[BOE Governor Mervyn King] kept the door open for more stimulus in his speech Tuesday. “With inflation falling back and wage growth subdued, there is scope for interest rates to remain low and, if necessary, for further asset purchases, to prevent inflation falling below the 2% target,” he said. The annual rate of inflation in the U.K. dipped to 4.2% in December from 4.8% a month earlier, and is expected to slow sharply this year.
Banks Point to a Pickup in Lending – WSJ.com
At Citi, retail-banking loans rose 15% from a year ago to $133 billion, as the New York bank lent more to individuals and local businesses. At San Francisco-based Wells, commercial and industrial loans rose 11% from a year earlier to $167 billion at Dec. 31, amid what Chief Financial Officer Tim Sloan called broad-based growth.
All told, loans outstanding at the companies and J.P. Morgan rose by $41 billion from a year ago in the fourth quarter, to $2.14 trillion. That’s the first increase for the three giant lenders since 2008…
via Banks Point to a Pickup in Lending – WSJ.com.
Comment: ~ Private sector deleveraging is slowing and new capital investment improving, but this may prove a temporary respite as purchases were brought forward to take advantage of accelerated tax depreciation in 2011. The 100% write-off of new capital investment (in the year of purchase) will expire in 2012 if not extended by Congress.
Nouriel Roubini’s Global EconoMonitor » The Straits of America
Given the bearish outlook for US economic growth, the Fed can be expected to engage in another round of quantitative easing. But the Fed also faces political constraints, and will do too little, and move too late, to help the economy significantly. Moreover, a vocal minority on the Fed’s rate-setting Federal Open Market Committee is against further easing. In any case, monetary policy cannot address only liquidity problems – and banks are flush with excess reserves.
Most importantly, the US – and many other advanced economies – remains in the early stages of a deleveraging cycle. A recession caused by too much debt and leverage (first in the private sector, and then on public balance sheets) will require a long period of spending less and saving more. This year will be no different, as public-sector deleveraging has barely started.
via EconoMonitor : Nouriel Roubini’s Global EconoMonitor » The Straits of America.
Greg Mankiw’s Blog: The Liquidity Trap may soon be over
About a decade ago….. I estimated the following simple formula for setting the federal funds rate:
Federal funds rate = 8.5 + 1.4 Core inflation – Unemployment
….Eddy Elfenbein has recently replotted this equation. Here it is:
via Greg Mankiw’s Blog: The Liquidity Trap may soon be over.
Mega-trends and their impact in 2012
To arrive at an outlook for the year ahead we first need to analyze the big trends that endure for decades and in some cases even longer.
Population growth and food resources
The number one dynamic over the last century has been the exponential rise in global population. It took 123 years for the world population to grow from 1 to 2 billion (by 1927) and only 12 years to grow from 5 to 6 billion (by 1999). Growth, however, is now slowing and we are predicted to rise from the current 7 billion to a peak of 9 billion in the 2050s.
At the same time we are faced with increasing scarcity of food and water. Advances in technology have improved crop yields, but increased meat consumption in China and other Asian economies will reduce overall output. The area of land required to produce an equivalent amount of edible protein from livestock is 4 to 5 times higher compared to traditional grains and legumes, and up to 10 times higher for beef. Diversion of land use for ethanol production will also restrict food output.
Global warming, whether man-made or a natural cycle, may also contribute to declining food production — through droughts, floods and depleting fish stocks.
Depleting natural resources
We are also depleting global deposits of ferrous- and non-ferrous ores — as well as energy reserves of crude oil and coal — as global industrialization accelerates. Commodity costs can be expected to rise as readily available resources are depleted and we are forced to dig deeper and endure harsher conditions in order to access fresh deposits. Deep water ocean-drilling and exploration within the Arctic and Antarctic circles are likely to increase.
As energy resources are depleted, nuclear energy production is likely to expand despite current safety concerns. Development of technologies such as thorium fluoride reactors hold out some hope of safer nuclear options, but these may be some way off. Wind and solar energy are likely to remain on the fringe until technology develops to the point where they are cost effective compared to alternative sources.
Global competition
Competition for scarce resources will increase tensions between major economic players, with each attempting to expand their sphere of influence — and secure their sources of supply. The Middle East, Africa, South America, Australia, Mongolia and the former USSR are all potential targets because of their rich resource base.
Trade wars
In addition to competition for scarce resources, we are also likely to see increased competition for international trade. Resistance to further currency manipulation — initiated by Japan in the 1980s and perpetuated by China in the last decade — is likely to rise. US Treasury holdings by China and Japan currently sit at more than $2.3 Trillion, the inflows on capital account being used to offset outflows on current account and maintain a competitive trade advantage by suppressing their exchange rate.
Rise of democracy
Another factor contributing to instability is the rise of democracy in some parts of the world. The Arab Spring is still in its infancy, but the development has no doubt caused concern amongst autocratic governments around the globe. Food shortages and rising global prices will act as a catalyst. The likely result is increased suppression in some autocracies and a rapid transition to democracy in others, like Myanmar. But the transition to democracy is never smooth — especially in countries with clear fault lines, such as language, religious, racial or cultural differences — and can lead to decades of conflict before some degree of stability is achieved.
Decay of Democracy
On the other hand we are witnessing the decay of long-standing, mature Western democracies. Undue influence exerted by special interest groups with large cash resources — such as banks, big oil, and armaments manufacturers — force politicians to serve not only their electorate but their financial sponsors. Aging populations pose a new threat: large voting blocs who are not participants in the economic workforce will wield increasing influence over distribution of social welfare payments such as Medicare and Pensions. And politicians are increasingly guilty of over-spending, running up public debt and debasing currencies, in their attempt to keep voters happy and secure re-election.
The long term hope is that we evolve a more consensus-based form of democracy, along the lines of the Swiss model, and away from the excesses of the current winner-takes-all system.
Global debt binge
The decay in Western democracy resulted in a massive debt binge over the last 3 decades, with private debt often growing at double-figure rates, accompanied by burgeoning public debt levels. The massive debt bubble far outstripped GDP growth, effectively debasing currencies and causing soaring inflation of consumer and asset (housing and stock) prices. The GFC marked the peak of the debt expansion and was followed rapid contraction as the private sector diverted income to repay debt. Debt contraction is catastrophic, however, and can cause GDP to fall by up to 25 percent as in the Great Depression of the 1930s.
The response has been a massive expansion of public debt as governments run deficits in order to offset the private debt contraction. Overall debt levels hardly faltered as government spending programs filled the hole left by private debt contraction. While this succeeded in plugging the gap, many Western governments are left with huge public debt and increasingly nervous bond markets.
Central banks such as the Fed and BOE stepped into the breach, purchasing government bonds with newly-created money. Apart from putting gold performance on steroids, central bank asset purchases had little impact on inflation because the effect was offset by the deflationary debt contraction. But cessation of the debt contraction would let the genie out of the bottle.
Outlook for 2012
Here is how I believe these big trends will impact on 2012. I do not claim to have a crystal ball and it may be amusing to review these predictions at the end of the year:
- Further debt contraction
Contraction of private debt and constraints on government borrowing will strengthen deflationary forces. - Further QE
The Fed and BOE are likely to expand their balance sheets to support public borrowing. The ECB may make a limited response because of constraints imposed by member states such as Germany. - Low inflation
Deflationary forces will outweigh the inflationary effect of QE by central banks. - Low global growth
Debt contraction and a euro-zone banking crisis will ensure low growth. - Euro-zone banking crisis will require further bank rescues
Placing further stress on public debt levels, and pressure on the ECB to act. - China “soft” landing
A second massive stimulus focused on low-cost housing and quelling social unrest will restore economic activity, but export markets will remain flat and the banking sector inundated with non-performing loans. - Easing of commodity prices slows
Massive stimulus from China will support commodity prices. - Further social unrest amongst autocratic regimes
The Arab Spring will continue sporadically across a far wider area. - Crude oil prices remain high, aided by further conflict
High crude prices will also contribute to low growth. - US current account deficit shrinks as yuan rises
Increased pressure from the US will prevent China from expanding its Treasury investments causing the yuan to strengthen against the dollar. - Dollar strengthens against euro
A euro-zone banking crisis will ensure that the dollar preserves its safe-haven status. - Gold bull-trend when QE resumes
Resumption of QE by the Fed would ensure that gold resumes its bull-trend against the dollar.
I wish you peace and prosperity in the year ahead but, most of all, the good health to enjoy it.
Regards,
Colin Twiggs
BBC News – Which are the eurozone’s zombie banks?
Banks are borrowing at 1% from the ECB and then lending the money back to the ECB at 0.25%. Or to put it another way, they are taking a substantial loss on their dealings with the central bank.
Why on earth would they do this?
Well, as I’ve said many times before, it is because they would rather be sure their money is safe and easy to get their mitts on, than take the risk of obtaining a higher interest rate by lending the cash to other banks…..
But actually for me there is a more troubling ECB statistic – which is that eurozone banks last night borrowed 15bn euros overnight from the central bank (and a little less on Monday but a bit more at the end of last week).
Why does this matter?
Well the European Central Bank has just pumped an astonishing amount of new loans into the banking system. And yet there are some banks out there which are still short of cash – and are unable to borrow it from other banks, financial institutions or commercial customers.
Bank-to-bank Euribor rates extend post-ECB cash drop | Reuters
Key euro zone bank-to-bank lending rates continued to drop on Wednesday, pulled down by the ECB’s recent record injection of almost half a trillion euros of ultra-long and ultra-cheap three-year liquidity. Euro zone banks received 489 billion euros late last month in the first of two opportunities to access the long-term loans — operations the ECB hopes will minimise the chances of them responding to the region’s debt crisis by slashing lending.
via Bank-to-bank Euribor rates extend post-ECB cash drop | Reuters.
Big Banks See Better Than 50/50 Odds of QE3 – Real Time Economics – WSJ
Wall Street’s biggest banks expect the Federal Reserve‘s 0% interest rates to persist into at least 2014, and see good odds the Fed will provide additional stimulus to the economy in the near term, according to a Federal Reserve Bank of New York survey of primary dealers.
…..The median expectation that the Fed could provide additional stimulus in the form of bond buying that would push the balance sheet beyond its current $2.9 trillion level stands at 60% over the year.
via Big Banks See Better Than 50/50 Odds of QE3 – Real Time Economics – WSJ.
The Black Swan of Cairo: How suppressing volatility makes the world less predictable and more dangerous
Complex systems that have artificially suppressed volatility tend to become extremely fragile, while at the same time exhibiting no visible risks. In fact, they tend to be too calm and exhibit minimal variability as silent risks accumulate beneath the surface. Although the stated intention of political leaders and economic policymakers is to stabilize the system by inhibiting fluctuations, the result tends to be the opposite. These artificially constrained systems become prone to “Black Swans” — that is, they become extremely vulnerable to large-scale events that lie far from the statistical norm and were largely unpredictable to a given set of observers.
….Preventing small forest fires can cause large forest fires to become devastating. This property is shared by all complex systems. In the realm of economics, price controls are designed to constrain volatility on the grounds that stable prices are a good thing. But although these controls might work in some rare situations, the long-term effect of any such system is an eventual and costly blowup whose cleanup costs can far exceed the benefits accrued.
….Humans simultaneously inhabit two systems: the linear and the complex. The linear domain is characterized by its predictability and the low degree of interaction among its components which allows the use of mathematical methods that make forecasts reliable. In complex systems, there is an absence of visible causal links between the elements, masking a high degree of interdependence and extremely low predictability. Nonlinear elements are also present, such as those commonly known, and generally misunderstood, as “tipping points.” Imagine someone who keeps adding sand to a sand pile without any visible consequence, until suddenly the entire pile crumbles. It would be foolish to blame the collapse on the last grain of sand rather than the structure of the pile, but that is what people do consistently, and that is the policy error.
The Black Swan of Cairo: How suppressing volatility makes the world less predictable and more dangerous
By Nassim Nicholas Taleb and Mark Blyth
Colin Twiggs: ~ This is a must read for those who want a deeper understanding of why complex systems fail and why we are continually blind-sided by unforeseen political and economic events.
Romer: Expectations Wallop Needed to Avert 40-Year Recovery
The Federal Reserve should set a “nominal target” for growth in the nation’s gross domestic product that is well above its current low rate for coming out of a recession, said Christina Romer, now an economics professor at the University Of California, Berkeley.“One thing I think it would do is pack a really big expectations wallop,’’ said Romer, speaking at the Super Bowl of Indexing wealth management conference here. “A new operating strategy is something that could really break through and affect people’s behavior.” Such a “new operating strategy” is needed to get the economy on the kind of course normally seen after a recession. In the first nine quarters after the 1982 version, the economy grew at an annual rate of 6.3 percent. In the first nine quarters of this edition, the rate has been 2.4 percent, barely at the nation’s historical rate of growth. And if a new approach is not taken, it could be decades before the nation is back at full employment.
via Romer: Expectations Wallop Needed to Avert 40-Year Recovery.