Analysis of the global economy
Zarathustra: [Chinese] imports contracted by 15.3% from a year earlier, which was well below the expected 3.6% contraction. On a month-on-month basis, exports fell by 14.2% and imports fell by 22.5% before seasonal adjustment:
via Chinese imports tank – macrobusiness.com.au | macrobusiness.com.au.
Latest stats from the RBA show that the sharp contraction in business credit has slowed, but growth of personal credit (mainly mortgage finance) is at its lowest rate since the early 1990s and is trending downwards. Credit growth does not have to fall below zero for it to have a negative impact on the economy. A fall in the rate of credit expansion will slow the rate of economic growth.
It appears that the objective of this Statement is to emphasise that without a significant deterioration in global financial conditions policy should remain unchanged. When you assess the various pieces of the Bank’s description of the domestic economy – weak employment; rising unemployment rate; subdued retail spending; soft housing market; below trend growth outside mining; scaling back of public investment; building construction subdued; inflation to remain around the mid-point of the target range; policy at neutral, not stimulatory – we see a fairly clear case for policy to move into the stimulatory zone immediately. Of course our forecasts as contrasted with the Bank’s forecasts clearly suggest that the qualitative descriptions provided in this statement are understating the need for a policy response.
It has been and remains our view that a further 50bps in policy easing can be justified immediately although our forecast is that this adjustment is likely to occur over a three to four month period. We find the use of the requirement that demand conditions need to weaken materially before a rate cut can be delivered overly conservative and expect that the Bank’s policy will change more rapidly than we assess is their current intention.
Consequently at this stage we maintain our view that the next rate cut in this cycle can be expected in March to be followed by a move in May but recognise that we are currently dealing with a central bank that while acknowledging all the reasons policy needs to be stimulatory appears to have no immediate intention to move.
Bill Evans
Chief Economist
A recent study by economists Katharine Abraham and John Haltiwanger at the University of Maryland, Kristin Sandusky at the Census Bureau and James Spletzer at the Labor Department found “substantial discrepancies” between employee payrolls and the household survey used to calculate Unemployment.
Some 6.4% of people who showed up as holding jobs on employee records were recorded as unemployed in the household survey. Many of them were 65 and older — which suggests they were people who considered themselves retirees even as they continued to draw some sort of paycheck. An even larger 17.6% of people who counted as employed in the household survey didn’t show up on employee records. Many of them had demographic characteristics, such as low education levels, that suggested they were working off the books.
via Did Economy Really Create 500,000 Jobs? – Real Time Economics – WSJ.
The Chicago Fed attributes part of the decline in US labor force participation to the baby boomer phenomenon producing a growing number of retirees, but this chart from their newsletter excludes retirees and highlights the real problem.
Female LFPR are expected to fluctuate by about 1 percent (from 1987 to 2020) while male college graduates have fallen by about 2 percent. Male high school graduates, however, have fallen by 6 percent and do not look like recovering any time soon. The primary cause is the declining manufacturing sector and loss of construction, banking and real estate jobs as a result of the housing market crash.
So we are brought back to the question of what the proper role of banks should be. This issue was discussed exhaustively prior to World War I………
It was above all in Germany that long-term financing found its expression in the Reichsbank and other large industrial banks as part of the “holy trinity” of banking, industry and government planning under Bismarck’s “state socialism.” German banks made a virtue of necessity. British banks “derived the greater part of their funds from the depositors,” and steered these savings and business deposits into mercantile trade financing. This forced domestic firms to finance most new investment out of their own earnings. By contrast, Germany’s “lack of capital … forced industry to turn to the banks for assistance,” noted the financial historian George Edwards. “A considerable proportion of the funds of the German banks came not from the deposits of customers but from the capital subscribed by the proprietors themselves.[3] As a result, German banks “stressed investment operations and were formed not so much for receiving deposits and granting loans but rather for supplying the investment requirements of industry.”
Comment:~ The author contrasts the short-term focus of modern banks with the long-term outlook of the early German banking system which was largely equity-funded, rather than deposit-based. The question is: could we ever successfully return to such a system?
James Rickards: The dollar is not necessarily on the road to ruin, but that outcome does seem highly likely at the moment. There is still time to pull back from the brink, but it requires a specific set of policies: breaking up big banks, banning derivatives, raising interest rates to make the US a magnet for capital, cutting government spending, eliminating capital gains and corporate income taxes, going to a personal flat tax, and reducing regulation on job-creating businesses. However, the likelihood of these policies being put in place seems remote – so the dollar collapse scenario must be considered.
via Peter Schiff Speaks to James Rickards, Author of Currency Wars | Peter Schiff | Safehaven.com.
The Board of the Reserve Bank surprised us with a decision to hold the cash rate unchanged at 4.25%. Whilst this indicates that for the time being the Bank is assessing the risks somewhat differently to ourselves we are not inclined to change our core view that a further 50bps in easing can be expected over the course of the first half of this year.
Bill Evans
Chief Economist
Bill Moyers interviews investment banker and former Reagan budget director, David Stockman:
Crony capitalism: the revolving door between Washington and Wall Street. A 53-minute video, but worth the time.
WSJ: Mean Street
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Brett Arends exposes flaws in Eurozone efforts to resolve the currency crisis.
