A few thoughts by UBS’ Magnusson on the Chinese imploding miracle. Via Macro business.
One way or another, China is going to rebalance. The question is whether it occurs in an orderly fashion with the investment side of the economy slowing to a rate less than the growth in GDP, but still growing. Or whether it happens in the context of a sharp decline in investment, with more alarming economic and political consequences that will cut across the economy.
After two decades of unparalleled economic success, we believe China now needs a reform programme on a scale similar to that adopted 30 years ago. Without it, a heavily investment-centric and credit-intensive economic model could soon become unstable, and later stall in a middle income trap. There’s only so much labour transfer from rural areas to urban factories. There’s a limit to how high the investment share of GDP can go. Rapid population ageing is chipping away at Chinese growth. The exceptional impact of accession to the WTO a decade ago is fading. And the significant, direct role of the government, state banks and SOEs in the economy as agents of economic policy, and owners and providers of heavy investment and infrastructure may no longer be appropriate as the economy becomes richer, more complex, and in need of greater competition and innovation.
Guest post by Lance Roberts of Street talklive.
When Ben Bernanke launched QE 2 in 2010, he outlined a third mandate for the Federal Reserve – the boosting of consumer confidence. He stated that the goal of QE 2 was to boost asset prices in order to spur consumer confidence through the “wealth effect”, which should translate into economic growth. In 2010 he was right, and QE 2 not only boosted asset prices sharply, but also kept the economy from slipping into a recessionary spat. As Friday’s speech from the economic summit in “Jackson Hole” draws near, Bernanke should be taking a clue from today’s release of consumer confidence in considering his next move.
The Conference Board released today a report on consumer confidence that was more than just disappointing. Not only did the consumer confidence index come in at the lowest level since 2011, when the government was last struggling with debt crisis and U.S. ratings downgrade, but the future expectations of the economy plunged 8 full points from 78.4 in July to 70.5. The three components on future business conditions, employment, and income all deteriorated sharply, showing a consumer struggling to make ends meet. This pessimism, particularly in incomes, poses a risk for retailers going forward and suggests weaker GDP data ahead.
While investors still focus on one subject only, Europe, the Asian Tigers are definitely getting more tired. Latest out we had the Chinese figures earlier today, showing China is getting closer to contraction. Is the “sudden” slowdown going to be used as an excuse for more stimulus? From the Telegraph.
The bellwether economies of Taiwan and Singapore both contracted in the second quarter. Korea’s industrial output fell in June, while Japan’s manufacturing PMI index fell in July to the lowest since the Fukushima disaster, with the export gauge crashing to recession levels.
“Factory output, new orders and exports all decreased at the fastest rates since April 2011. These are worrying developments given the weakness of global demand,” said Markit’s Alex Hamilton.
While China has ostensibly held up much better, electricity use has been falling in recent months. “Unless the Chinese steel and aluminium industries have discovered how to make do without electricity, it would appear that their growth has virtually ground to a halt,” said Berkeley professor Barry Eichengreen.
Guest post by Azizonomics.
The entire economics world is abuzz about the intriguing smackdown between Paul Krugman and Ron Paul on Bloomberg. The Guardian summarises:
- Ron Paul said it’s pretentious for anyone to think they know what inflation should be and what the ideal level for the money supply is.
- Paul Krugman replied that it’s not pretentious, it’s necessary. He accused Paul of living in a fantasy world, of wanting to turn back the clock 150 years. He said the advent of modern currencies and nation-states made an unmanaged economy an impracticable idea.
- Paul accused the Fed of perpetrating “fraud,” in part by screwing with the value of the dollar, so people who save get hurt. He stopped short of calling for an immediate end to the Fed, saying that for now, competition of currencies – and banking structures – should be allowed in the US.
- Krugman brought up Milton Friedman, who traversed the ideological spectrum to criticize the Fed for not doing enough during the Great Depression. It’s the same criticism Krugman is leveling at the Fed now. “It’s really telling that in America right now, Milton Friedman would count as being on the far left in monetary policy,” Krugman said.
- Paul’s central point, that the Fed hurts Main Street by focusing on the welfare of Wall Street, is well taken. Krugman’s point that the Fed is needed to steer the economy and has done a better job overall than Congress, in any case, is also well taken.
Remember the stimulus introduced three years ago? Did it produce what it promised? By de Rugy From Mercatus Center;
The Stimulus bill is turning three today. The main argument for enacting a $787 billion stimulus bill was that if government spends money where it is the most needed, that expenditure would create jobs and trigger economic growth. It also assumed that in a good Keynesian fashion, the money would be spent in a timely manner, and would be temporary. Finally, the reason why the returns on government spending would be so high is that the administration assumed that for every dollar spent, the economy would grow potentially by $1.57 (that’s what economists call the multiplier and it was estimated to be 1.57).
The result, we were told would be 3.5 million jobs “created or saved” over the next two years, mostly in the private sector and the promise that unemployment wouldn’t go up beyond 8.25 percent, and that, by the end of 2010, unemployment would have dropped to 7.25 percent. (Full article here).
Aside from countless banks calling for QE3 which one has to wonder if their analysis may be slightly biased for personal gain the question remains will we see QE3.
The November 2010 FOMC statement which launched QE2 made it clear why the Fed was expanding their balance sheet by $600 billion.
“To promote a stronger pace of economic recovery and to help ensure that inflation, over time, is at levels consistent with its mandate, the Committee decided today to expand its holdings of securities.”
Assuming their basis for future QE has not changed then looking at the data may give us a sense of if and when QE3 will happen.
“To promote a stronger pace of economic recovery”
With rates already at zero the only remaining policy tool with a real chance of achieving this goal is a weak USD that will theoretically stimulate export growth. In the summer of 2010 the USD was approaching $88 whereas today it is $80. In other words the USD has room to run higher before the Fed feels the need to “short the dollar” through policy.
Maybe Dallas Fed President Fisher will be the next Fed Chairman. Who knows. Below some highlights from his speech. Full version here.
“My colleagues and I are professionally beholden to beware of short-term fixes that might contradict, or place in jeopardy the long-term duty and credibility of the central bank.”
“As I have said repeatedly, we have filled the gas tanks of the economy with affordable liquidity,” he said. “What is needed now is for employers to confidently step on the pedal and engage the transmission that will use that gas to move the great job-creating machine of America forward.”
“If I believe further accommodation or some jujitsu with the yield curve will do the trick and ignite sustainable aggregate demand, I will support it,” he said. “But the bar for such action remains very high for me until the fiscal authorities do their job, just as we have done ours. And if they do, further monetary accommodation may not even be necessary.”