I am supposed to have a professional interest in things economics, but that interest can sometimes be like pushing on a piece of string–it goes nowhere. When big economic institutions like the IMF and World Bank think about what may ail or aid smallish economies (not to be confused with the physical size of a country or territory), such as those in Africa or regions like the Caribbean, those thoughts can matter a lot to decision makers in those countries. But, when it comes to thinking about the bigger economies–let’s call them the G7 or the major shareholders of the institutions–those thoughts are like the wind that does not pass through the tree during the height of summer in Washington. It hardly makes a leaf rustle. I would have recommended that they take the summer off and have a good vacation, or focus on ways to help other countries. It’s not that they do not have views that may count, it’s just that views or otherwise, the US and most G7 countries will do what they see is right for them, not what the international financial institutions see as right.
Most of the world’s major developed economies have been trying to raise their heads out of the worst recession in decades. It was not another worldwide depression. Countries in Asia and the Pacific region have done much better than those in North America and Europe, many never seeing negative growth, and they have rebounded strongly. For a while, it seemed that all the stimulus pumped into their respective economies by governments in Europe and North America loosening fiscal policies and central banks being more accommodating in their monetary policies was doing something to start help the desired green shoots grow. But, some who had concerns that any recovery would be uneven and perhaps short-lived, were never so convinced that these boosts would do the trick. They talked about the shape of the recovery being more like an L than a U or a V. They had concerns about a double dip recession, and worried that some nations would withdraw stimulus too soon. Neither side really seemed to have the game won, as the US economy registered strong growth coming out of 2009 and into 2010, and Europe began to see signs of slower but nonetheless positive growth. Financial markets also seemed to share that indecision as indices such as the Standard and Poor’s 500 moved from lows in March 2009, to highs in late April 2010, but then decided to take a pause or even reconsider, as they moved down in early July and now in August cannot seem to decide if they are coming or going (see chart)
When the US Federal Reserve Open Market Committee had its monthly meeting this week, it took on a major dramatic role. Enough signals had been given by central bank officials in the past weeks that their outlook for the US economy was going to be downgraded, and signs of economic faltering were there in not-fast-enough growth in private sector jobs to offset losses of permanent and temporary government jobs. So, when the Fed decided to keep its balance sheet unchanged rather than let it shrink naturally over the coming months, it seemed clear that the risk of double dip was there. So, no ice cream yet, and the Fed hoped no “I scream” either. US markets first reacted in a way that suggested that all would be well, but then reality kicked in as Asia and Europe and then the US markets saw that this really meant that things were more dire than perhaps they wanted to admit. Stock markets sold off hard since Tuesday, especially yesterday, and the US dollar, which had been on the ropes since early June, got a huge kick up the rear. Those currencies from countries which people somehow thought represented a better prospect than the US–Europe and the UK–got the shock of their lives when it was clear that not only were they already anemic in their recovery, but with a weaker US outlook they would not be getting much trickle down or direct infusion. The Bank of England in their inflation report made that clear enough, if it was not already ringing in the ears of currency traders. So, instead of topping 1.60 to the US dollar, the pound sterling headed back toward 1.55. The Euro, much beleaguered earlier in the year by the debt woes of Greece and its so-called PIIGs (Portugal, Ireland, Italy, Spain, and Greece), and trying to muscle up toward 1.34 to the US dollar from lows around 1.19 in early June, got a sudden blast of freezing air instead of balmy summer breeze. Today, it’s looking 1.28 in the face, and “Mirror, mirror on the wall…?” will not get a favourable answer about who is fairest of all.
I’m in the bears camp regarding where economic trends will go in the near term. Today, the US weekly initial jobless data printed another ‘unexpected’ rise to 485,000 (rather than an expected 465,000, see Bloomberg report), and housing foreclosures appear to be continuing at a worry rate: these were up 3.6% from the month before but down 9.7% from 12 months earlier (see CNN report). I may not follow those who see double dip, but I see a long drawn out road to recovery. Am I prepared to put my money where my mouth is? Yes, for the foreseeable future.