Baseball91's Weblog

April 17, 2012

In Europe, Fiscal Matter Strikes Still Object

Filed under: Hyman Minsky — baseball91 @ 9:45 PM
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Within the new World Economic Outlook, International Monetary Fund’s chief economist Olivier Blanchard recommends that ‘unconventional’ monetary policy (such as Europe’s Long-Term Refinancing Operations, in which the European Central Bank offers unlimited low-cost loans to Europe’s banks) should continue. Stated in its latest Global Financial Stability Report: “The sizable presence of central banks in the long-term government securities market may limit the room for further policy manoeuvre, and may constrain central bank flexibility in smoothly unwinding current monetary policies.”

So this is it, with all the cards on the table: Economist Blanchard believes that there is scope for “further monetary easing.” Olivier Blanchard told reporters in Washington that the International Monetary Fund was doing “everything possible” to prevent a country from being forced to leave the eurozone; Blanchard added the IMF does not have a “Plan B” in case this should happen.

Meanwhile, that September 2011 move dubbed Operation Twist — intended to spur spending and investment by making borrowing cheaper — is scheduled to end June 30, 2012. The Federal Reserve Bank of the United States has been adjusting its central bank’s securities portfolio to hold more long-term government debt and mortgage bonds. Some version of additional quantitative easing from the Federal Reserve should be anticipated before June. The stock markets have been manipulated to their current heights, and if the Fed’s policy is the most extreme policy even, then Europe is beyond extreme. What possible plan exists should these extreme measures fail?

“The shrinking universe of safe assets and the upward-demand pressures have negative implications for global financial stability,” states an article in its latest Global Financial Stability Report. In its larger and larger role, the International Monetary Fund has cast significant doubt over Italy’s plans to tackle its debt mountain and return to growth. The Fund’s just published new Fiscal Monitor report predicted that Mario Monti will only manage to lower Italy’s deficit to 2.4% of GDP this year, not the 1.6% target. This forecast is a blow to Prime Minister Mario Monti’s sliding popularity and just as the country’s borrowing costs rise. Monti’s reform efforts are meeting rising criticism and resistance.

In Spain, borrowing costs jumped sharply, but investors were relieved at day’s end the auction by the Spanish Treasury found buyers for €3.18bn of 12-month and 18-month treasury bills which was slightly more than its maximum target. The IMF’s latest World Economic Outlook, just published in Washington, predicted sharp contractions in Spain and Italy this year. Stronger German economic sentiment is providing an excuse to overlook the worsening situation in Italy and Spain.

The IMF also warned that the risk of an escalating eurozone debt crisis remains, and that the global economic recovery remained fragile. The International Monetary Fund expects the eurozone to shrink by 0.3% this year, with Italy contracting by 1.9% and Spain by 1.8%. The bigger test comes at the auction of longer-term Spanish bonds on Thursday. In Spain, Miguel Ángel Fernández Ordóñez, governor of the Bank of Spain, warned that Spain will face “financing difficulties for some time.” He has also given his backing to the country’s current fiscal plans, telling a parliamentary committee that this is the only way to maintain market confidence.

As Spain struggles to cut one of Europe’s largest budget deficit to shore up investor confidence, borrowing costs have surged to four-month highs in past days because of concerns over Spain’s ailing finances. The country faces an important test Thursday during a planned auction of long-term government bonds. Earlier in April, Spain suffered weak demand at a bond sale which was followed by a sustained sell-off of its debt in secondary markets. Yesterday Spain reminded regional governments it could seize control of their finances.

The International Monetary Fund now expects overall global growth of 3.5% this year (up from 3.3%), and growth of 4.1% in 2013 (up from 3.9%). Olivier Blanchard, who was brought in by the former Managing Director Dominique Strauss-Kahn in September 2008, is a fan of John Maynard Keynes. The overall plan is to achieve some kind of economic stasis before imposing widespread tax increases where the patient’s condition stabilizes. Stop the bleeding, protest the wound, worry first about growth, because austerity can be self-defeating. Treat for shock. Then tackle the deficits; use aggressive monetary policy to drive down short-term and long-term interest rates; deflation not inflation is a bigger risk.

And there were far-reaching implications in the news this week from China. With the government already talking about liberalizing interest rates, now it is also taking steps to allow the exchange rate too float a little more freely. And all the while news of the accusations against the wife of Bo Xilai (he from a prominent revolutionary family) as well as his fall from grace, with his old strident view on communism, seem connected to the announcement of a greater two-way fluctuation in a wider trading band of the yuan starting today against the dollar – widening to between 1% above and 1% below a daily reference exchange rate. The end of expectations of yuan appreciation is directly related to population and to demographics. To realize the challenge to live in a nation of one billion, to feed the children of the one billion. And you felt more or less confident about the future? So will the Chinese citizen take up the investment slack? This with an existing pledge of the Chinese government to bring consumption into play as a driver of growth, in the Chinese form of capitalism, The People’s Bank’s decision is significant for what it says about the direction of China’s reform.

It was six months ago that Tom Orlik of the Wall Street Journal warned that change in China’s exchange-rate strategy was most unlikely. In the preceding three months the Hang Seng China Enterprises Index has fallen 35 percent. The strategy followed in Beijing was one of gradual appreciation. “Yes, China heads into the possibility of a second global downturn with more problems than it did the first,” wrote Orlik, “but markets have gotten ahead of themselves.”

China said its economy grew 8.1% in the first three months of 2012, its slowest pace in nearly three years, with weak demand in the nation’s key export markets. Probably because twenty-five percent of its exports went to the eurozone. China’s main weaknesses continue to be its dependency on exports and a real-estate bubble. In response, China is lowering interest rates, to pump a weakening economy. Because the winds from the eurozone would be sure to deflate the real estate bubble for the rest of the year in China.

There were not those sucking noises when air pressure collapses, as bubbles burst. As the way a bubble ends is not with a pop, but with a hiss. There was slow climate change, when stability is lost. While facing a shrinking universe of safe assets, with the loss of global financial stability, The Federal Reserve Bank of the United States has been adjusting its central bank’s securities portfolio to hold more long-term government debt and mortgage bonds. It sounded too much like nostalgia for the good old-days. Because as more instability was to come, nations had to be ready for the storm. And people lived more and more day to day. A lot like the people of China have always had to live over the past one hundred years.

It was fifty years ago when Time magazine ran the cover story asking if God was dead. The answer was “No, just in Europe.” And no one anywhere would want to be left holding the bonds of whatever was left of the individual EU nation, in this age of divorce.


1 Comment »

  1. What the experts are now saying, in the way of Tom Orlik, about China’s economy.

    Comment by baseball91 — June 8, 2016 @ 3:58 AM | Reply

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