Analysis of the global economy
U.S. Federal Reserve officials extended through the end of the year a program meant to drive down long-term interest rates and signaled that they were “prepared to take further action” if needed amid heightened worry about the economy’s performance.
By continuing the program, known as “Operation Twist,” the Fed will buy $267 billion in long-term Treasury bonds and notes while it sells short-term Treasurys. The program had been set to expire this month.
Phat Dragon is placing the most value on new information regarding credit demand and supply. It is credit growth that tells us more about the shape of activity later this year than any other macro indicator……the supply side of the credit equation is moving decisively higher (greater policy emphasis, increased willingness to lend) but ……sluggish demand for loans is holding the system back. Indeed, the June quarter observation for “loan demand” (bankers’ assessment) fell to 12% below average, lower even than the Dec-2008 reading, even as the “lending attitude of banks” (corporate assessment) rose for a second straight quarter and the ‘easiness’ of the monetary policy stance (bankers’ assessment) rose to 21% above average.
via Westpac: Phat Dragon – a weekly chronicle of the Chinese economy.
What happened in 1931 to turn a bad economic downturn into the Great Depression? Dramatic events in Europe included failure of Credit-Anstalt, Austria’s biggest bank, in May of 1931. That was followed by bank runs in Hungary, Czechoslovakia, Romania, Poland, and Germany. As is often the case historically, the financial problems were a combination of a banking crisis….and a currency crisis…..
In 1931, countries faced doubts about whether they would stay on the gold standard, and had a choice of either to abandon gold or else to inflict further domestic economic damage in the form of monetary contraction and price deflation. Those doubts and their damage ended up bouncing across countries like a ping pong ball.
James Rickards, senior managing director of Tanget Capital Partners and author of “Currency Wars: The Making of the Next Global Crisis,” talks about inflation and the gold standard in the 20th century.
At the latest Casey Research conference, Recovery Reality Check, James Rickards, senior managing director of Tanget Capital Partners and author of Currency Wars: The Making of the Next Global Crisis, debates Harry Dent, founder and president of HS Dent Foundation, on the subject of which is more likely in the near-term economic future, inflation or deflation.
Zarathustra: [Chinese] over-investment over the past many years, and particularly in the years after the financial crisis, has created massive over-capacity across the economy that no one is really able to quantify. We have already got over-building in the real estate sector which resulted in massive number of empty apartments and empty shopping malls…. We are also aware of the over-capacity and inventory build-up in various sectors like coal and steel….. steel industry profits have fallen by 96.7% in the first four months of the year compared to the same period a year ago….. actual CPI figures are already in negative territory on a month-on-month basis. In short, deflation is already here for China….
Zarathustra: We have just discovered that China’s M2 money supply has doubled once more since the collapse of Lehman brothers. M2 money supply currently stands at around RMB90 trillion, and it was at about RMB45 trillion the month before Lehman collapsed. Thus the so-called RMB4 trillion stimulus after Lehman’s collapse (which is more like a RMB8 trillion fiscal stimulus in reality) has translated into a RMB45 trillion increase in M2 money supply.
via Chart: Since Lehman’s collapse, China’s money supply has doubled.
Hat tip to macrobusiness.com.au
Air-freight competitor UTi Worldwide, which recently reported results, sounded a note of caution about business in coming months. And April data on volumes from FedEx, the latest available, suggest a 9% drop in international cargo through its main hub in Memphis.
All this hints that fourth-quarter results for the period ended in May, due Tuesday, could be accompanied by cautious guidance for the next fiscal year…….A glance at sales and income from previous downturns shows how sensitive FedEx is to economic growth…. the kind of company that catches a cold when the world economy merely sneezes.
“The single-minded concentration on austerity policy (in the 1930s) led to mass unemployment, a breakdown of democratic systems and, at the end, to the catastrophe of Nazism,” said Ewald Nowotny [Austria’s central bank governor and member of ECB governing council] at a financial conference in Vienna. He added that central bankers during the start of the financial crisis had been very keen to avoid the mistakes of the 1930s.
Mr. Nowotny also cautioned against trying to impose a “moralistic” solution to the euro zone’s current debt problems. “It is not about punishing children who have behaved badly,” he said, adding that it was important not to let the concept of moral hazard turn into an excuse for not taking “practical initiatives.”
via ECB’s Nowotny Cautions Against ‘Single-Minded’ Austerity – Real Time Economics – WSJ.
Following months of intense industry pressure, regulators say they now plan to make it easier for banks to comply with a key provision of new international banking rules that will require lenders to maintain sufficiently deep pools of safe, liquid assets—like cash and government bonds—that can survive market meltdowns and other crises…..Among the planned changes, one would allow a wider variety of assets—such as gold and equities—to count toward banks’ liquidity buffers, according to people involved in the talks.
….Some experts warn that loosening the rules could lead banks to rely on assets that later become unsafe. “The widening of the definition [of eligible assets] can spell trouble, because we may discover illiquidity precisely when the liquidity is needed,” said Anat Admati, a professor at Stanford University’s Graduate School of Business.
