The global economy is in deep trouble.
Forget the headlines reporting meager growth in the U.S. Forget the positive news about German exports. Ignore the stories that China’s worries are overblown (see The Economist leader, The Great Fall of China). Our global economy is like a tired old boxer on the ropes, with blow after blow raining down on him. There are just too many signs that suggest we are running on empty and, with little in the tank, we are about to fall- heavily.
Let’s first look at the U.S. The Fed is toying with the first interest rate hike since 2007. Many hedge fund operators have never even seen a rate hike before. With volatility so vibrant, in the stock market and the price of oil among others, there is no way the Fed will increase rates. Or will they, to save face, nominally increase rates by the smallest amount possible? And what would the impact be anyway? If purely symbolic, it will only signal a future for the Fed that will surely come as the yuan fulfills its destiny as reserve currency.
Global trade is in the can. Data from the Dutch World Trade Monitor suggests that “world trade contracted in the first half of the year at the fastest pace since 2009”. See The Economist The World This Week. With China’s growth slowing, Euro-zone anemia, and U.S. negligence, is it going to get better? No.
See “Emerging market currency wars threaten to cut back world trade” in the U.S. print edition of the Financial Times. The financial times today (US print edition) carries a troubling analysis of emerging market currency impact on global trade. It seems that their analysis suggests that over 100 currencies that have devalued (or tried to) against each other and rather than act as a boost for imports, it damages exports. This is not logical since lower currency exchange should drop the prices of exports. Clearly something else is happening.
Why this is troubling is that this kind of behavior is very typical in history as a response to periods resulting in really difficult economic conditions. The period between the two World Wars were subject to dangerous and frightening currency valuation changes. The U.S. embarked on a globally damaging deflationary period in the early 1920’s, just as Europe, looking for stability to drive recovery, were looking to rejoin the gold standard to stabilize currency exchange. The U.S. action prevented this. And competitive currency devaluations became the norm and global trade struggled and so too economic recovery.
Some specific data is alarming:
- low wage growth in U.S. for what appears to be a healthy job recovery
- near zero or zero interest rates and high public debt suggesting little wiggle room for many western central banks, when or should recession hit
- commodity prices at extremely low levels, in some cases the lowest this century
- inflation stubbornly low or falling
- anaemic economic growth in the west, and falling growth in the east
The commodity price issue is alarming because of the pent up price deflation in the supply chain. The Economist article reports that factory-gate pricing continues to fall across Asia. “In China they have declined for 41 consecutive months; in South Korea and Taiwan for 35 months; and in Singapore for 31 months”. Prices in consumer and industrial product supply chains will fall, not increase. Deflationary pressures continue to build.
But it is not any one currency depreciation, or any one interest rate, or any one measure of GDP, that is proving our most important challenge. Did you notice how last week the market movements around the world, among the largest in history, were not triggered from anything the U.S. reported or Federal Reserve said. The source was China; the stabilizing function emerged from China (reduced interest rates). I was taken aback at the market dynamism and the role of China as villain and then hero, in the space of a week.
What is killing and preventing progress is not the data, but the changes in the data. Or more precisely, it is the volatility with which policy, data and results are changing. This week the price of oil oscillated more than it has since 1977. It is the nervous features of a complex system that is preventing progress. It is September 1st and the next Fed meeting is but 15 days away. Pundits flip flop, daily, with their “go/no go” rate change advice for the Fed. This is crazy. How can such an important policy decision be so vague and varied but two weeks away? How in the world can the Fed get this right? They have as much chance as a crap shoot at a circus. Really.
Sure, unemployment has recovered well. But for the fact that job recovery has not driven high paying jobs: wage growth is nonexistent. Policy types talk of increased minimum wage, rather than economic growth, as if money grows on trees. Productivity in the developed world has all but stalled. No one seems to care as they would rather spend time counting out the welfare services they want to increase. Student debt in the U.S. is out of control. So instead of reducing grants that would reduce a universities ability to charge higher fees, we hear arguments for increased government contributions and debt forgiveness. Really? This is all madness. Out leaders have lost the plot. Worse than that we have, as individual countries, almost lost the ability to advantage oneself over others.
The Economist article, “Briefing: China and the World Economy- Taking a Tumble” suggests that the gyrations of the Chinese stock market, when it jumped up, and crashed down, do not reflect changes in Chinese economic conditions. There are technical points made in the article that show this. But the way in which the stock market signals trigger painful and volatile changes around the world are worrying. If the Chinese stock market did not matter much, why the dramatic changes in Europe and U.S.?
I wrote an Open Letter to Christine Lagarde, head of the IMF, the other day. If ever we needed another meeting of minds, such as a Bretton Woods level, it is now. We need to coordinate macroeconomic policy in order to
- stabilize currency value and therefore exchange
- agree where and how to prevent barriers to global trade increasing and infect reduce them
- agree policy to coordinated investments at a national level that drive short to medium term growth
- agree policy to reduce public sector debt
We are so over the edge it’s not funny. No policy, no headline, no movement, not even any one change of office, will fix this funk. Coordinated, visionary leadership is needed. Where is the Keynes and the Harry White we need?
The jobs report is due September 4th. If the news is good, the Fed may increase rates despite the market, the global, volatility I speak of. I think that would be a mistake. We don’t need to focus on when the Fed will raise interest rates. We need to focus on collaborating, alignment, and reduction of volatility.