Mark Carney: Growth in the age of deleveraging

Today, American aggregate non-financial debt is at levels similar to those last seen in the midst of the Great Depression. At 250 per cent of GDP, that debt burden is equivalent to almost US$120,000 for every American (Chart 1).

US Debt/GDP 1916 - 2011

…..backsliding on financial reform is not a solution to current problems. The challenge for the crisis economies is the paucity of credit demand rather than the scarcity of its supply. Relaxing prudential regulations would run the risk of maintaining dangerously high leverage – the situation that got us into this mess in the first place.

As a result of deleveraging, the global economy risks entering a prolonged period of deficient demand. If mishandled, it could lead to debt deflation and disorderly defaults, potentially triggering large transfers of wealth and social unrest.

Managing the deleveraging process

Austerity is a necessary condition for rebalancing, but it is seldom sufficient. There are really only three options to reduce debt: restructuring, inflation and growth. Whether we like it or not, debt restructuring may happen. If it is to be done, it is best done quickly. Policy-makers need to be careful about delaying the inevitable and merely funding the private exit.

……Some have suggested that higher inflation may be a way out from the burden of excessive debt. This is a siren call. Moving opportunistically to a higher inflation target would risk unmooring inflation expectations and destroying the hard-won gains of price stability.

…..With no easy way out, the basic challenge for central banks is to maintain price stability in order to help sustain nominal aggregate demand during the period of real adjustment. In the Bank’s view, that is best accomplished through a flexible inflation-targeting framework, applied symmetrically, to guard against both higher inflation and the possibility of deflation.

The most palatable strategy to reduce debt is to increase growth. In today’s reality, the hurdles are significant. Once leverage is high in one sector or region, it is very hard to reduce it without at least temporarily increasing it elsewhere.

In recent years, large fiscal expansions in the crisis economies have helped to sustain aggregate demand in the face of private deleveraging. However, the window for such Augustinian policy is rapidly closing. Few except the United States, by dint of its reserve currency status, can maintain it for much longer.

…..The route to restoring competitiveness [in the euro-zone] is through fiscal and structural reforms. These real adjustments are the responsibility of citizens, firms and governments within the affected countries, not central banks. A sustained process of relative wage adjustment will be necessary, implying large declines in living standards for a period in up to one-third of the euro area.

…..With deleveraging economies under pressure, global growth will require global rebalancing. Creditor nations, mainly emerging markets that have benefited from the debt-fuelled demand boom in advanced economies, must now pick up the baton. This will be hard to accomplish without co-operation. Major advanced economies with deficient demand cannot consolidate their fiscal positions and boost household savings without support from increased foreign demand. Meanwhile, emerging markets, seeing their growth decelerate because of sagging demand in advanced countries, are reluctant to abandon a strategy that has served them so well in the past, and are refusing to let their exchange rates materially adjust. Both sides are doubling down on losing strategies. As the Bank has outlined before, relative to a co-operative solution embodied in the G-20’s Action Plan, the foregone output could be enormous: lower world GDP by more than US$7 trillion within five years. Canada has a big stake in avoiding this outcome.

Mark Carney: Growth in the age of deleveraging.

Comment: ~ One of the most important papers I have read this year. Mark Carney, Governor of the Bank of Canada and Chairman of the Financial Stability Board — established by the G-20 in 2009 to further global economic governance — maps out the hard road to recovery from the current financial crisis.

Fragile and Unbalanced in 2012 – Nouriel Roubini – Project Syndicate

The outlook for the global economy in 2012 is clear, but it isn’t pretty: recession in Europe, anemic growth at best in the United States, and a sharp slowdown in China and in most emerging-market economies.

……Adjustment of relative prices via currency movements is stalled, because surplus countries are resisting exchange-rate appreciation in favor of imposing recessionary deflation on deficit countries. The ensuing currency battles are being fought on several fronts: foreign-exchange intervention, quantitative easing, and capital controls on inflows. And, with global growth weakening further in 2012, those battles could escalate into trade wars.

via Fragile and Unbalanced in 2012 – Nouriel Roubini – Project Syndicate.

An ex-ambassador in Beijing: Master of ping-ping diplomacy | The Economist

“Here we know there’s a reason why someone’s pinged for corruption or someone’s not pinged for corruption and usually there’s something sits behind it, so when there’s an anti-corruption campaign in Guangdong or Shenzhen, then it’s a fair bet that that’s somehow tied to elite politics, because why ping Person A and not B? And I think that is the context in which law is practiced here,” [Geoff Raby, who from 2007 until this summer served as Australian ambassador to China] said. “There is rule by law here…But there’s no rule of law. There’s nothing that sits above the political processes of the [top leadership].”

…….“We have never seen in world history, with Nazi Germany perhaps to one side, a global economic power that has stood so far apart from the international norms of social and political organisation, so it’s something different. It really, really is different,” Mr Raby said. He later assured me that when he uses this line in speeches, he throws in a mention of Nazi Germany to pre-empt the nitpickers of history, not as a point of comparison to China. That would be rather undiplomatic indeed.

via An ex-ambassador in Beijing: Master of ping-ping diplomacy | The Economist.

Shanghai follows through

Yesterday, the Shanghai Composite Index broke through primary support at 2300. Today the index followed through, falling to 2260. Dow Jones Shanghai Index shows a similar fall below 280. The weekly chart shows an earlier break in August below primary support at 330, leading to a re-test of the 2010 low at 280. Now primary support at 280 has failed, signaling a decline to 240*. Declining 63-day Twiggs Momentum, below zero, warns of a strong primary down-trend.

Dow Jones Shanghai Index

* Target calculation: 280 – ( 320 – 280 ) = 240

Shanghai breaks primary support

The Shanghai Composite index broke primary support at 2300 Monday, signaling a decline to 2100*. Follow-through on Tuesday would strengthen the signal. The sharp fall on 13-week Twiggs Money Flow warns of strong selling pressure.

Shanghai Composite Index

* Target calculation: 2300 – ( 2500 – 2300 ) = 2100

Hong Kong’s Hang Seng Index held above 18500 Monday, but another test of medium-term support at 17500 is likely.

Hang Seng Index

China’s manufacturing sector under contractionary pressure – Westpac: Phat Dragon

Well, the official November manufacturing PMI, a more reliable survey than the private sector alternative [once seasonally adjusted], saw finished goods inventories rise to their highest reading ever in November. Along with across the board weakness in order books….. and a deceleration in output, import weakness, a steep decline in the new orders-to-inventories ratio and a depleting work backlog, the manufacturing sector looks to be under contractionary pressure. The moment of discontinuity has not yet arrived, but the odds of such an unwelcome appearance manifesting in the near term from this enfeebled jumping off point have certainly shortened.

China weakens

Dow Jones Shanghai Index respected resistance at 320 and is now testing support at 285. Failure would offer a target of 260*. 63-Day Twiggs Momentum deep below zero continues to signal a strong primary down-trend.

Dow Jones Shanghai Index

* Target calculation: 290 – ( 320 – 290 ) = 260

DJ Hong Kong index is testing medium-term support at 360. Failure would mean a re-test of the primary level at 320; respect is less likely but would indicate another test of 410. Declining 13-week Twiggs Money Flow below zero warns of selling pressure.

Dow Jones Hong Kong Index

Inside China’s ugly PMI – macrobusiness.com.au

China’s official manufacturing purchasing managers index PMI dipped below 50 for the first time since the recovery yesterday. The headline PMI declined to 49, below consensus of 49.8. Looking into the components probably provides an even gloomier picture. New exports order declined further to 45.6 from 48.6, indicating continued deterioration of global demand.

via Inside China’s ugly PMI – macrobusiness.com.au | macrobusiness.com.au.

Clinton warning over aid from China – FT.com

Hillary Clinton has urged developing nations to be “smart shoppers” when accepting foreign aid from China and other new donors, as she became the first US secretary of state in more than 50 years to visit Burma on Wednesday.

In Rangoon, Mrs Clinton warned that powerful emerging economies may be more interested in exploiting natural resources than promoting real development.

“Be wary of donors who are more interested in extracting your resources than in building your capacity,” she said. “Some funding might help fill short-term budget gaps, but we’ve seen time and again that these quick fixes won’t produce self-sustaining results.”

via Clinton warning over aid from China – FT.com.

China, in Surprising Shift, Takes Steps to Spur Bank Lending – NYTimes.com

HONG KONG — Faced with an economy that appears to be slowing faster than economists forecast even a month ago, the Chinese government on Wednesday unexpectedly reversed its yearlong move toward tighter monetary policy and took an important step to encourage banks to resume lending.

The central bank said that commercial banks would be allowed to keep a slightly lower percentage [0.5pc] of their deposits as reserves at the central bank. The change, which will take effect on Monday, means that commercial banks will have more money to lend, which could help to rekindle economic growth and a slumping real estate market.

via China, in Surprising Shift, Takes Steps to Spur Bank Lending – NYTimes.com.