Chief economists at banks, brokerages and academia, along with market analysts and commentators, are swinging en masse towards the idea that Europe and the US are either in or approaching another recession. Anemic, frail growth is sliding towards contraction. Too many shocks have come too quickly and political paralysis in the US has left decision-makers sitting on their hands, waiting for more clarity on the cost of doing business.
Here is Nouriel Roubini on why fiscal policy has run out of options to stave off the coming slump:
“Quantitative easing is constrained by above-target inflation in the eurozone and UK. The US Federal Reserve will likely start a third round of quantitative easing (QE3), but it will be too little too late. Last year’s $600 billion QE2 and $1 trillion in tax cuts and transfers delivered growth of barely 3% for one quarter. Then growth slumped to below 1% in the first half of 2011. QE3 will be much smaller, and will do much less to reflate asset prices and restore growth.
"Currency depreciation is not a feasible option for all advanced economies: they all need a weaker currency and better trade balance to restore growth, but they all cannot have it at the same time. So relying on exchange rates to influence trade balances is a zero-sum game. Currency wars are thus on the horizon, with Japan and Switzerland engaging in early battles to weaken their exchange rates. Others will soon follow. Meanwhile, in the eurozone, Italy and Spain are now at risk of losing market access, with financial pressures now mounting on France, too. But Italy and Spain are both too big to fail and too big to be bailed out…"
Not all fun at the fair
In the end, as John Mauldin points out in a newsletter piece entitled 'The Recession of 2011?' it is enterprise rather than fiscal policy that pulls countries out of recession. Mauldin predicted both the 2000 and the late 2007 recessions well ahead of the game and has now come down firmly on the side of Recession 2011 for the US, and, by implication, for the rest of us as well. However, as he himself admits, while he and Roubini both predicted the last recession, they did so rather too much ahead of the game. The markets rose some 20% after their predictions, which is somewhat on the painful side for a market commentator. In an ideal world investors would like, oh, about a day’s warning to shift into cash before the markets crash. Most, given the choice, would much prefer not to forego the chance of profiting from that last mad upward surge of the last big peak before the tipping point is reached.
In a reverse of the fun fair, when it comes to the market roller coaster, the exhilaration is all on the up slope, unless you are an inveterate shorter of markets, and few want to be on that roller coaster on the down ride. What this adds up to is that you win few friends by predicting an imminent recession only to see the markets make nonsense of your utterances for six months.
Roubini earned the soubriquet “Dr. Doom” for his persistently negative forecasts while the markets were still rising. However, as every analyst knows, timing big market moves is hellishly difficult and more often than not what looks like great timing is more a matter of chance than it is of skill. So calling it as you see it is no bad policy, even if you do end up being somewhat exposed for a while.
Digging a Jackson Hole?
I’m penning this blog on the Wednesday before Fed chairman Ben Bernanke’s much awaited “Jackson Hole” speech, scheduled for Friday. The markets are already moving upwards again after being in full retreat for more than a week, simply on the supposition that the Fed chairman has one more rabbit to pull out of the hat. The smart money is betting that Bernanke will opt to swap a chunk, possibly a large chunk, of the Fed’s short-dated holdings for longer-dated bonds, driving down the yield on longer bonds. The thinking here is that this will drive down the cost of mortgages, which are very sensitive to long-dated bond movements, which in turn might give a shove to America’s deeply troubled housing market, which might revive the moribund construction industry, which might generate a spate of jobs and a growing feel-good factor to replace the current gloom.
It’s an idea, and not a bad one, but the problem it faces is that large numbers of people seem to have already decided that now is not the time to buy a house. Their jobs and their futures are too uncertain. Changing that mindset takes time, often measured in years rather than months. There is also more than a touch of irony in the idea that the Fed might be desperately trying to engineer a boom in the housing market when this was precisely what blew the wheels off the US – and the global – financial sector in 2008. “Be careful of what you wish for…” comes to mind.
It is going to be interesting to see which way Bernanke jumps and whether what he does has any lasting impact on retarding or reversing the way we’re slip-sliding into Recession 2011…
As a side note, it will be interesting too, to see if the coalition government in the UK proves itself to be a one-trick pony with austerity as its only mantra, or whether it feels the urge to finesse a few growth messages into its “cut to the bone” approach to the management of the economy. If we wanted to adopt a “take the pain” approach, maybe the time to do that was before the UK ran up a world class deficit bailing out the banks… but then that was a different government, wasn’t it? Don’t you love politics?
Further reading on political risk, rebalancing and global recession:
- Nothing but Painful Choices Ahead as the Global Debt Supercycle Ends by John Mauldin
- The Unintended Consequences of Globalization by Paul Wharton
- Deleveraging, Deflation, and Rebalancing in the Global Economy by Paul Brain and Laurie Carroll
Tags: Ben Bernanke , currency depreciation , double dip , Dr Doom , Federal Reserve , global recession , housing market , Italy , jackson hole , Japan , John Mauldin , Nouriel Roubini , QE2 , qe3 , recession 2011 , Spain , Switzerland , The Recession of 2011 , US deficit , US economy