Ambrose Evans-Pritchard has a good piece up at the Telegraph on an issue that appears not to have gotten the attention it merits, namely, the level of underutlization of capacity and the risk it poses to anything dimly resembling recovery. Evans-Pritchard brings up a related topic, that deflation is a bigger issue that most commentators are acknowledging. He sees it as a perceptual bias, as a result of inflation being something everyone knows all too well, but not deflation. It may be hard to conceive of deflation being possible after massive central bank liquidity creation. Yet that can happen with banking systems choked with dud credit, as the Japan experience attests.
Another point Evans-Pritchard makes late in his piece is that the widely-held assumption, thanks to the weightiness of Milton Friedman’s and Anna Schwartz’s Monetary History of the United States, is that the Great Depression resulted from bad monetary policy. But other academics, such as Peter Temin, argue that the near-hallowed tome failed to deliver the goods, that extensive detail masked a failure to prove the argument. But the Friedmanite view is driving policy.
Separately, on another failure to prove an argument, I have to take issue with a post at International Economy Zone, “Ambrose Evans-Pritchard, Worst Financial Reporter,” at International Economy Zone, which is a long-form ad hominem. The only substantive charge is that Evans-Pritchard is “sensationalist,” without once saying whether he has his facts wrong, which would seem to be a basic requirement for deserving the charge.
Gretchen Morgenson of the New York Times happens to hyperventilate too, and veers from being spot on and well researched (usually in equity markets, executive comp, and litigation, where she reads court filings diligently) to having a mix of solid fact and mistaken inferences in her pieces on credit markets. So if you are going to bash Evans-Pritchard, you need to bash Morgenson too (and frankly, on accuracy, I’d say AEP has the edge here). And while Bloomberg has some strong columnists (Caroline Baum, Michael Lewis, Jonathan Weil) they also have some who will go unnamed who are pretty dubious.
In fact, one the things that Evans-Prichard got exercised about in 2008 when everyone was going nuts about inflation risk and the oil bubble was that deflation was the real danger. He seems to have gotten that one right. One could argue he is a deflationista, but he does back up his grim views with data.
Evans-Pritchard does have a bearish bias, and has a very strong anti EU fixation. But the flip side is he covers topics that get short shrift elsewhere, and provides useful detail. Most readers are smart enough to tune down his occasional rhetorical excesses, which I frankly find entertaining. Most finance writing is deadly dull.
The real beef seems to be his book against the Clintons. Sorry, even if he was sloppy or wrong on that, you can’t use that to attack his financial reporting, or at least not if you intend to be fair and accurate. I take note of the fact that writers who I disagree with on many issues nevertheless upon occasion put out something that is very solid and sensible. If you are going to accuse him of doing a bad job as a financial reporter, you need to deliver the goods, as in say where and how he was wrong, not take pot shots.
From the Telegraph:
Too many steel mills have been built, too many plants making cars, computer chips or solar panels, too many ships, too many houses. They have outstripped the spending power of those supposed to buy the products. This is more or less what happened in the 1920s when electrification and Ford’s assembly line methods lifted output faster than wages. It is a key reason why the Slump proved so intractable, though debt then was far lower than today.
Thankfully, leaders in the US and Europe have this time prevented an implosion of the money supply and domino bank failures. But they have not resolved the elemental causes of our (misnamed) Credit Crisis; nor can they.
Excess plant will hang over us like an oppressive fog until cleared by liquidation, or incomes slowly catch up, or both….
Justin Lin, the World Bank’s chief economist, warned last month that half-empty factories risk setting off a “deflationary spiral”. We are moving into a phase where the “real economy crisis” bites deeper – meaning mass lay-offs and drastic falls in investment as firms retrench. “Unless we deal with excess capacity, it will wreak havoc on all countries,” he said.
Mr Lin said capacity use had fallen to 72pc in Germany, 69pc in the US, 65pc in Japan, and near 50pc in some poorer countries. These are post-War lows. Fresh data from the Federal Reserve is actually worse. Capacity use in US manufacturing fell to 65.4pc in July.
My discovery as a journalist is that deflation is a taboo subject. Those who came of age in the 1970s mostly refuse to accept that such an outcome is remotely possible, and that includes a few regional Fed governors and the German-led core of the European Central Bank.
As a matter of strict fact, two- thirds of the global economy is already in “deflation-lite”. US prices fell 2.1pc in July year-on-year, the steepest drop since 1950. Import prices are down 7.3pc, even after stripping out energy. …
Elsewhere, the CPI figures are: Ireland (-5.9), Thailand (-4.4), Taiwan (-2.3), Japan (-1.8), China (-1.8), Belgium (-1.7), Spain (-1.4), Malaysia (-1.4), Switzerland (-1.2), France (-0.7), Germany (-0.6), Canada (-0.3).
Even countries such as France and Germany eking out slight recoveries are seeing a contraction in “nominal” GDP…
Global prices will rebound later this year as commodity costs feed through – though that may not last once China pricks its credit bubble after the 60th anniversary of the revolution in October…
The sugar rush of fiscal stimulus in the West will subside within a few months. Those “cash-for-clunkers” schemes that have lifted France and Germany out of recession – just – change nothing. They draw forward spending, leading to a cliff-edge fall later. (This is not a criticism. Governments did the right thing given the emergency). The thaw in trade finance has led to a V-shaped rebound in East Asia as pent up exports are shipped. But again, nothing fundamental has change….People talk too much about “liquidity” – a slippery term – and not enough about concrete demand.
Professor James Livingston at Rutgers University says we have been blinded by Milton Friedman, who convinced our economic elites and above all Fed chair Ben Bernanke that the Depression was a “credit event” that could have been avoided by a monetary blast (helicopters/QE). Under that schema, we should be safely clear of trouble before long this time.
Mr Livingston’s “Left-Keynesian” view is that a widening gap between rich and poor in the 1920s incubated the Slump. The profit share of GDP grew: the wage share fell – just as now, in today’s case because globalisation lets business exploit “labour arbitrage” by playing off Western workers against the Asian wages. The rich do not spend (much), they accumulate capital. Hence the investment bubble of the 1920s, even as consumption stagnated.
I reserve judgment on this thesis, which amounts to an indictment of our economic model. But whether we like it or not, Left or Right, we may have to pay more attention to such thinking if Bernanke’s credit fix fails to do the job. Back to socialism anybody?