On data coming out of the fiat currency economies in the US, the UK and Japan
Actually this post isn’t about fiat currency despite the title. It’s really more about what is occurring outside the eurozone and most of the links I have concern the US, UK and Japan. Nevertheless, the three countries do pose a good trio in terms of understanding the effects of macroeconomic policy on economic performance in fiat currency regimes. The fiscal policy space they have is greater than it is in the euro zone.
Let’s start with the US because they released preliminary GDP results today. The numbers were a bit lighter than expectations, with growth coming in at 2.5% annualized compared to expectations of 3.0%. Personal consumption expenditures were actually pretty robust with growth at a 3.2% annualized pace. Expectations here were for 2.8%. So that tells you that US consumers are ploughing ahead despite fairly weak real wage growth. Inventories were another area of upside here. If you recall, inventories really killed the Q4 2012 GDP number, subtracting 1.5% from GDP growth. This time they added 1.0%. So that’s a net shift of 2.5% in GDP, meaning inventories essentially explain the entire shift in the US GDP trajectory. Real final sales actually increased less in Q1 2013 than they did in Q4 2012: 1.5% versus 1.9%. WHat that tells you is that the US GDP growth trajectory is not really that different now than it was in Q4 2012. In fact, one could reasonably argue that the trend is now down. I would love to see how these numbers break out month-to-month because I suspect that there has been a deceleration in growth.
In the UK, the numbers came out with 0.3% growth in GDP for Q1 2013. Clearly that is a lot weaker than the U.S. but it does avoid the dreaded triple dip. And, in my view, it takes pressure off of George Osborne, who has received a lot of criticism for his economic stewardship (rightly so, in my view). The UK data also help the pro-austerity side, therefore, as it demonstrates that you can have growth with austerity. If you look at the chart from the last post, you can see that since the initial dip in 2009, the UK has mostly grown despite austerity being the prevailing economic policy since 2010. You know that I don’t believe in austerity because I don’t believe deficits should be a goal of economic policy. But I do have to point out that empirically speaking it is not clear that austerity has killed the UK economy.
The juxtaposition between the US and the UK growth trajectory does demonstrate that over the medium-term, a more expansive government fiscal policy favours growth. The idea of expansionary fiscal consolidation is rubbish and I am glad that it has been discarded. I should point out that expansionary fiscal consolidation was the canard that Osborne had been using to promote his anti-growth policies. But, of course, the real question is long-term sustainability and that question has yet to be answered. It will be made plainer after the next downturn. The UK is more vulnerable here not necessarily because of austerity, but because of its outsized financial services sector. I am going to stop short here on the economic commentary but I would say that I don’t support austerity. I don’t support Osborne’s agenda for that reason. But I wouldn’t say that I support the US economic agenda since it’s geared toward releveraging which I think is going to cause problems. But let’s just see how this plays out.
The last of the three here is Japan and the preliminary data suggest that the deflationary spiral has not been arrested. In fact, the data show worse deflation after Abenomics than before. It’s too early to tell if Abenomics will work or not but the Bank of Japan is setting a 2015 target for its 2.0% inflation target. I would expect the Yen to start to drift up well before then if the inflation numbers do not rise soon. And I don’t believe monetary policy alone will get Japan there. They need fiscal and structural reform as well. What that reform needs to be is a big debate, however. My view remains that Japan is a cautionary tale for other nations because they are in a deflationary environment while demographics are shrinking the population. Having spent two decades in on- and off-again austerity and stimulus, the country does not seem to be any nearer to sustained economic prosperity than the US and the UK. Yet government debt is much, much higher.
That’s it. Here are the links.
Great graph of UK GDP since 2007 here. I have used this in a post on Britain and austerity.
“George Osborne says growth is evidence the coalition’s policies are helping to ‘build an economy fit for the future'”
“Now, in a sworn declaration obtained exclusively by Truthout, Col. Lawrence Wilkerson, who was chief of staff to former Secretary of State Colin Powell during George W. Bush’s first term in office, said Bush, Cheney, and Rumsfeld knew the “vast majority” of prisoners captured in the so-called War on Terror were innocent and the administration refused to set them free once those facts were established because of the political repercussions that would have ensued.”
“Boston Marathon bombing suspect Dzhokhar Tsarnaev has been moved to a prison at Fort Devens, Massachusetts, from the hospital where he had been held since his arrest a week ago, the U.S. Marshals Service said on Friday.
The 19-year-old ethnic Chechen, who was badly wounded in an overnight shootout last week with police hours after authorities released pictures of him and his older brother, also a suspect, had previously been held at Beth Israel Deaconess Medical Center, where some of the victims were also being treated.”
“South Korea’s growth rate hit a two-year high in the first three months of the year, boosted by a rebound in construction, investment and exports.
The economy grew by 0.9% in the January to March quarter from the previous three months, the central bank’s estimates showed.
The data is likely to help allay fears over the health of the Korean economy.”
“Costa Rica on Tuesday raised $1bn through a dual-tranche offering – a deal that bankers said was 10 times oversubscribed. Pricing for its $500m 12-year bond came in at 4.375 per cent – much lower than initial guidance of 4.5 per cent and earlier talk of 4.625. Its $500m 30-year tranche was priced at 5.625 per cent – also lower than initial guidance of 5.75 per cent and lower than the 6.058 per cent that Portugal is paying for its 30 year bond.
Rwanda, meanwhile, is looking to sell is first international bond. The central African country, which is rated B, or five notches below investment grade, is looking to raise $400m through a 10 year bond. Pricing is expected to close on Thursday and bankers say they expect yields of around 7 per cent. If so, this would make Rwanda’s financing costs cheaper than those of Greece (11.3 per cent).”
“GDP increased by 0.3% in Q1 2013 compared with Q4 2012. GDP was 0.4% higher in Q1 2013 than in Q3 2011 and therefore has been broadly flat over the last 18 months.
By far the largest contribution to Q1 2013 GDP growth came from services; these industries increased by 0.6% contributing 0.47 percentage points (pp) to the 0.3% increase in GDP.
There was also a small upward contribution (0.03pp) from production; these industries rose by 0.2%, largely due to mining & quarrying, which increased by 3.2% following a weak Q4 2012 when extended maintenance in the North Sea reduced output.
These upward contributions were partially offset by construction; these industries fell by 2.5%, reducing GDP growth by 0.17pp.”
“Christian Leffler, who was in Ottawa briefly Tuesday to meet with senior Canadian officials, told the Wall Street Journal that Canada and the EU are “very close, we think, to the finishing line,” in terms of inking a trade pact. “I think it would certainly be possible to wrap it up in time for the G-8 meeting,” he said. The G-8 Summit, which will bring together the leaders of the world’s biggest economies in Northern Ireland, is set for June 17-18.
But Mr. Leffler also said the EU will be launching negotiations with the U.S. in late June or July and is about to start talks with Japan, meaning Canada will get less attention if a deal isn’t concluded soon.
“It’s obvious that ultimately, you have to prioritize the allocation of time,” and “there will be less time available to make that final push with Canada,” Mr. Leffler said.
Canada and the EU have been negotiating a trade deal for almost four years and missed the deadline to reach a pact by the end of 2012.”
“Almost three times as many women as men have become long-term unemployed since 2010, says Fawcett Society”
“The Archbishop of Canterbury, the Most Rev Justin Welby, has called for Britain to “break up” one of its biggest banks to create a series of regional lenders.”
“Britain is in the depths of an economic depression from which it could take a generation to escape, the Archbishop of Canterbury claimed last night.”
This plan sounds a bit nuts to me. How can Japan escape deflation if it is doubling sales tax, a regressive form of taxation?This makes no sense at all.
“Japan’s government should stay with its plan to double the sales tax to 10 percent, compile a detailed plan to return to primary budget surplus in 2020 and boost revenue from other taxes, the Organisation for Economic Cooperation and Development said.
The size of fiscal consolidation needed means Japan does face the risk of a spike in interest rates that would hurt the financial system due to its large exposure to Japanese government bonds, the Paris-based think tank said.
“The new quantitative and qualitative monetary easing should be implemented to meet the new 2 percent price stability target, although this may not be enough,” the OECD said in its economic survey of Japan.
“Pushing ahead with structural reform on a broad front is equally imperative to achieve sustained growth.””
“Margaret Thatcher’s path to power was eased, without her knowledge, through a piece of vote- rigging by a Conservative Party official in 1958, according to her authorized biography.”
“An important measure of success for monetary policy is a central bank’s ability to anchor inflation expectations; inflation expectations influence actual inflation and, hence, the achievement of a given inflation goal. This notion has special significance for Japan, where CPI inflation has been intermittently negative since 1994 and where it is widely believed that expectations of future inflation have been persistently negative (that is, ongoing deflation is expected). In this post, we describe and evaluate an alternative, market-based measure of Japanese inflation expectations based on international price parity conditions. We find that recent inflation expectations have attained a level substantially higher than their previous peaks over the past three years.”
“the most important issue in the subsequent discussion in blogs and newspaper op-eds (for a quick rundown see here) is the question of causality. Does the negative correlation between public debt and economic growth rest on high levels of public debt causing low economic growth, as RR and other “austerians” claim (we borrow this term from Jim Crotty)? Or is the causation the reverse of what the austerians say, meaning low economic growth causes higher public debt? Using the HAP data set for 20 OECD countries, economist Arindrajit Dube of University of Massachusetts-Amherst has shown that (a) the negative relationship between public debt and growth is much stronger at low levels of growth, and (b) the association between past economic growth and current debt levels is much stronger than the association between current levels of debt and future economic growth. This is strong evidence for the second causation argument, where low growth leads to high debt.”
I have become increasingly disappointed in the analyses made by Richard Koo because he makes plain how much he believes in the myth of the money multiplier. This is a completely flawed way of looking at the monetary system and leads to very bad conclusions. Koo is otherwise very good but the money multiplier is all over this piece and makes it of limited value.
This is an interesting way of looking at the problem. I think the market is right though; when push comes to shove we will choose to burn the fuels! Jeremy Grantham is oted here as believing the risk is too high though.
“The so-called “carbon bubble” is the result of an over-valuation of oil, coal and gas reserves held by fossil fuel companies. According to a report published on Friday, at least two-thirds of these reserves will have to remain underground if the world is to meet existing internationally agreed targets to avoid the threshold for “dangerous” climate change. If the agreements hold, these reserves will be in effect unburnable and so worthless – leading to massive market losses. But the stock markets are betting on countries’ inaction on climate change.”
“What is most startling of all is the level of government guarantees for mortgage bonds, following the collapse of the private securitisation market in the wake of the financial crisis. “Investors have nearly completely abandoned the private label [mortgage-backed securities] market— the government is responsible for nearly 100 per cent of the securitisation market,” a Congressional committee on financial services noted this week.
“In fact, the displacement of private sector competition is so large that roughly 90 per cent of all residential mortgage originations are securitised into government-backed [bonds].”
Yes, you read that right: in the supposed land of the free (markets), the state is now guaranteeing almost all new mortgage bonds. Government involvement on this scale has never been seen before in American history; although entities such as Fannie Mae have existed for decades, they used to guarantee between a fifth and a half of the market. Indeed, state support like this is unprecedented anywhere in the western world – even in the parts of Europe that right-wing American senators sometimes like to label as “socialist”.”
“The crisis has brought important lessons about the benefits of possessing a freely floating currency. One benefit, UK experience suggests, is monetary and fiscal policy autonomy. But a substantial depreciation has contributed much less to the adjustment of the current account than most would have expected. These lessons have important policy implications.”
“Consumer prices, excluding the impact of a sales-tax increase and volatile fresh food costs, will rise 1.9 percent in the fiscal year starting in April 2015, according to the median estimate of BOJ board members published in Tokyo today. A separate release showed that the gauge tumbled by 0.5 percent in March, the most in two years.
BOJ Governor Haruhiko Kuroda’s faith that monetary policy alone will end more than a decade of deflation weighing down the world’s third-largest economy has run up against predictions of failure from former central bankers and ex colleagues from his Finance Ministry days. Policy makers may come under pressure to expand stimulus should prices continue to drop.”
“Our view has always been that causality runs in both directions, and that there is no rule that applies across all times and places. In a paper published last year with Vincent R. Reinhart, we looked at virtually all episodes of sustained high debt in the advanced economies since 1800. Nowhere did we assert that 90 percent was a magic threshold that transforms outcomes, as conservative politicians have suggested.”
“Central banks, guardians of the world’s $11 trillion in foreign-exchange reserves, are buying stocks in record amounts as falling bond yields push even risk- averse investors toward equities.
In a survey of 60 central bankers this month by Central Banking Publications and Royal Bank of Scotland Group Plc, 23 percent said they own shares or plan to buy them. The Bank of Japan, holder of the second-biggest reserves, said April 4 it will more than double investments in equity exchange-traded funds to 3.5 trillion yen ($35.2 billion) by 2014. The Bank of Israel bought stocks for the first time last year while the Swiss National Bank and the Czech National Bank have boosted their holdings to at least 10 percent of reserves.”