Analysis of the global economy
By JON HILSENRATH And KRISTINA PETERSON
The Federal Reserve sent its strongest signal yet that it is preparing to take new steps to bolster the recovery, saying that measures would be needed fairly soon unless economic growth picks up substantially.
The statement was included in minutes released Wednesday from the Fed’s July 31-Aug. 1 policy meeting. The minutes also indicated that a new round of bond buying, known as quantitative easing, was high on its list of options.
By Ambrose Evans-Pritchard,
9:39PM BST 20 Aug 2012
“A currency can only be stable if its future existence is not in doubt,” said Jörg Asmussen, the powerful German member of the ECB’s executive board. He signalled full backing for the bond rescue plan of ECB chief Mario Draghi, brushing aside warnings from the German Bundesbank that large-scale purchases would amount to debt monetisation and a back-door fiscal rescue of insolvent states in breach of EU treaty law.
via Germany backs Draghi bond plan against Bundesbank – Telegraph.
In 1997 Milton Friedman commented on Bank of Japan policy following Japan’s deflationary spiral of the early 1990s:
Defenders of the Bank of Japan will say, “How? The bank has already cut its discount rate to 0.5 percent. What more can it do to increase the quantity of money?”
The answer is straightforward: The Bank of Japan can buy government bonds on the open market, paying for them with either currency or deposits at the Bank of Japan, what economists call high-powered money. Most of the proceeds will end up in commercial banks, adding to their reserves and enabling them to expand their liabilities by loans and open market purchases. But whether they do so or not, the money supply will increase.
There is no limit to the extent to which the Bank of Japan can increase the money supply if it wishes to do so. Higher monetary growth will have the same effect as always. After a year or so, the economy will expand more rapidly; output will grow, and after another delay, inflation will increase moderately. A return to the conditions of the late 1980s would rejuvenate Japan and help shore up the rest of Asia.
Austerity measures adopted in Europe are failing and central banks are likely to attempt Friedman’s option in a number of guises. Already, as Gary Shilling points out “competitive quantitative easing by central banks is now the order of the day.” The Bank of Japan last year expanded its balance sheet by 11 percent, the Federal Reserve by 19 percent, the European Central Bank by 36 percent and the Swiss National Bank by 33 percent. Even countries with relatively strong balance sheets, like Switzerland, are forced to respond to prevent appreciation of their currencies from harming exports.
Inflation will remain moderate only so long as central bank balance sheet expansion is offset by deflationary pressures from private sector deleveraging. That is the difficult task ahead: to maneuver a soft landing by balancing the two opposing forces. Failure to do so could lead to a bumpy ride.
Since the euro’s introduction, unit labor costs have risen dramatically faster in France than they have in Germany. According to Eurostat data published in April 2011, the hourly labor cost in France was €34.2, compared to €30.1 in Germany – and nearly 20% higher than the eurozone average of €27.6. France’s current-account deficit has risen to more than 2% of GDP, even as its economic growth has ground to a halt.
The high cost of employing workers in France is due not so much to wages and benefits as it is to payroll taxes levied on employers. The entire French political class has long delighted in taxing labor to finance the country’s generous welfare provisions, thus avoiding excessively high taxation of individuals’ income and consumption – though that is about to come to an end as Hollande intends to slap a 75% tax on incomes above €1 million. This is a version of the fallacy that taxing companies (“capital”) spares ordinary people (“workers”).
via “François Hollande’s Wrong Idea of France” by Brigitte Granville | Project Syndicate.
By Dietmar Hawranek and Isabell Hülsen:
When Helping Is Hurting
Ironically, the victims of these two developments — focusing on production in France and high wage increases — are those whose cause is being championed by governments and labor representatives: the autoworkers themselves. Workers at the [Peugeot] Aulnay plant had to look on as their company went into gradual decline. Aulnay was once one of the most modern plants in the country, annually producing more than 400,000 cars. Today, fewer than 140,000 vehicles roll off its assembly lines each year. An auto plant that produces so few vehicles can hardly be profitable. If President Hollande and the unions compel Peugeot to keep the plant in operation, they will only accelerate the company’s demise.
via French Industrial Policies Are Aiding Rapid Decline of Peugeot – SPIEGEL ONLINE.
The cost of automated assembly lines is falling and at some point will become cheaper than their labor-intensive equivalent. The result could be a tectonic shift in manufacturing but where will the redundant assembly workers find jobs? JOHN MARKOFF of the NYTimes writes:
The falling costs and growing sophistication of robots have touched off a renewed debate among economists and technologists over how quickly jobs will be lost. This year, Erik Brynjolfsson and Andrew McAfee, economists at the Massachusetts Institute of Technology, made the case for a rapid transformation. “The pace and scale of this encroachment into human skills is relatively recent and has profound economic implications,” they wrote in their book, “Race Against the Machine.”
In their minds, the advent of low-cost automation foretells changes on the scale of the revolution in agricultural technology over the last century, when farming employment in the United States fell from 40 percent of the work force to about 2 percent today.
via New Wave of Deft Robots Is Changing Global Industry – NYTimes.com.
Milton Friedman, December 1997:
Defenders of the Bank of Japan will say, “How? The bank has already cut its discount rate to 0.5 percent. What more can it do to increase the quantity of money?”
The answer is straightforward: The Bank of Japan can buy government bonds on the open market, paying for them with either currency or deposits at the Bank of Japan, what economists call high-powered money. Most of the proceeds will end up in commercial banks, adding to their reserves and enabling them to expand their liabilities by loans and open market purchases. But whether they do so or not, the money supply will increase.
There is no limit to the extent to which the Bank of Japan can increase the money supply if it wishes to do so. Higher monetary growth will have the same effect as always. After a year or so, the economy will expand more rapidly; output will grow, and after another delay, inflation will increase moderately. A return to the conditions of the late 1980s would rejuvenate Japan and help shore up the rest of Asia.
via Friedman’s Japanese lessons for the ECB « The Market Monetarist.
Friedman was suggesting that the BOJ implement QE to boost the money supply and create inflation. Inflation would rescue the banks and real-estate-owners with underwater mortgages.
10 August, 2012, 1:53. Posted by Zarathustra
Nomura has a Air cargo volume index (as we first mentioned here), which correlated with global industrial activities pretty with (correlation = 0.84).
via Air cargo volume indicator points to weakening of industrial activities.
Gary Shilling: If we have a consumer-led recession it will be very different to previous post-WWII recessions which were always led by the Fed.
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Aftermath of the GFC.
http://youtu.be/h3VgY1_PzUs
