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November 23, 2011

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Barry Eichengreen: Europe's Never Ending Crisis

Posted: 23 Nov 2011 12:42 AM PST

Fed Watch: And the Global Economic Saga Continues

Posted: 23 Nov 2011 12:24 AM PST

Tim Duy:

And the Global Economic Saga Continues, by Tim Duy: The last week has been a non-stop flood of news. And, quite honestly, none of it is encouraging. I imagine the sole exception to that rule is the relatively sanguine nature of the US data. That said, I remain unconvinced that the US can for much longer resist the downward pull of the rest of the globe.

What more can we say about Europe that has not already been said? There has been no forward progress in the past week. To be sure, ECB bond buying has helped keep a lid on Italian bond yields. Yet, while ECB monetary policymakers focus on Italy, Spain and Belgium are slipping away. And France is clearly the next domino to fall. The "accidental" downgrade last week simply reveals that S&P has already prepared the report, clearly anticipating a deterioration in France's budget position as the Eurozone recession deepens. And to make matters worse, Zero Hedge points us to signs the Dexia bank rescue is faltering, and the Belgians realize they need to shift more of that burden of that rescue onto France. Meanwhile, the situation in Eastern Europe is rapidly deteriorating - Yves Smith directs us to the Telegraph for that story. And in Greece, the opposition party still insists they will not sign any pledge to commit to the October deal. Was any deal really reached last month?

Conventional wisdom is that the European Central Bank eventually acts as a lender of last resort to alleviate the sovereign debt crisis. This was clearly not on the mind of ECB President Mario Draghi in his recent speech. I certainly hope something was lost in translation, as the speech has some memorable moments. Notably:

Activity is expected to weaken in most of the advanced economies. This is the result of a weakening of various components of aggregate demand, both domestic and foreign.

Economic activity is weakening because the underlying components of economic demand are weakening. I am not sure this is particularly insightful. Is this the best analysis he can muster from the intellectual firepower of ECB economists? If so, we are in very big trouble. But it continues. The first two of Draghi's three pillars of monetary policy:

Continuity first and foremost refers to our primary objective of maintaining price stability over the medium term.

Consistency means to act in line with our primary objective and with our strategy both in time and over time.

I am having a hard time distinguishing between "continuity" and "consistency" here. The third (second?) pillar is predictable:

Credibility implies that our monetary policy is successful in anchoring inflation expectations over the medium and longer term. This is the major contribution we can make in support of sustainable growth, employment creation and financial stability. And we are making this contribution in full independence.

Gaining credibility is a long and laborious process. Maintaining it is a permanent challenge. But losing credibility can happen quickly – and history shows that regaining it has huge economic and social costs.

Translation: "We can only save the Euro, but only at the cost of German hyperinflation of the 1920's." He then pulls a Ben Bernanke and tosses the ball back to fiscal policymakers"

National economic policies are equally responsible for restoring and maintaining financial stability. Solid public finances and structural reforms – which lay the basis for competitiveness, sustainable growth and job creation – are two of the essential elements.

But in the euro area there is a third essential element for financial stability and that must be rooted in a much more robust economic governance of the union going forward. In the first place now, it implies the urgent implementation of the European Council and Summit decisions. We are more than one and a half years after the summit that launched the EFSF as part of a financial support package amounting to 750 billion euros or one trillion dollars; we are four months after the summit that decided to make the full EFSF guarantee volume available; and we are four weeks after the summit that agreed on leveraging of the resources by a factor of up to four or five and that declared the EFSF would be fully operational and that all its tools will be used in an effective way to ensure financial stability in the euro area. Where is the implementation of these long-standing decisions?

Here I think that Draghi is simply delusional. Does he not realize that plans to expand the ESFS are essentially dead at this point? That France and Germany are not willing or able to contribute more capital? That the plans to leverage the ESFS are floundering as the reality sets in that financial engineering will not work here? That the Chinese scoffed at efforts to get them to buy into such a plan? That the EU political system is capable at moving even a fraction of the speed of financial markets?

I understand the ECB does not want to take on the role of fiscal authority, but what other choice do they have? Little else than to oversee the collapse of the currency they are charged to protect.

Meanwhile, word is the Greek debt haircut deal is in jeopardy. Not a surprise, as not real was really reached at the summit, just a desperate attempt to buy time. Market participants should by now realize the outcome of any European summit is little more than smoke and mirrors.

Speaking of smoke and mirrors, the news from this side of the pond is not exactly encouraging. The Supercommitte hit a brick wall, to no one's surprise but Wall Street's. The stage is set for a nontrivial fiscal tightening in short order - 5 weeks or so. Greg Ip at the Economist puts some numbers on what is at stake, and comes up with contractionary policy on the order of 2.4% of GDP. Note that the Federal Reserve forecast for 2012 is 2.5% to 2.9%, and I bet not much fiscal contraction is built into those numbers. So, make no mistake, the failure of the Supercommittee to come up with a plan for "smart" austerity - austerity focused on the medium and long-runs, with stimulus in the short run, is very meaningful. The conventional wisdom is that Congress will not go home for the holidays without at a minimum extending the payroll tax credit. I will follow that lead, but remain worried that the weight of Washington gridlock argues for more disappointment in the weeks ahead.

Across the Pacific, another storm is brewing - the Chinese economy continues to slow. Via Bloomberg:

China's manufacturing may contract this month by the most since March 2009 as home sales slide, adding to evidence the world's second-biggest economy is slowing, a preliminary purchasing managers' index shows.

The reading of 48 reported by HSBC Holdings Plc and Markit Economics today compares with a final number of 51 last month. A number below 50 indicates a contraction.

Conventional wisdom is that the downside is limited, as at its heart China is a command and control economy. That said, even a minor slowdown is disconcerting, as the US economy does not need another trade shock to add to the trade and, more importantly, financial shock about to flow from Europe.

Bottom Line: The world economy remains in a precarious place as we head into the final month of 2011.

Links for 2011-11-23

Posted: 23 Nov 2011 12:06 AM PST

Economic Insecurity

Posted: 22 Nov 2011 01:08 PM PST

Via Motoko Rich at the NY Times:

... A new report ... shows that 45 percent of United States residents live without economic security. That means they are not earning enough income to cover basic expenses, plan for important life events like college or save for emergencies like unexpected health bills. ...
The report showed that 55 percent of children live in households where families do not earn enough to achieve economic security. Even among those households with two full-time workers, 22 percent of those families with children earn less than is necessary to guarantee economic security.
The most vulnerable households are those led by single mothers, as well as African-American and Hispanic households. Only 18 percent of households headed by single mothers are living with economic security, while two-thirds of Hispanic households and 62 percent of African-American households are not earning enough to cover basic needs and saving requirements.
Part of the problem ... is that so many jobs pay low wages. ... "We have a construct in this country that if you work full time and keep your nose clean and live by the rules, you will get that full-time job that allows you to take care of your family," Ms. Addkison said. "And what we're finding is that workers who are working full time or the equivalent are still struggling."

Third Quarter GDP Growth Revised Downward

Posted: 22 Nov 2011 09:36 AM PST

Our not so robust recovery is weaker than first reported:

Real gross domestic product ... increased at an annual rate of 2.0 percent in the third quarter of 2011 ... according to the "second" estimate released by the Bureau of Economic Analysis. ... The GDP estimates released today are based on more complete source data than were available for the "advance" estimate issued last month. In the advance estimate, the increase in real GDP was 2.5 percent...

So once again the advance estimate captured headlines and allowed policymakers to say hurray, things are improving, we don't have to act. I disagreed at the time -- even 2.5 percent is a sputtering recovery compared to what we need to reemploy the millions of jobless and policymakers have waited far too long already -- but the headline figure was enough to allow policymakers to "wait and see." Now, with growth even lower than we thought, will policymakers change course? Though I see no reason to let them off the hook, I gave up on fiscal policy authorities long ago. I just hope they won't make things worse. But monetary authorities ought to be acting now to bolster the economy further, especially given the substantial risks from Europe and elsewhere, and it's disappointing that they haven't done more already.

Update: More comments at CBS News.

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