The health of the global economy, and that of markets, depends on the success of a series of medium-term hand-offs between the public and private sectors -- in growth, balance sheets and credit flows. This week's data highlighted their complexity. Fortunately for investors, the valuation impact is being compensated by central banks' wide open liquidity spigots.
To counter disorderly private sector de-levering and avoid an economic depression, governments and central banks around the world have aggressively ballooned their balance sheets. This has helped heal some private balance sheets but job creation has remained very anemic, income inequality has increased, and growth has been too weak to allow for the de-levering of the public sector (including fiscal deficits and central balance sheets which now vary in size from from 20 percent of GDP in the U.S. to 30 percent in Europe).
In the U.S., Friday's disappointing GDP print for the fourth quarter was a reminder of the challenge, especially in view of a less-than-reassuring composition. Consumer growth was limited to just 2 percent notwithstanding yet another decline in the savings rate to 3.7 percent, a level last seen at the end of 2007. Export growth also decelerated. Indeed, were it not for a surge in inventory, the economy would have probably succumbed to the drag from government components.
The extent of the growth challenge in Europe was highlighted by Friday's higher than expected increase in Spanish unemployment (to an agonizing 22.9 percent). Meanwhile several of the region's governments, ECB, IMF and private creditors continued to squabble about how to allocate the inevitable losses on Greek debt. In Portugal, another highly vulnerable economy, market measures of default risk reached record highs this week.
The longer such solvency and growth indicators continue to flash red in Europe, the more likely that capital will continue to flee; and the harder it will be to overcome the region's debt crisis.
With the U.S. still too weak to act as the global growth locomotive and Europe being more of a caboose, attention naturally shifts to the emerging economies. Are they robust enough to tip the global balance in favor of high growth?
The IMF was less than fully re-assuring on this a few days ago. Yes, several emerging economies still benefit from strong balance sheets and productivity gains. Unfortunately, they too are slowing and, in the process, will act as less of a global locomotive.
Today's markets are not pricing in fully the growth and solvency disappointments, and for good reason. Central banks continue to pump a massive amount of liquidity into the system. And, this week, they again left little doubt about their commitment to this course of action notwithstanding it's failure to deliver the desired economic outcomes.
In Wednesday's statement, the American Federal Reserve extended by another 18 months the expected period for exceptionally low interest rates (through at least the end of 2014). Chairman Bernanke went further in his press conference, confirming that the Fed stands ready to consider additional quantitative easing should economic data remain weak.
Across the Atlantic, Meryvn King, the governor of the Bank of England, also signaled his willingness to do more. Meanwhile the ECB did nothing to counter market expectations that it's second three-year LTRO operation next month will be sizeable, especially given the lowering of collateral requirements.
Wherever you look, markets are balancing liquidity versus solvency and growth. The hope is that ample central bank liquidity will serve as a bridge to help the west overcome too much debt and too little growth; the risk is that the liquidity will prove a bridge to nowhere.
Dr. Mohamed El-Erian is CEO and co-CIO of PIMCO, the bond investment house.
Cross-posted from CNBC.com.
El Errian, for example, doesn't come to the point until the last coordinate clause, and then ends, evading all responsibility for exposition of fiscal policy solutions for problems with no monetarist solution.
Meanwhile, the official line of the GOP has made Friedrich Hayek into a Mary Baker Eddy preaching "natural healing" for man-made economic collapse.
Economics would not be a "dismal science," if the lack of character among economists were not abysmal.
Very few economists support the ineluctable conclusions drawn by MMTers on how our money is really managed since abandoning the gold standard 41 years ago. As long as our erstwhile leaders have no clue and are guided by economists living in the world of gold standard rubrics we are doomed to repeat otherwise easily avoidable policy choices.
F & F
Some balance The Fed creates money out of thin air and we pay the banks interest on our own money and if they do lend it to us it's at usurious predatory rates..!
I'd have Nationalized these Major Corrupt Banks and Reformed them Top to Bottom before re-privatizing them...
We blew it, Obama blew it, and now we still have to vote for him to fend off the insane Republican threat to our nation..!
Ordinary people however have little interest and even less knowledge about such esoteric matters.
Ordinary people--those consumers whose spending you rely on to keep the wheels of the markets turning are the problem. Not only do they have less money to spend, but the necessary items like fuel and food are rising in price far faster than the official inflation rate.
Some in your general station (but not necessarily you) have forgotten that much of the blame for the current crisis that has mostly affected those "beneath" is theirs. They have also forgotten that much of the reason for their station is the spending on those "beneath" them. Most importantly they have forgotten that government cannot keep them afloat for long either by monetary policy that directly supports them or by government spending closer to the bottom that trickles up.
Supposedly we have built a "new economy" in the United States and a global economy both of which encouraged great speculation as to continued growth. Now that this new world economy has hit its first major obstacle, methods from the "old" economy are being used to clear the way.
My belief is that both the "new economy" and global economies are failures as the only things shared globally are greed and exploitation of the weak.
We face a very prolonged period where much "innovation" of the last 30-odd years must be eliminated.
Humans will have a moral imperative to find and utilize methods such as a basic income model to insure all people on the planet can benefit from being members of the human race..
Nothing that is being proposed.. austerity nor spending will bring back jobs... and the economy will suffer - or to put it more succinctly, humans on the lower end of the earnings curve will suffer more... until we institute a Basic Income model worldwide.. or end our worship of a false exchange medium.. traditional work for a living values will never again fuel society.
F & F
I am tired of the continual PUNISHMENT of savers by the reduction of INTEREST rates !
i pine for the Years of JIMMY CARTER with interest rates REWARDING savers up to 14 -17 %
all to help businesses borrow CHEAP and then become Bankrupt and not doing anything for the people anyway...... A BOOM for BORROWERs and a MALAISE for GOOD SAVERS ???
HOW fair is that ??
The article also take me back to the beginning, the Bush/Cheyney era that ended with so much public trust terribly shattered. The present administration ended up being on the same path, and hearing yet new promises on the tail of 2012 election breaks one's heart.
What is bothersome is that, there are voices in the status quo that projects an attitude that the matter of regaining trust (by actually showing some accountability somewhere) from among the middle class and poor is not a high priority. I am not quite sure how to think forward if this awareness builds up in a society at large. It is amazing that human beings with so high level of creativity can go along with such a don't care attitute. Each one to his own?
"Banking has moved so far away from funding industrial growth and economic development that it now benefits primarily at the economy’s expense in a predator and extractive way, not by making productive loans. This is now the great problem confronting our time. Banks now lend mainly to other financial institutions, hedge funds, corporate raiders, insurance companies and real estate, and engage in their own speculation in foreign currency, interest-rate arbitrage, and computer-driven trading programs. Industrial firms bypass the banking system by financing new capital investment out of their own retained earnings, and meet their liquidity needs by issuing their own commercial paper directly. Yet to keep the bank casino winning, global bankers now want governments not only to bail them out but to enable them to renew their failed business plan – and to keep the present debts in place so that creditors will not have to take a loss..."
"History provides a wealth of examples illustrating the dangers of capitulating to bankers, and also for how to restructure banking along more productive lines..."
Capitalism, Socialism and Communism all look good on paper.
The devil is in the details.
They all fail miserably when exploitation reaches the majority instead of a small minority.
-AJB
by Milton and Rose Friedman. Dr. Friedman is the economist who
is quoted most often when they are praising free
markets and capitalism. "But we cannot rely on custom or
conscious alone to interpret and enforce the rules; we need an
umpire.These then are the basic role of government in a free
society; to provide a means where we can modify rules, to
mediate differences among us on the meaning of rules, and to
enforce compliance with the rules on the part of those few who
otherwise would not play the game." For whatever reason, this
part of Dr. Friedman's philosophy is never mentioned when it
comes to making "free markets" work