By David Llewellyn-Smith, founding publisher and former editor-in-chief of The Diplomat magazine, now the Asia Pacific’s leading geo-politics website. Cross posted from MacroBusiness
PIMCO famously coined the phrase to “the new normal” to capture what it saw was a structural change to global markets in the wake of the GFC. It was to be period defined by lower returns on assets owing to a combination of delevering, deglobalization, and reregulation. Today that looks like fantasy.
Last night, the Obama Administration proposed its new budget plan for the years ahead with significant austerity measures already embedded. From Bloomie:
The administration forecasts that the federal budget deficitfor the fiscal year that begins Oct. 1 will be $744 billion, or 4.4 percent of the economy. The Office of Management and Budget estimates that the shortfall this year will be $973 billion, or 6 percent of the economy. The budget projects the deficit will decline to 2.8 percent of the economy by 2016 and 1.7 percent by 2023.
Administration forecasters cut their estimate for U.S. economic growth this year to 2.3 percent, matching last year’s rate, down from the projected 2.7 in July. For all of 2014, the economy may expand 3.2 percent, budget figures showed. Private forecasters surveyed by Bloomberg put growth at 2 percent for calendar year 2013 and 2.7 percent for calendar year 2014.
Equities shrugged this off. Public deleveraging? Phht!
Last night also witnessed the Fed Minutes via the FT:
The US Federal Reserve was ready to slow down its QE3 programme of asset purchases in the summer or early autumn but weak payrolls data may already have changed its plans.
According to the minutes of its March meeting, released early on Wednesday after an accidental leak, “many” participants at the rate-setting Federal Open Market Committee said that continued labour market improvement should prompt a QE slowdown “at some point over the next several meetings”.
According to two sources in Congress, the accidental release came from Brian Gross, a special assistant to the Board of Governors who works on government relations.
The next meetings of the FOMC are in April, mid-June, late July and then mid-September. Only a “few” participants thought that the economy would be weak enough to keeping QE going at its current pace until late in the year.
The minutes show that the Fed was gearing up for a tapering of the QE programme at its last meeting, much earlier than markets had expected, but that debate may already be out of date after feeble jobs growth of just 88,000 in March.
Given the latest data, the Fed is likely to wait and see whether the March figures were just a blip or a sign of deeper weakness in the labour market before deciding how long to keep buying assets.
Equities plowed straight through this event as if it were not even there, signaling decisively that the share market no longer fears monetary tightening. Private delveraging? Phht!
Also fueling the last week’s rally has been the excitement generated by the monumental act of monetary intervention by the Bank of Japan. Currency wars are nationalist endeavours aimed at seizing production from other countries by manipulating interest rates. For Japan, the domestic efficacy of the measures are highly questionable given thirty years of the same approach has failed. But the external effects have already been spectacular and will continue to be so with the yen collapsing across the board and big profitability and competitiveness boosts pouring in for exporters.
This is an outright good for Japan but one has to wonder why anyone else, especially American markets, are excited about it. Currency devaluation is a zero sum game and Japan is simply going to take more from a pie that is no bigger than yesterday, meaning American firms will eat less. Those most impacted in American markets will be manufacturers, supposedly the key recovery sector for any sustainable US economic renaissance. Deglobalisation? Phht!
The real explanation for why markets have so loved the Japanese intervention is that it means more free money via excited carry trades and forex volatility. Even the IMF is warning about it. From the FT:
Speaking ahead of the International Monetary Fund’s spring meeting in Washington next week, Ms Lagarde said that the world was dividing into three groups – some countries doing well, some on the mend and some still in trouble.
Her speech highlights a new phase for the global economy in which the uneven pace of growth around the world is creating new financial imbalances that could sow the seeds of a future crisis.
“We do not expect global growth to be much higher this year than last. We are seeing new risks as well as old risks,” Ms Lagarde told an audience in New York on Wednesday. “In far too many countries, improvements in financial markets have not translated into improvements in the real economy.”
Emerging economies were growing fast, she said, but low interest rates in advanced economies were prompting them to build up debt and foreign exchange exposure that could cause trouble.
“Over the past five years, foreign currency borrowing by firms in emerging markets has risen by about 50 per cent,” said Ms Lagarde. “Over the past year, bank credit has increased by 13 per cent in Latin America and 11 per cent in Asia.”
She said that developing countries needed to respond by beefing up bank supervision, restricting credit to fast-growing areas, imposing capital requirements that changed with the economic cycle and monitoring their foreign exchange exposures.
Regregulation? Phht!
The tenets of the new normal are crumbling. Asset returns are accelerating. Enjoy it while it lasts but don’t forget where it ends.
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What’s the GFC?
Great Financial Crash?
Greasiest. Fried. Chicken. … ?
Giraffes Fraternizing with Cows.
..must.. buy off the masses with more bread and circuses.. must buy
Who wants to go to war! Come on folks, where’s that patriotism?
Good question, and what is GFCI? I live in a world of acronyms and once in awhile it would be nice if authors would follow the generally accepted tech writing rule of using the phrase the first time it is used and then the acronym afterwords. There are about a million of these things out there and it’s almost impossible to remember what every one means on a daily basis.
It makes reading tough when you have no clue what the central subject is :)
Thank you for suggesting the writing convention to use the full name followed by the acronym before using the acronym. I get weary of having to search acronyms for their meanings in order to comprehend an article. A few acronyms can be commonly recognized, e.g. “IRS.” The rest should be used only after first using the full name from which the acronym is derived, in order to allow for mass communication of information.
“Global Financial Crisis” (?)
Something tells me we’re not ready for negative growth. Just saying it out loud is gonna make tough guys pee their pants. Got cash? Hope you’all haven’t been spending your savings to maintain that middle-class lifestyle, ’cause you’re gonna need that cash, and just pray the gov’t doesn’t come take your IRA away from you on national security concerns.
This mess could be explained thusly: The Great Financial Crisis brought about a state of defacto but undeclared martial law in Western countries. It’s financial martial law because plugging the holes is such a frantic and desperate exercise that normal legal behavior just doesn’t work. Capitalism? Pfft! Somebody cue the sirens. Clearly it’s a bad time to be breaking up the TBTF banks while the oligarchs are stealing all our money to keep them afloat.
“This is an outright good for Japan but one has to wonder why anyone else, especially American markets, are excited about it. Currency devaluation is a zero sum game and Japan is simply going to take more from a pie that is no bigger than yesterday, meaning American firms will eat less.”
And just like how Great Britain emerged first from the previous global depression: it devalued its currency off the gold standard and stole growth from its neighbors in a zero sum game. Which is another way of saying currency warfare–exactly as the very perceptive and intelligent author above is talking about above, with the case of Japan.
I wonder at the value of theories that try to treat currencies as mere utilitarian units of exchange when there are life and death struggles over their relative value constantly being played out both behind the scene–as with the Fed’s and US government’s constant manipulation of the stock markets and precious metal markets, and blatantly (and indecorously) out in the open as with Abenomics.
JGordon says:
Economists have struggled day and night for the last 225 years, proselytizing the theory that economics operates in its own little kingdom, completely soevereign and independent of politics.
It’s all fiction of course, nothing but a bait and switch for the proles. But in an era when belief in belief itself has become the holy grail, this is what passes as science.
“belief in belief is the holy grail”
Very well said.
It’s not a bait and switch, South. That gives them too much credit (no pun intended).
Just because somebody is rich and powerful doesn’t mean they’re not stupid.
Most of them go to college and believe everything they’re told. Then they go to graduate school and believe it even more. Then they get a job and believe it all the time as a matter of principle. Then they see the wreckage around them and believe all it takes is a bigger wrecking ball to rebuild everything.
But they do believe it. Most of them. That’s how stupid they are.
The vast majority of people can’t think for themselves, or if they can, it’s simple stuff like how to drive to the supermarket and back.
The rest of us can think for ourselves, but what good is it? I don’t know, personally. But if my short position ever works out, I’ll feel better about it. If it doesn’t work out, which is what I’m thinking now, it looks like it’s more of the day job.
“Just because somebody is rich and powerful doesn’t mean they’re not stupid.”
Especially in these days where you get rich and powerful by:
(1) inheritance
(2) connections
(3) luck
(4) charisma
None of that has anything to do with intelligence. I would expect someone who got rich *by inventing something* to be smart, but not your average rich person.
“This is an outright good for Japan but one has to wonder why anyone else, especially American markets, are excited about it”
Here’s an idea. During the 30s, each country went off the “shackles of gold” one at a time. But someone had to be the first.
Perhaps American speculators are cheering because they figure if Japan does it, the US can’t possibly be stupid enough not to follow suit.
(This is of course wrong — the US CAN be that stupid and probably will. Some countries, insanely, went BACK on the gold standard after leaving it. But speculators probably don’t know THAT much history.)
Anyone who takes “currency wars” seriously has been reading too much internet. Here’s a handy tip: if you see something mentioned on the editorial pages of a Chinese state newspaper, it’s probably BS. And they talk about currency wars a lot (take a look PBoCs balance sheet to see the irony of this).
It’s a silly idea because the vast majority of almost every economy is internal/domestic, which means the vast majority of things that effect it are also internal/domestic. Blaming other countries for the failure of your economic management is just politics.
The Chinese central bank or any other cb can neutralize Japanese devaluation at any time. All they have to do is purchase the quantity of yen introduced into FX markets. Those yen then become a balance in a reserve account at the Bank of Japan and exchange rates remain unaffected, as will markets.
Honestly, you think the rest of the world is like the US. Please educate yourself before spouting off.
http://data.worldbank.org/indicator/NE.EXP.GNFS.ZS
David Llewellyn-Smith said, quoting the FT:
Don’t you love the way these neoliberal spear carriers like Lagarde talk out of both sides of their mouths, saying one thing and then doing just the opposite?
In the wake of the GFC, several Latin American countries experienced huge capital inflows resulting from carry trades made attractive to market participants by the expansionary monetary policies several large economies had undertook as a response to the crisis. To counteract this, a number of these countries imposed capital controls.
But here’s the rub: US trade agreements penalize the use of capital controls.
And if that doesn’t work, the saber rattling begins.
That’s what’s going on in South America as we speak. As this article explains, Brazil, Ecuador, Bolivia, Venezuela and Argentina have made great advances in wiggling out from under the jackboot of the United States, which greatly inconveniences the “multinationals, bankers and the governments of the G-8.” “The recovery of the role of the state in South America is significant,” the article explains, which has “changed the way the multinationals operate,” who now “have to negotiate” with “benefits for the mentioned countries.”
Last June, US covert and not-so-covert ops engineered the overthrow of the government of Paraguay and installed a puppet regime. From there, as well as the US’s ally in the Southern Cone, Chile, the US is beefing up its military and covert ops presence. From these strategic points the US projects its instruments of state violence, the purpose being to intimidate the countries in the region. Another article which describes what is going on is this one:
The real reason for all of this bellicosity – to lend a helping hand to the transnational bankers and corporations — is of course not being owned up to by Washington. Quite the contrary, all this war making is being done in the name of the War on Drugs.
Ah, yes, Parraguy, where the Bush family has a little place. http://www.guardian.co.uk/world/2006/oct/23/mainsection.tomphillips
I figure that the coup was all part of fixing up the new place, you know, to make things more confortable.
The US has been trying to control South America since what, 1830?
I think that particular toolbox is doomed to fail. The Iraq War was the big deal psychologically: it proved that the US could and would lose — that the Vietnam War wasn’t a fluke.
Paraguay is a nothing of a country compared to Brazil or Argentina, in both of which the US has decisively lost control, and the US can’t even regain control over Bolivia. If the US government thinks it can “project power” — and I believe it does think this — it is WRONG.
It will probably discover its wrongness much the way the Prussian Empire found out its wrongness in 1914 — they also thought they could “project power”. I wish I didn’t have to live through it.
Or HotFlash may be right, this may just be the Bush family preparing their escape route.
FWIW, the “War on Drugs” excuse is falling apart as we speak too. It had a good long run of over 80 years. The “War on Terrorism” excuse was never very successful, by comparison. At some point the shifting excuses stop working.
The “soft power” control through propaganda can be effective for centuries. After it fails, control through raw intimidation stops working surprisingly soon after. The US is already losing such control, and the people in charge have been flailing around, unable to admit it.
Global financial crisis. No one ever did answer Peggy’s question, and JCC is correct.
What crisis? Retail sales are beating expectations.
I’m wondering if maybe the entire crisis was staged, like a Cecil B. DeMille movie.
A few hundred thousand people paid to be extras. Thronging faceless crowds among the pyramids with donkeys and white cotton robes blowing in the dust under a high sun.
Then they all get run over by a monsoon. That’s not easy since a monsoon is made of water, but this is a movie and the cinematography is breathtaking.
But the next day you see them all out shopping. How can this be real? It’s all very suspicious and there must be more to it.