I’m off to the APEC CEO Summit in Lima, Peru and so in a bit of a rush. So I’ll just dump the good stuff that’s crossing my desk this Monday morning without too much editorial.
In short, I’m looking for signs of de-coupling of the real economy from the financial smoke and mirror factories - the ‘zombie’ Wall Street banks. I’m also looking for global triage and think it possible that we’ll see some economies (that’s you Japan, China, Brazil, India and Saudi Arabia) break away from the de-leveraging black hole and via fiscal stimulus sustain each others’ growth and credit needs in a manner similar to Malaysia’s course in the ‘98 crisis. For the time being, I’ve given up on the US (too much debt, too little industry), and Europe looks neutral at best. Iceland, of course, is toast, and the UK is wobbly.
Paulson throws your money at the one sector of the economy that doesn’t do anything useful, money that could have been used to support those sectors that provide your jobs and produce things that are actually useful.
Is it just me, or does the US dollar remind you of frequent flyer points that can only be spent on a rapidly dwindling catalog of increasingly shonky goods? It looks like China may be wishing to cash in some of theirs on parts for a railroad, and they should.
Comstock Partners summarises the situation for the US:
We have a budget deficit of about $455 billion this fiscal year and as we have warned in many of our weekly comments, we expect a deficit of $1 trillion or more in the next fiscal year. The incoming administration is also inheriting a $10 trillion government debt… We don´t expect the current global recession to end until the end of 2009 or beginning of 2010. The record U.S. total debt of over $50 trillion on an economy of almost $15 trillion is what we would call very onerous. For a period of about 20 years from the 1960s through 1970s it took $1.50 of increased debt to generate each additional $1 of GDP, but that ratio has trended up consistently in the last 28 years. In recent years it has taken about $3.50 of increased debt to generate an incremental $1 of GDP… Now that the deleveraging process of debt unwinding is in full swing world-wide, what do you think is going to happen to global economic conditions?
US data last week set more records:
U.S. workers drawing jobless benefits hit a 25-year high this month… Consumer spending fell 1.5 percent last month, after a 2.4 percent drop in September that was the largest since SpendingPulse started the data series in 2003… U.S. imports from China hit a record $33.1 billion in September, but imports from the European Union fell 3.8 percent and imports from the Organization of Petroleum Exporting Countries slumped 27.1 percent as the cost of imported oil fell by a record $12.41 per barrel in September… imports of consumer goods fell nearly 7.9 percent in September… U.S. exports fell at the fastest pace in seven years… U.S. goods exports fell by a record $10.4 billion, with all major categories showing a decline.
Ecinya doesn’t expect much from the G-20 conference:
The world cannot begin to resolve the systemic and economic problems that have derived from the American fiscal and monetary policy malaise UNTIL George W Bush departs the global stage. This weekend George W is hosting the G20 Summit.
Everyone has advice for the summiteers. VoxEu published a short book (pdf). Dani Rodrik had a good go at pre-drafting the inevitable communiqué as leaders agree to agree, except “The Bush administration opposes any regulatory agency with cross-border authority”. His summary:
There is no coordination in the fiscal arena, the promises made to emerging markets are vague, and even though there is a clear statement on protection and export subsidization, there is no monitoring or enforcement mechanism.
Jean-Claude Trichet (president of the European Central Bank) would like to fix three things: incentives, transparency, and pro-cyclicality.
Modern financial systems have favoured instruments and intermediaries that promise large returns in the short term. Institutions come under pressure to follow the strategies of those able to show high short-term profits. This process tends to lead to herding behaviour, in which risk controls easily become a secondary issue. We need to counter these mechanisms and establish the right incentives for achieving a balance between short-term and long-term investors and intermediaries. Incentives for market participants need to be strengthened in this respect, including through revised internal compensation schemes…
The second point concerns transparency. Despite all regulatory advances and progress in information technology, the financial system has been characterised by a lack of transparency about the ultimate allocation of risks. Two examples are the sheer complexity of structured financial products, which even sophisticated investors are not able to assess properly, and the lack of regulation for certain financial institutions. Regulators therefore need, in particular, to tighten up requirements for markets in which structured financial products are traded and strengthen reporting requirements for formerly unregulated institutions…
Finally, pro-cyclical behaviour is pronounced in financial systems. But in the present global financial system there are mechanisms that intensify fluctuations. The challenge is to preserve an efficient financial system as an engine for economic growth and at the same time ensure its stability. For example, capital regulations and provisioning rules as agreed by the Basel committee on banking supervision, and industry governance structures, especially in the area of risk management, need to restrain excessive risk-taking in upturns and discourage excessive conservatism when credit to companies and households is most needed…
Spiegel surveyed Nobel prize economists…
Lucas: The public needs a conveniently provided medium of exchange that is free of default risk or “bank runs.” The best way to achieve this would be to have a competitive banking system with government-insured deposits.
Stiglitz: To too great extent, there has been a race to the bottom in accordance with the myth that deregulation breeds innovation. Instead, the innovation was greatest when it came to getting around the regulations designed to ensure good information and a safe and sound financial system… Financial market regulators, at both the national and international level, have failed… Even countries which have done everything right — those which have managed their economy with far better regulation and better macro-economic prudence than the US — will suffer as a result of America’s mistakes… The sources of liquid funds are in Asia and the Middle East. But why should they turn their hard earned money over to an institution with a failed track record; one which pushed the deregulatory policies that have gotten the world into the mess where are in now; one which continues to advocate the asymmetric policies which contribute to global instability; and one whose governance structure is so flawed?
Phelps: A good life requires a rewarding workplace — one of change and challenge — and that requires some sort of well-functioning capitalism… That the banks chose to take on ever-greater levels of risk, with no end in sight until the collapse, was an effect of employee compensation: Fortunes could be made for each additional day that the bank could operate. There was no claw-back provision that would pay bonuses only for performance over the long term… Unfortunately, the banks for the most part appear to have lost the expertise to make business loans and investments, which they once had…
Samuelson (age 93!): Based on my observations of economic history, both short run and long run, I believe that there is no satisfactory alternative to market systems as a way of organizing both economically poor and economically rich populations. However, using markets is not the same thing as unregulated capitalism so beloved by libertarians. Such systems cannot regulate themselves, either micro-economically or macro-economically… President George W. Bush will figure in the history books as the worst president in the 234 years of US history…
In a sign that they are prepared to sideline the outgoing US president, Mr Medvedev backed the call from President Sarkozy for a follow-up summit in February once Barack Obama has taken over.
The world simply has to hold its breath for 60… more… days…
