Thoughts For The Weekend

Here are some snippets to ponder while you wait for the weekend to get under way:

• The US is pushing for the G20 countries to adhere to limits on their trade deficits. The suggested limit is 4% of GDP. How convenient for the US that its trade deficit is only 3.2%. Some other usual suspects have signed up already: the UK, Japan, France and a few of the others. Major objections are already being launched by the Germans and Chinese. The German surplus is 6.1% of GDP while the Chinese weighs in at 4.7%. For those countries to cut back they would have to kick domestic demand into gear, which is something neither have shown any appetite for recently. On the contrary the Chinese just raised interest rates to slow their economy a tad in order to head off inflation. The confrontation between the importers and the exporters is destined to heat up before any agreement is reached. The issue, meanwhile, is that the ongoing imbalance between the two sides is one reason the global economy is stuttering rather than purring along.
• I just read that a former regulator here in the US is calling for the government to intervene in the foreclosure mess by kicking out the management of the big banks involved in its creation. That won’t happen, of course, because we are beholden to the banks. They own us. But the idea is fun to churn in your mind: the banks are setting records for their incompetence and the total lack of control they have over their own operations. It appears they have edged very close to committing fraud. They trashed the economy – yes they did it – and they are whining about the horror of renewed regulation. It is time to stop them. But we won’t. The opportunity was back in the peak of the crisis when the government had the chance to take one or two over and break them up. The failure not to do so will haunt us for a long time. At least until the next bank induced crisis. Which, judging by what I see coming from the current management, may not be far away.
• I have not commented on the British government’s attempt to commit suicide with its economy. The austerity measures they introduced this week are draconian and unnecessary. The authorities there seem to be reacting to a ghost rather than to a real world problem. The cuts are enormous and are designed to shrink the size of government rather than to respond to an economic crisis. So the agenda is purely political. The pretense is, of course, that the budget “needs” to be balanced and that time is against the government. They want to convince us that unless these measures are taken the bond market will react and plunge the country into a funding crisis. They claim the the country is bankrupt. This is ridiculous. The UK cannot go bankrupt the way that either Ireland or Greece so nearly did. Why? It prints its own currency. Neither of the other two do. So they are tied to the Euro, whose value reflects the German economy. They cannot devalue their currency and so are forced to fight the budget war with one arm tied behind their backs. The UK doesn’t have that problem. Which the credit markets seem to have noticed: UK interest rates have not risen despite the rapid run up in debt. Clearly the markets are more savvy than the UK government. The swing deep into the red was a function of the collapse of the UK economy after the big banks hammered it. Prior to that the debt ratios were reasonable. So the goal should be to fix the banking mess, not gut the economy. But that is not part of the political agenda, so austerity wins. They are playing with fire. The odds are now that the UK will fall back into recession. Anyone who wants to know how this will play out should go and study the years 1931 through 1937. Not pretty, but that’s the road the country is on.
• Finally: gird yourselves for next week’s GDP update. We will get a look at the third quarter numbers on Friday. The consensus is for around 2.0% growth. My guess is that we may fall short of those levels. The imports figures are something to worry about, and they have been a little high over the late summer. That, plus the signs of a slowdown in manufacturing, suggest to me that 2.0% is at the upper end of the range. Still let’s hope not.