the late 2014 date out of the policy statement.
The US suffers from legacy legislation, which predates modern monetary economics, which places the burden upon the Fed of pursuing both price stability and low unemployment. The evolution of the US Fed has been led by human energy within the Fed. Starting from Paul Volcker, who took charge in August 1979, the US Fed has run a Taylor rule with a nice strong above-1 inflation coefficient. In a recent column in the Indian Express, Ila Patnaik tells us about Paul Volcker’s story and how it matters to us. In effect, from Volcker’s chairmanship onwards, the behaviour of the US Fed has been that of an inflation targeting central bank. This was the de facto reality. Everyone knew that the US Fed targets inflation at 2%. What is new now is that the Fed has put greater credibility behind this, by going closer to de jure inflation targeting.
A key dharma of good central banking is to say what you will do, and then do what you just said. By saying that there is an inflation target, there is now full alignment between the words and deeds of the US Fed.
The day will come when India will enact high quality legislation which puts monetary policy on a sound institutional foundation. But we should not accept mal-performance by RBI until that day. It is possible for RBI to do much better, when compared with the present, even though the present legislation is really badly written. The US Fed is a good example of how technical capabilities within the Fed, and not an external legislative mandate, have driven improvements in the functioning of the Fed. This sort of progression is what RBI can and should aspire to, and this does not require waiting for a high quality RBI Act.
By Ajay Shah, on October 25th, 2011
A few days ago, I wrote a blog post about India’s inflation crisis. For five years now, in every single month, the y-o-y CPI inflation has exceeded 5%. Under these conditions, economic agents have little confidence that RBI cares about inflation. They are now reporting double digit inflationary expectations. Under these conditions, inflation will be persistent. By itself, inflation is not going to go back to the target range of 4 to 5 per cent. This blog post made certain qualitative claims about fighting inflation under two scenarios: when the central bank has credibility and when it does not.
I recently came across a fascinating paper which is about a similar situation: it is about the problems faced in Ghana recently, in fighting back an inflation. It gives numerical values which are interesting for us. Their inflation was a bit worse than ours – they were at 20%. But for the rest, this analysis illuminates what we face in India today. The paper is : A model for full-fledged inflation targeting and application to Ghana, by Ali Alichi, Kevin Clinton, Jihad Dagher, Ondra Kamenik, Douglas Laxton and Marshall Mills, IMF Working Paper, 2010.
Here is the main story. First, look at the projected trajectory for what happens to the short term interest rate and inflation under conditions of weak credibility of the central bank:
The nominal rate is required to go all the way out to 26%. Inflation responds slowly. It is projected to get to the target (with some overshooting at first) by 2016. The cumulative damage to GDP growth, in this process of exorcising inflation, works out to roughly 20 per cent of GDP. (This is the sum total of the output cost over all the years taken in wrestling this inflation down).
Compare this against the picture obtained when the central bank has high credibility:
This is much nicer story. The nominal interest rate starts out high (18%) but inflation responds rapidly and the interest rate can also come down rapidly. By 2013, inflation is at the target. The cumulative damage to GDP growth, in this process of exorcising inflation, works out to only 4% of GDP.
This difference is striking. Lacking credibility, the central bank has to force a total output loss of 20% of GDP, and they get to target inflation by 2016. With credibility, the job gets done three years sooner, and at a cost of only 4% of GDP of output loss.
This is an essential insight into our inflation crisis today. In the end, raising rates will get the job done. No matter how bad is the monetary policy transmission, no matter how deeply ingrained inflationary expectations have become, raising rates will ultimately deliver price control. The choice that we face is between being bloody-minded about it, or simultaneously undertaking RBI reforms which involve zero output loss, and improve RBI’s credibility.  
By Bron Suchecki, on August 12th, 2011
The Vietnam Government saga against its people’s preference for gold continues. Commodity Online reports that after the gold price “skyrocketed” the State Bank of Vietnam allowed private companies to import “5 tons of gold to help stabilise domestic markets and supplement local supply. … ‘Taking advantage of the situation, speculators in the domestic market had speculated, and manipulated, causing unstable psychology among people even though the amount of Gold in the market is still high’ [State Bank of Vietnam] said. The State Bank of Vietnam also said its consistent policy is to stabilize the dong’s value, and it is risky for people to buy and hold gold at the moment…”
I’d say its risky to buy and hold the dong whereas holding gold would indicate a very stable “psychology”!
By Simon Grey, on May 6th, 2011
Federal Reserve Chairman Ben Bernanke said Thursday the central bank was already moving forward with its new mandate to promote broad financial stability in the wake of financial oversight reform legislation that instructed it to do so.
The Fed “has restructured its internal operations to facilitate” a regulatory approach that looks beyond the health of individual financial institutions, to one that looks at the interlinkages between firms and the overall state of the banking system, the official said. [Emphasis added.]
Notice what the FRB has to say on its “About” page: The Federal Reserve System is the central bank of the United States. It was founded by Congress in 1913 to provide the nation with a safer, more flexible, and more stable monetary and financial system. Over the years, its role in banking and the economy has expanded. [Emphasis added.]
I’m not sure how Bernanke managed to overlook this, what with him being the head of The Fed and all, but the whole purpose of having a central bank was, from day one, to promote financial stability. That has always been The Fed’s mandate. It’s like a default setting for the system, which is why it’s so surprising that Bernanke is just now catching on to this.
Bernanke’s reaction thus speaks to the general problem of bureaucrats. Namely, bureaucrats have a nasty tendency to shirk their duties, which always requires renewing their efforts at doing their job, accompanied with more power and money than before. The reason why bureaucrats fail at their job (micromanaging the economy) is not because they don’t possess enough knowledge and information, it’s because they don’t have enough resources at their disposal.
Thus, no bureaucrat ever admits that he is less than omniscient. He merely pledges to renew his effort, promising that he’ll get the job done right this time. Provided, of course, that he is given more money and power with which to do his job.
By Ajay Shah, on August 18th, 2010
Tom Wright and Siobhan Gorman in the Wall Street Journal on new thinking by Pakistan’s ISI about who is enemy #1.
Tamal Bandyopadhyay in the Mint on the campaign against C. B. Bhave. Also see Ashok Desai and Mahesh Vyas on these issues.
A. K. Bhattacharya in the Business Standard on the crisis of project management in government. This is what animates Nandan Nilekani’s TAGUP group and I hope this induces fundamental change in Indian public administration. Also see.
Fascinating new research by Devesh Kapur, Chandra Bhan Prasad, Lant Pritchett and Shyam Babu, written by Ila Patnaik in the Financial Express.
Jayanth Varma is dismayed at RBI’s lack of modern finance knowledge in thinking about CDS.
India on the FATF high table by K. P. Krishnan, in the Economic Times.
Neelasri Barman and Parnika Sokhi in DNA about the most important question in RBI reforms: that of HR practices. Roughly 30
years ago, RBI used to do direct recruitment at middle management levels. When the union became powerful and recruitment became restricted to the entry level, it had greatly damaging consequences on the organisation’s capability. If the HR falls
into place with really top quality people, then all the needed RBI reforms will rapidly get done.
William Dalrymple in the New York Times on Sufis.
Jeffrey Goldberg in the Atlantic magazine about the task of stopping Iran’s nuclear capability.
Jeff Frankel says that we have a lot to learn from small countries.
Damon Darlin in the New York Times tells the story about how Netflix worked on video over the net even though this directly
competed with its profitable DVD-by-post business.
Javier Blas and Greg Farrell in the Financial Times on the interesting role of agricultural commodity futures in the recent
flareup of prices.
By Trace Mayer, on February 9th, 2010
When a daisy chain of retrocessionaires exists, a single weak link can pose trouble for all. In assessing the soundness of their reinsurance protection, insurers must therefore apply a stress test to all participants in the chain, and must contemplate a catastrophe loss occurring during a very unfavorable economic environment. After all, you only find out who is swimming naked when the tide goes out. At Berkshire, we retain our risks and depend on no one. And whatever the world’s problems, our checks will clear. – Warren Buffett in the 2001 Berkshire Hathaway Chairmen’s Letter 
Having read all of the Berkshire Hathaway Chairman’s letters I can attest that there are many pearls of investing wisdom contained therein. I prefer to keep my capital safe and not dependent on insolvent banks, which are barbarous relics compared to digital gold currency, in order for my checks to clear. Just look at the FDIC failed institution list. Nevertheless, the Great Credit Contraction grinds on and it appears the next round is imminent; a Laboon is coming. As Australia’s News reports for the week of 6 Feburary 2010,
Representatives from 24 central banks and monetary authorities including the US Federal Reserve and European Central Bank landed in Sydney to meet tomorrow at a secret location, the Herald Sun reports.
Organised by the Bank for International Settlements last year, the two-day talks are shrouded in secrecy with high-level security believed to have been invoked by law enforcement agencies.
If the recovery is doing so well and if the credit crisis has subsided then why all the secrecy? Why not tell everyone, openly, the true state of affairs? Why does the Fed deny release of gold swap information under the FOIA requests from GATA? But we know why. Vampire squids operate in the shadows of secrecy and evaporate in the sunlight of truth.
THE LAST DAYS OF LEHMAN BROTHERS
Over the weekend I watched The Last Days Of Lehman Brothers and found it pretty entertaining. For those who have not seen it I would recommend picking up a copy.
The day of reckoning has only been delayed and will be intensified. This round will be attacks against currencies not investment banks. Perhaps that day of reckoning is coming sooner?
EURO BEGINS EVAPORATING
The only plausible fiat replacement for the FRN$ is the Euro. But if you think the FRN$ has problems the Euro’s are a multitude greater. But after the Euro evaporates, and it will eventually, then it will be time for the FRN$ to evaporate. There is only one alternative for the world reserve currency.
On May 20, 1999 Alan Greenspan testified before Congress, “And gold is always accepted and is the ultimate means of payment and is perceived to be an element of stability in the currency and in the ultimate value of the currency and that historically has always been the reason why governments hold gold.”
WHEN THE TIDE GOES OUT THE LABOON COMES
In Southeast Asia on the coasts of Thailand and Burma (Myanmar) live the Moken people who catch fish for their sustenance. For hundreds of years the tribal knowledge of the sea has been passed from father to son. One sign of particular importance is when the water recedes. Why? Because then soon comes the ‘Laboon‘ – a wave that eats people.
The elders of the village saw this terrible sign in December of 2004 when the massive tsunami slammed Southeast Asia killing over 200,000 people. I am sure the greyheads shouted and hooped and hollored in an attempt to warn everyone to run to higher ground. And like humans are I am sure not everyone listened or was liquid enough to move and undoubtably some must have perished in the Laboon.
In the financial world, gold is the highest ground to protect against financial asset destruction because it is the King of Commodities, the ultimate means of payment and is always accepted. Gold can stay at the bottom of the ocean for 500 years and still have the same amount of value when you pull it out. In other words, you can wait any crisis out indefinitely.
On the other hand, when you are in money market funds, auction rate securities, the massive bond market, (nationalized) retirement accounts, frozen bank accounts in Greece or Iceland, Monex, Failure-To-Delivers that weave the fiction of liquidity on the NYSE through the DTCC, or any other multitude of financial asset then you do not own an asset with intrinsic value. That asset can become either worthless or not be accepted for value like with ARS, CMBS, and etc. which makes H.R. 4248 The Free Competition In Currency Act of 2009 all the more important.
THE GOLD PULLBACK WAS HIT
On 28 December 2009 in Third Round Of Gold Upleg Ready To Start I concluded,
Sure, the third round of the upleg could not materialize for any number of reasons such as interest rates being raised, the mythical Cibola being discovered, etc. As the upleg progresses the gold to silver ratio should probably close from the current 63.27 towards a more normal 50-55. The better time to buy gold, silver or platinum was before the first or second rounds of this upleg. But if the precious metals are absent from one’s portfolio then the second best time to buy them is now although the real bargain may be around $1,050-$1,080 but we may not see that.
With gold trading around $995 on 9 September 2009 in Gold Party Barely Started I wrote, “This puts $1,300 gold and $25 silver within range without greatly exceeding previous trading norms”. With the current silver to gold ratio at 70.8 silver looks increasingly cheap.
I reiterated the opinion of $1300 by Q2 2010 on 9 October 2009 when interviewed on BNN. About a month later I was joined in the $1300 price target by Paul T. Jones II of Tudor Investment Corporation and on 4 February 2010 John Embry of Sprott Asset Management, a long-time gold advocate, chimed in with a similar opinion.
Gold should continue to consolidate over the next few weeks but, the next big move is likely to be up.
This is the view of Sprott Asset Management’s chief investment strategist John Embry, who says he is looking for the price of the yellow metal to hit around $1,350 to $1,400 by late spring.
CONCLUSION
The Last Days of Lehman Brothers, like the movie Rollover, is playing out before our eyes but not with investment banks but with currencies, the common stock of nations. A memorable quote was, ‘Nothing is something.’ And that is the reason to own gold. As The Great Credit Contraction grinds on capital will oscillate in waves between gold, the FRN$ and the Euro as capital seeks safety and liquidity which results in the fictitious capital being evaporated. For those who have not secured their financial castle on high ground, now is not the time to be hunting around for sand dollars in the retreated water.
The bailouts, quantitative easing and gigantic government enforced Ponzi scams known as retirement schemes will only cause the Laboon, which currently races towards the financial shore at a breakneak pace, to be that much larger and more intense. Despite what Geithner shrills, Treasury debt will not only lose its Aaa status it will eventually become worthless. The impotent costumed officials will be no more successful at holding off the Laboon than King Cnut was in ordering the sea to go out.
DISCLOSURES: Long physical gold and silver with no interest in sovereign debt from Greece, Portugal, Italy, Ireland, Spain, etc., Euros or the problematic SLV, Streettracks Gold ETF Trust Shares or the platinum ETFs.
By Thersites, on January 25th, 2010
Back in the olden days, people simply bartered products. One might trade a couple of loaves of bread for a fish. In order to ease this process so people didn’t have to bring their produce to market, over time people turned to gold, later paper money backed by gold and ultimately paper money backed by faith in government as currency in trade. Money itself should thus be considered as merely a commodity to be exchanged for other commodities. It only differs from other goods to the extent that it is not consumed like milk or sugar or a house. Its value is in serving as a medium of exchange of other goods and services.
As such, it makes no sense that governments should create money through “quasi-private” central banks. If there is consumer demand for facilitating the exchange of goods and services, then there will arise through the spontaneous order of the free market a system of competing providers of currencies. Presumably, those who produce money that will retain its value will drive out of the market those incompetent or unscrupulous competitors producing depreciating money. This is because money that retains its value over time will make the exchange of products easier because businesses will be able to make better calculations in exchange, and because as with any product, a premium will be placed on maintenance of value over depreciation.
One could speak to a host of problems with government currency: that inflation of the money supply unfairly benefits debtors at the expense of creditors and serves as an outright tax on all; that a constantly debased currency allows the government to fund unjustifiable wars in addition to all sorts of social programs and other means of unjust and unconstitutional wealth redistribution; that government naturally will mismanage the money supply just as they do all programs from a purely economic standpoint; that it is absurd that the government should have the power to outlaw monopolies yet grant itself a monopoly on a commodity like money that serves a specific special interest of the banking sector; and finally that government’s record in management of the money supply has been horrendous, with central banks creating a perpetual boom-bust cycle and constantly devaluing the people’s money. Concentrating the monopoly power over the money supply in the hands of a select group of bureaucrats is an asinine, irrational and furthermore dangerous policy.
But without going into these sometimes arcane economic phenomena, the most important thing to understand is that at its core, money supply is just like the supply of any other good or service except to the extent that its value is derived from its use as a commodity in exchange, rather than from the utility we gain in consuming a traditional good or service. If the market can provide other goods and services in the proper quantities and qualities to meet the demands of society, then surely it too can provide the proper quantity and quality of money. To believe that somehow, government provision of money is any more sacred or preferable to government provision of any other good or service is pure folly.
By Claus Vistesen, on December 3rd, 2009
If the theoretical discussion in the context of monetary policy, through most of 2009, has been centered on the different tools disposable to central banks in the form of unconvetional measures it seems almost certain that 2010 will be all about putting theory into action. Most notably is of course the much debated concept of exit strategies from quantitative easing (or enhanced credit support in the case of the ECB), what it means to really exit, how to exit, and when to exit.
Starting with the last point the G3 central banks have pretty all indicated that the latter part of 2009 and beginning of 2010 would see a gradual, but firm exit from quantitative easing and thus, essentially, unwinding of asset purchases and extraordinary liquidity provisions. In terms of how and without going too much into details all three central banks have clearly communicated how they intend to unwind QE if and when they see it fit. Finally, and on the first point it is naturally much more difficult since you can really only answer this question ex-post.
As I argued recently communicating an exit strategy may be quite simple not least since this task appeals to the more technocratic discourse which central banks master with ease, but actually performing one in practice may not be so easy. Recent evidence seem to vindicate this point.
Consider then the 12-month loans from the European Central Bank set to end with the last allotment the 15th of December where the ECB, according to Bloomberg, will lend as much as 150 billion euros ($227 billion). Now, the fact that demand for this tender will large is not so important but that it comes at this point in time when markets and the economy seem decidedly fragile is quite another;
(quote Bloomberg)
The ECB, which may detail conditions for the loans tomorrow, will lend banks 150 billion euros ($227 billion) in the Dec. 15 tender, according to the median of 19 economists in a Bloomberg News survey. That’s double the 75.2 billion euros banks drew in September, though less than half the 442 billion euros allotted in the first tender in June. The ECB will offer the loans at a fixed 1 percent, its current benchmark rate, 18 of the economists said.
The ECB has already signaled this month’s 12-month loans are likely to be the last as it starts to scale back its emergency lending to banks. With financial markets jittery after Dubai last week said it would seek to delay debt repayments, and Greece’s ballooning budget deficit pushing up its borrowing costs, European banks may take the opportunity to stock up on the ECB’s cheap cash.
“Take-up could potentially be very large, it’s the last opportunity to get into what could be a nice little earner,” said James Nixon, co-chief European economist at Societe Generale SA in London, who expects demand to total 200 billion euros. “Given the wobbles about Greece and Dubai, the ECB will cross their fingers and hope the 12-month tender goes off without too much of a problem.”
Clearly, today’s ECB meeting will tell us a lot, not least in relation to whether the ECB will be offering this final tender at a fixed rate or, in foresight of excess demand, deploy a variable rate. As Societe Generale points out in their latest ECB watch, Trichet and co seem very eager to remove liquidity as soon as possible as they consider the risk that banks’ operations may become too dependent on them. Naturally, I agree with this position, but as ever the ECB risks facing some hard questions in the context of e.g. a double dip recession in Germany, a blowout in Spain or Greece (which is coming), or if suddenly an event akin to the Dubai unravelling enters the stage to disrupt markets. Especially on the second point, it will be very interesting to see how intra-Eurozone spreads react to the unwinding of bank funding as I have long suspected (as well as many others) that the liquidity provided by the ECB has been used to fund the widening fiscal deficits in the Eurozone.
Elsewhere in the G3 or more specifically, at the BOJ any talk of an exit from QE was temporarily halted this week as the BOJ held an emergency meeting where the central bank responded to the increasing woes of the government by committing to a 10 trillion yen ($115 billion) program to supply loans to commercial banks at the prevailing refinancing rate of 0.1%.
(quote Bloomberg)
The central bank yesterday said it will offer three-month loans to commercial banks at 0.1 percent under the new facility. Governor Masaaki Shirakawa stopped short of boosting the monthly target for government-bond purchases from 1.8 trillion yen, a step analysts said may be taken within months.
The decision followed escalating warnings from Prime Minister Yukio Hatoyama’s government about the danger of prolonged consumer-price declines, exacerbated by the surge in the yen to a 14-year high. By contrast, Shirakawa, who met with Hatoyama today, in recent weeks raised his economic assessment and announced plans to end some emergency lending programs.
Shirakawa’s announcement “aimed to explicitly show the BOJ’s stance to cope with deflation and strong yen pressures proactively with minimum action,” said Junko Nishioka, chief economist at RBS Securities Japan Ltd. in Tokyo, who previously worked at the Bank of Japan. “We look for the bank to be eventually pushed into taking further actions to satisfy the government.”
As is readily clear, the decision by the BOJ to re-enter, as it were, QE follows mounting worries in the government about an annual deflation rate of some 2% and a JPY trading close to 80 to the USD which is not fun when you are dependent on exports (not to mention that Japan has also lost competitiveness to its main Asian rivals). It is of course particularly interesting to note the idea of the BOJ “satisfying” the government which seems a farcry from the situation in Europe where Trichet couldn’t give a sh’te about the cries from Eurozone government leaders. In this way, we should not be surprised to see the BOJ announcing that it is about to step up the purchase of government bonds. Gleen Macquire from Societe Generale (who is very good on Japan mind you) estimates, according to Bloomberg, that monthly government-debt purchases need to exceed 2.2 trillion to 2.5 trillion yen to have a “meaningful effect.
Of Theory and Practice
The two examples above show that while exit strategies may be very nice and handy in theory, they are bit more difficult to initiate in practice. In this respect, it is important for me to emphasize that I am no QE apologist who simple believes that liquidity provisions should be provided indefinitely and without a critical view of the underlying circumstances. However, at this point in time the central banks may be playing a dangerous game, especially in the case of the ECB where I would expect it to be a bit more difficult to simply turn on the tab again if it turns out that the initial decision to exit was premature. In this sense, it is the strenght as well as the weakness of the ECB that it tends to climb onto a very high horse in relation to regime changes and major policy reversals (although to be fair, the ECB has repeatedly stated that it is not committed either way).
In any case, I will be following the QE exit stragies played out before us in real time with some interest since they are bound to provide important precedence for future policy makers.
By Claus Vistesen, on November 16th, 2009
As I am preparing for a tournament this weekend in Sweden I only have time for some random shots, but then again; taking random shots seem to be exactly what the markets are all about at the moment. The first such random shot came from today’s release of the GDP figures from Europe which showed, with much fanfare, how the Eurzone (and Europe) is now effectively out of recession.
(quote Bloomberg)
The euro-area economy emerged from its worst recession since World War II in the third quarter as exports from Germany and France helped compensate for households’ reluctance to increase spending Gross domestic product in the economy of the 16 nations using the euro rose 0.4 percent from the second quarter, when it fell 0.2 percent, the European Union’s statistics office in Luxembourg said today. Economists had forecast the economy to grow 0.5 percent, according to the median of 34 estimates in a Bloomberg survey.
Europe’s economy is gathering strength after governments stepped up stimulus measures and the European Central Bank injected billions of euros into markets to encourage lending. While confidence in the economic outlook is at a 13-month high, rising unemployment, the expiration of stimulus plans and a surging euro are threatening to undermine a recovery. “The euro-zone economy has officially turned the corner and that is cause for relief, but not celebration,” said Martin van Vliet, a senior economist at ING Bank in Amsterdam. “The economy remains in a fragile state and is recovering mainly because of government stimulus and temporary inventory effects.”
Now, before we get ahead of ourselves, the comments by Mr. van Vliet should, as I would assume the comments from any other proper economist, alert us to the fact the current impressive figure, while not a figment of imagination, is indeed driven by decidedly imaginative factors in so far as goes the idea of a sustained recovery. In this way, one off government spending which, by nature, cannot be sustained indefinitely as well as a less severe bout of inventory reduction by part of companies (which may of course be a forward looking indicator) do not in themselves make a recovery.
Add to this that behind the headline figure for EU16 and EU27 of 0.4% and 0.2% GDP growth qoq respectively lies a decidedly murkier picture. Consequently, Greece and the UK continued to spend the third quarter in recession (-0.3 and -0.4 qoq respectively) and then we have poor Spain of course where the horror show of a recession continues without showing any signs (-0.3 qoq), whatsoever, of abating. It is noteworhty in this respect to consider the stark contrast between the European economies in the context of the latest aggregate confidence reading conducted by Bloomberg;
Bloomberg users in Spain remained the most pessimistic in Europe as that nation stayed mired in recession, with unemployment soaring toward 20 percent and the economy struggling to recover from a construction-industry collapse. The Spain confidence index was 17.7 this month from 10 in October.
So, the divergences are growing inside Europe and already they must be hard at work in Frankfurt to try to knit to together a strategy to suit all the individual economies of the Eurozone. The point is of course that they can’t and it will indeed be interesting to see how they manage this particular challenge in the future. Before we get to that though and, one would assume, any talk of lifting nominal interest rates from their current low levels we need to get over the hurdle of when and how to pull back “extraordinary measures” of monetary policy.
And here, this is not only about the ECB.
Consequently, and with the small exception of the BOE where Mervyn King recently left it an open question of whether the BOE would buy additional gilts, the three major central banks have all upped their discourse on the winding down of asset purchases in the context of the Fed and BOJ and “enhanced credit support” in relation to the ECB.
In Frankfurt and elsewhere, the outlook on these exit strategies remain opaque except to say that with the continuing emphasis by part of central banks most market commentators expect these measures to be withdrawn some time in Q1-Q2 2010 with the notable exception that the ECB seems to have indicated that the liquidity offering (12 month) coming in December will be the last.
Without going too much into detail [1] it appears to me that central bankers may end up in trouble on account of those exit strategies and how to instigate them into a 2010 “post stimulus” slowdown. This is not so much because I cannot see the impetus to exit in itself, but rather because if now is not the time to exit, how can you argue in the first half of 2010 that it is?
Surely, on this account I would give them an A+ in so far as goes the attempt to prepare markets, but I am more uncertain as to which they will also be able to actually deliver the exit strategy to the tune of the same grade. We will see I guess; for now, I hope that they are not taking, what will turn out to be, random shots at volatile asset prices and premature signs of non-materialising recoveries.
—
[1] This will have to wait for another time.
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