Monday, 15 June 2009

Zombiegrad Spring

yo!...good news week...innit!

capitulation day

...this morning... in...


...even the msb...

...are carryin the real news...


..."Paul Krugman: The "Nipponisation" of the world economy with a bunch of "Argentinafications" playing a role in the acute crisis. But even after those are over, we have the Nipponisation of the world economy. And that's really something.

Will Hutton: What was the heart of the Japanese problem? What was at the heart of their 17 years of going nowhere?

PK: Well, my guess is that it was that the balance-sheet problems took a very long time to resolve. And it is difficult to get enough demand in an economy where you have really very adverse demography ...

WH: So, which countries look closest to being Nipponised - combining balance-sheet problems and ageing populations?

PK: Well, the US doesn't have the same combination. But in Europe, Germany and Italy look comparable. France is better and Europe as a whole is considerably better.

WH: Germany matches Japan to an uncanny degree. You talk about the Nipponisation of the world economy: I'm not so sure. But I would talk about the Nipponisation of Europe via a German economy at its centre in the grip of the same problem - and that starts to be a global problem.

PK: Germany has huge inadequacy of domestic demand. Their economic recovery in the first seven years of this decade rested on the emergence of gigantic current account surplus.

How is it possible that Germany, which did not have a house price bubble, is having a steeper GDP fall than anyone else in the major economies?

The answer is that they depended upon exporting to the bubble regions of Europe, so they actually got side-swiped by the loss of those exports worse than the bubble regions themselves got hit.

It's Germany on a global scale that is the concern. We worry about the drag on world demand from the global savings coming out of east Asia and the Middle East, but within Europe there's a European savings glut which is coming out of Germany. And it's much bigger relative to the size of the economy.

WH: And on top there is an unique and unaddressed huge potential banking crisis. The Germans pride themselves on their three-legged banking system, but it is incredibly interlinked. The IMF warns that Germany could have to take at least $500bn of writedowns, which its banks have not begun to recognise. German banks hold a trillion dollars - maybe more - of maturing collateralised debt obligations that can only be refinanced by crystallising the losses. We've had RBS and you've had Citigroup. Germany's GDP will fall 6% this year - before the banking crisis has hit it....

...PK: That the cause is primarily financial. Certainly, Lehman and all of that alerted us all. And it did trigger an immediate drop in demand. But the housing bust was going to happen regardless.

The fall in business investment is at least to a large degree a response to excess capacity, which is the result of falling consumer demand and the housing bust. So we don't know.

WH: I think we know more than that. The links between bank capital, loan losses, credit availability and economic activity and asset prices have never been clearer. That was why there was a threat of Depression.

PK: Clearly, re-establishing stability in the financial markets is a necessary condition for recovery. But we're not sure it's sufficient.

WH: That's very scary.

PK: Well, that is part of the reason why I am so depressed.

WH: In one of your lecture charts you seemed to be suggesting that we're 12 months into what you think could be a 36-month period of downturn, albeit at a slower rate.

PK: Easily.

WH: It's quite shocking that you think it will be that severe.

petey : Im shocked that you're shocked...Will

PK: If we measure the 2001 US recession by when the labour market finally started to turn around, it was a 30-month recession. It was really 30 months in before you started to see the unemployment rate come down."

wolfgang in the FT...

..."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.

The answer is yes, but on conditions that seem increasingly implausible if we extrapolate current policies. We can avoid calamity if monetary and fiscal policies remain supportive throughout the duration of this crisis, if we fix the banking system and if we impose regulations to constrain a resurgent financial sector. We also have to be lucky to avoid another round of market turbulence in the near future.

In other words ... the answer may well be no. Central banks and governments therefore risk moving too swiftly out of a recession-mode strategy. When Axel Weber, president of the Bundesbank, publicly talks at this time about how to communicate a rise in interest rates, it tells me that the danger of a premature exit, at least in Europe, is clear and present....

...So at this point, I see the chances as roughly even between a global slump and a return to quasi-stagnation. What is so galling about this scenario is that it is avoidable. The central banks took the right decisions. But the political reaction has been near-catastrophic almost everywhere.

Instead of solving the problems to generate a recovery, the political strategies have consisted of waiting for a recovery to solve the problem. The Europeans are relying on the Americans to generate growth. The Americans are relying on the Chinese, who in turn are waiting for the rest of the world.

Even if the US were to generate some growth, as is likely after this summer, it would not benefit global exporters; China may be one of the fastest growing economies in the world, but it is only about half as large as the eurozone in dollar terms. And as Brad Setser** has pointed out in his blog, there is absolutely no evidence that China contributes to a global recovery. While Chinese investments are up by more than 30 per cent from last year alone, imports are down 25 per cent. All this hype about decoupling and China pulling the world out of recession is baloney. The data tell us that China’s exports and imports are both falling, and that imports are falling faster.

As everybody expects the others to move first, nobody ends up moving. In the meantime, the problems grow worse. US house prices, which are down by a little over 30 per cent from their peak, still have some way to fall. Until the US housing market hits rock bottom, perhaps sometime in 2010, there is no chance of a recovery in the securitisation market, without which there may not be sufficient credit growth....

...The only potentially good news in the past three months has been the receding threat of a currency crisis in central and eastern Europe. But I am not even sure that this is for real. The persistent refusal by eurozone policymakers to concede fast-track euro accession for central and eastern member states could yet prove destabilising.

Last week, the ECB had to provide €3bn in euro liquidity to Sweden’s Riksbank, in the absence of which Sweden may have experienced its second banking meltdown in less than two decades. The inevitable collapse of Latvia will have ripple effects on the Baltic region and may cause panic among investors in other central and east European countries.

This is why last week’s news about the withering green shoots is so important.

It tells us that the non-strategy of waiting until things get better is not working.

The March signs of life reinforced complacency.

Optimism will get us out of this crisis only if it is founded in reality.

Last week showed us that this is not the case."


..."Neil Mackinnon, chief economist at ECU Group, said Washington believes European states are "free riding" on American stimulus, expecting the US to pull them out of crisis yet again.

Europe's industrial output continued to slide in April and was down 22pc from a year earlier, suggesting that talk of a "V-shaped" rebound is premature. At best, the pace of decline has slowed. Production fell 23pc in Germany and 24pc in Italy.

The ECB expects the eurozone economy to contract by 4.6pc this year and a further 0.3pc next year, with no recovery until mid-2010.

Structural rigidities of the region raise risks that it will remain trapped in slump well after the rest of the world has turned the corner, as it did after the dotcom bust.

This time Europe faces the extra head-winds of a strong euro, over-valued against the 45-odd countries such as China that are linked to the dollar. This currency effect is slowly "hollowing out" Europe's industrial core...."


...oh yeah!.. this...

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