Deflation, Deflation, Deflation...
So, the UK election is out of the way, and New Labour was returned on the back of it's "strong economic management". Ironic really, as Gordon Brown is already beginning to make excuses for the slowdown here in the UK. Also interesting, as financial markets appear to be watching the UK closely for clues regarding economic strength, and any hint of slower retail sales or industrial decline triggers buying of European interest rates.
It may seem a big step to get from current conditions of reasonable economic growth, falling oil prices and reasonable forecasts from various central banks, to the headline of "Deflation..." However, a very simple case can be made, and a good place to start would be Fed Governor Ben Bernanke's 2002 speech on the potential for deflation to strike the US, and how to respond. In the speech he said that even with interest rates at zero the Fed could counter inflation by "turning on the printing presses" - creating money. He added that cooperation between the Fed and the government on monetary and fiscal policy could help overcome any tendency to deflation.
Why is this important? Because the US government launched it's tax cuts - in the face of bitter opposition - shortly afterwards (turning a $217bn budget surplus in 2001 into a $413bn deficit in 2004) and because Japan did turn on the monetary printing press at the same time - to the tune of Yen35trn in the 15 months to March 2004. This may have been coincidence, and it may have been prompted by self-interest, but the net result was a co-ordinated policy of tax cuts, financed on the cheap by yen loans to the US; the consumption thus stimulated lifted the Asian economies. The yen printed were used to buy US paper, which led to the accumulation of large amounts of US paper in Asian central bank coffers.
There have been plenty of articles written on the US deficit, and the potential losses facing Asian CBs when the $ responds "appropriately" to record deficits, but that doesn' concern me here. What concerns me is the fact that these two elements combined to keep the global economy chugging along; now, however, the tax cuts have ended, and Japan has stopped printing yen. The question which must be irking politicians and central bankers the world over (those that have a clue about economics and the real world, anyway) is whether this massive stimulation has been sufficient to give the world economy enough momentum to keep going without assistance. Everything else feeds into this one question; with the economy rumbling along, the other imbalances that are written about (twin deficits, US housing bubble etc.) are manageable. If it doesn't, any one of the aforementioned could tip the weaker economies into recession.
Which are the weaker economies? Who said Europe? An economic zone that seems hell-bent on discovering just how low bad management can bring an economy (see the vote for the imposition of a 48-hr week on the UK, just as France is trying to dismantle it's limits), where red tape and regulation are driving dis-investment to new highs, and where the politicians try to buy this generation's votes with health care and social security benefits to be paid off by generations to come.
So, returning to the title, it seems a straight line can be drawn between Japanese monetary printing presses, US consumer spending and global economic health. My guess is that we are about to find out who the weaker members of the global economic community are: those who have splurged the windfalls from cheap oil and tax revenue from the last years of the 20th century; who refuse to recognise the reality of the modern world, and that passing laws which give competitors a massive advantage will eventually hollow out an economy; and who refuse to take the tough decisions needed to stop our problems being rolled up and handed to the next generation. If the US economy is unable to stand on it's own without stimulus from the Fed or the govt, the global economy will stumble; and if it stumbles the weakest will be trampled underfoot.
It may seem a big step to get from current conditions of reasonable economic growth, falling oil prices and reasonable forecasts from various central banks, to the headline of "Deflation..." However, a very simple case can be made, and a good place to start would be Fed Governor Ben Bernanke's 2002 speech on the potential for deflation to strike the US, and how to respond. In the speech he said that even with interest rates at zero the Fed could counter inflation by "turning on the printing presses" - creating money. He added that cooperation between the Fed and the government on monetary and fiscal policy could help overcome any tendency to deflation.
Why is this important? Because the US government launched it's tax cuts - in the face of bitter opposition - shortly afterwards (turning a $217bn budget surplus in 2001 into a $413bn deficit in 2004) and because Japan did turn on the monetary printing press at the same time - to the tune of Yen35trn in the 15 months to March 2004. This may have been coincidence, and it may have been prompted by self-interest, but the net result was a co-ordinated policy of tax cuts, financed on the cheap by yen loans to the US; the consumption thus stimulated lifted the Asian economies. The yen printed were used to buy US paper, which led to the accumulation of large amounts of US paper in Asian central bank coffers.
There have been plenty of articles written on the US deficit, and the potential losses facing Asian CBs when the $ responds "appropriately" to record deficits, but that doesn' concern me here. What concerns me is the fact that these two elements combined to keep the global economy chugging along; now, however, the tax cuts have ended, and Japan has stopped printing yen. The question which must be irking politicians and central bankers the world over (those that have a clue about economics and the real world, anyway) is whether this massive stimulation has been sufficient to give the world economy enough momentum to keep going without assistance. Everything else feeds into this one question; with the economy rumbling along, the other imbalances that are written about (twin deficits, US housing bubble etc.) are manageable. If it doesn't, any one of the aforementioned could tip the weaker economies into recession.
Which are the weaker economies? Who said Europe? An economic zone that seems hell-bent on discovering just how low bad management can bring an economy (see the vote for the imposition of a 48-hr week on the UK, just as France is trying to dismantle it's limits), where red tape and regulation are driving dis-investment to new highs, and where the politicians try to buy this generation's votes with health care and social security benefits to be paid off by generations to come.
So, returning to the title, it seems a straight line can be drawn between Japanese monetary printing presses, US consumer spending and global economic health. My guess is that we are about to find out who the weaker members of the global economic community are: those who have splurged the windfalls from cheap oil and tax revenue from the last years of the 20th century; who refuse to recognise the reality of the modern world, and that passing laws which give competitors a massive advantage will eventually hollow out an economy; and who refuse to take the tough decisions needed to stop our problems being rolled up and handed to the next generation. If the US economy is unable to stand on it's own without stimulus from the Fed or the govt, the global economy will stumble; and if it stumbles the weakest will be trampled underfoot.
posted by Jambutty at 9:42 am
1 comments
