園田義明めも。

フィナンシャル・タイムズのGavyn Daviesも１９３０年代へバック・トゥ・ザ・フューチャー。


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August 5, 2011 10:12 pm

Only luck and wise policy can save us from a double dip
By Gavyn Davies
http://www.ft.com/intl/cms/s/0/c971ad82-bf93-11e0-90d5-00144feabdc0.html#axzz1U6i7m3PG

Global financial market confidence has collapsed, and visions of the 1930s are flooding back. Recession probability models are flashing red: some suggesting there is now more than a 50 per cent probability of America entering recession before the end of the year. The world’s advanced economies now need an unlikely combination of luck and wise policy to avoid a double dip.

Only a few months ago, economic forecasts were upbeat: the global economy seemed set for a third year of recovery following the great recession of 2008. So what went wrong? First, the contractionary effects of excessive private debt have continued to hold down household spending, especially in the US, the UK and the peripheral European economies. For a while last year it seemed that households had retrenched enough, when consumers’ expenditure started tentatively to rebound. This year, however, higher oil prices squeezed consumers while labour and housing markets stayed weak. Consumers lost confidence.

The weak underlying condition of household balance sheets means that even relatively minor shocks can knock consumers off their stride. But this has been made infinitely worse by a second factor: policymakers totally unable to cope with the stream of challenges thrown at them. It was one thing to come together to respond to the 2008 crisis. But having thrown all known weapons at it, and having just barely stabilised the situation, there is now no agreement on what to do next.

This state of indecision applies to the economics profession too. Many economists were willing to support the use of fiscal and central bank balance sheets to prevent a depression in the early days of the financial crisis, but there is now much concern about the risks of high public debt ratios, and the unprecedented current central bank holdings of that debt.

Most economists, and I am among them, still believe the most pressing concern is a shortage of demand, but there are legitimate worries about whether this can be fixed indefinitely by expanding public debt or direct monetary creation. There is also a vociferous group of anti-Keynesians, who think that such action is worse than useless. Many of us used to wonder how policymakers in the 1930s, and in Japan during its two lost decades, persuaded themselves it was impossible to address a chronic shortage of demand. Having lived through the past two years, their mistakes are easier to understand.

With economists divided and each side holding views with entrenched certainty, policymakers have fallen back on familiar orthodoxies, such as balancing budgets and normalising monetary policy. Some of this is understandable, given the inevitable uncertainties they face, but there have been big unforced errors.

The abject failure of the eurozone to conduct an elementary rescue operation during its sovereign debt crisis is a case in point. Germany says all options are on the table, except the one that would work, which is a greater issue of eurobonds. President Nicolas Sarkozy of France had a chance to explain this to chancellor Angela Merkel on the phone on Friday. Let us hope that he did so.

The other unforced error was the pantomime in Congress about the US debt ceiling. We needed an uncontroversial increase, along with a long-term plan for fiscal sustainability and some near-term, temporary, tax reductions. Instead we saw US politicians persuade investors that the strongest nation on earth, with its own currency, limitless taxable capacity and a credible central bank, might actually choose to default on its sovereign debt for political reasons. They finally stepped back from the brink, but not before severely shaking the world’s confidence in the ability of Washington to lead the global economy out of its malaise.

Now, the markets are looking once more at the Federal Reserve, which meets on Tuesday amid expectations that it will announce another round of quantitative easing. I doubt it is ready to do so. More worrying is the fact that many investors believe quantitative easing may at best be irrelevant in present circumstances. After all, US Treasury yields are already about 2.5 per cent. How much lower can they go? And would it matter very much if they did fall further? The nightmare scenario is the markets decide the global economy needs more help from policymakers, but the latter decide they have run out of ammunition, or are firing blanks.

So where are the escape routes? The first is that oil prices might fall, bringing down global inflation and boosting incomes. If this happened some of the forces that weakened the world economy earlier this year would then go into reverse, while central banks would be more willing to ease further. The second is that the corporate sectors of the developed economies, which are in rude health given the economic backdrop, may gradually pass their profits growth into extra employment and investment. They have been showing signs of doing this, but recent policy confusion threatens to damage business confidence. Friday’s slightly better jobs data from the US offer at least a few rays of hope.

The global economy stands on the brink of a double-dip recession. We now need leaders ready to prevent it from happening. If not, those images of the 1930s will quickly seem much less old-fashioned.

The writer is co-founder of Fulcrum Asset Management and Prisma Capital Partners