Daily commentary: On panic, retrenchment and deleveraging
The Martin Wolf piece about panic becoming all too rational fits very nicely with the macro case i made earlier today. He points to the private sector indebtedness and subsequent retrenchment as well as to the policy errors that have come from leaders not being able to change tack quickly enough to deal with the events on the ground. I have to say, I wasn’t left feeling optimistic by reading his piece, It gave me more a sense of inevitability about the next down leg.
Finance plays a central role in crises, generating euphoria, over-spending and excessive leverage on the way up and panic, retrenchment and deleveraging on the way down. Doubts about the stability of finance depend on the perceived solvency of debtors. Such doubts reached a peak in late 2008, when loans secured against housing were the focus of concern. What is happening inside the eurozone is now the big worry, with the twist that sovereigns, the actors upon whom investors depend for rescue during systemic crises, are among the troubled debtors.
Privately, I am also hearing that some policy makers acknowledge that a global double dip seems likely. To the degree I hear more like this I will let you know. But again, the information leaves me with a sense that policy is driven by political considerations that simply cannot adjust quickly enough to deal with the crisis proportions of economic turmoil we are seeing.
Now, Wolf’s piece focuses on Europe as people tend to do these days but what about China? The Chinese have the benefit of being able to be more long-term oriented in policy since they are not geared to the election cycle. But does that make them less fallible? I am concerned that they too could be constrained by political issues – different, internal party issues to be sure, but politics nonetheless. It is not clear to me that the Chinese are vastly different here and it pays to be watching how they respond to the global economic slowdown.
I think the links speak for themselves. The bad news is all around. The good news is that housing is in a seasonal recovery that might even be cyclical if this cycle can get through one more year. The US services PMI was decent. The India services PMI was also another bright spot. However, on the whole, data still are underwhelming.
That’s it. Here are the links.