For the past week, I have put the Green Shootometer in the garden and have taken regular readings. The upshot is: the glass is definitely half empty - or half full. Let me explain. As is clear from the most interesting blog post by Barry Eichengreen and Kevin O'Rourke, and its recent update on VoxEU, the global economy is, as regards some key activity indicators (industrial production, world trade, world stock markets), tracking the Great Depression of the 1930s with frightening precision and tenacity (see also Martin Wolf's recent column "The recession tracks the Great Depression" on this). They date the start of the current global contraction in April 2008. However, somewhat to my surprise, central bankers and policy makers turn out to be capable of learning, even across generations. The lessons of the 1930s appear to have been learnt. New mistakes are being made all over the place, especially as regards moral hazard, the too-big-to-fail problem and other incentives for excessive risk taking in the financial sector, but that won't become a serious problem until the next bust following the next financial and asset market boom and bubble. ... Global financial markets have normalised, in the sense that spreads have return to the levels just before Lehman fell over. I must admit to feeling, in early September 2008, that financial market conditions were far from favourable, however. So cardiac arrest may have been seen off, the patient is not about to jump out of bed and do a horlepiep. Access to capital markets has been restored for many of the larger firms, but the cost of funding tends to be high. In part, the recent burst in capital market funding represents a diversion of funding demand away from the banks, which are generally still in a zombified state. It also tends to be unavailable to SMEs. ... As far as I'm concerned, I've been down so long, it looks like up to me.
As is clear from the most interesting blog post by Barry Eichengreen and Kevin O'Rourke, and its recent update on VoxEU, the global economy is, as regards some key activity indicators (industrial production, world trade, world stock markets), tracking the Great Depression of the 1930s with frightening precision and tenacity (see also Martin Wolf's recent column "The recession tracks the Great Depression" on this). They date the start of the current global contraction in April 2008.
However, somewhat to my surprise, central bankers and policy makers turn out to be capable of learning, even across generations. The lessons of the 1930s appear to have been learnt. New mistakes are being made all over the place, especially as regards moral hazard, the too-big-to-fail problem and other incentives for excessive risk taking in the financial sector, but that won't become a serious problem until the next bust following the next financial and asset market boom and bubble.
...
Global financial markets have normalised, in the sense that spreads have return to the levels just before Lehman fell over. I must admit to feeling, in early September 2008, that financial market conditions were far from favourable, however. So cardiac arrest may have been seen off, the patient is not about to jump out of bed and do a horlepiep. Access to capital markets has been restored for many of the larger firms, but the cost of funding tends to be high. In part, the recent burst in capital market funding represents a diversion of funding demand away from the banks, which are generally still in a zombified state. It also tends to be unavailable to SMEs.
As far as I'm concerned, I've been down so long, it looks like up to me.
The dynamics of US general government (Federal, State and Local) public debt since 1970 is shown in Figures 1 and 2 below. They show the fiscal irresponsibility of the George W. administrations; fiscal policy was relentlessly procyclical, with the sizeable primary surpluses of the Clinton years blown away in a series of regressive tax cuts. Figure 3 shows that, even before the economic downturn started raising the numerator and lowering the denominator of public spending as a share of GDP (from the second quarter of 2008), general government expenditure had been growing faster than GDP during most of the George W. years (all three figures are based on OECD data). ... These figures should not come as a surprise. Obama's plans for public expenditure are conventional, middle-of-the road social democratic spending plans. You cannot have social democratic spending ambitions if you are not able to impose social democratic tax burdens. My fears about the sustainability of the US public finances is based on my belief that the US public believes there is a Santa Claus: that you can have the higher benefit levels and higher-quality provision of public goods and services without paying the price in the form of higher taxes or user charges. The US polity is so polarised, that it is not likely that a compromise will be achieved in the years and decades to come, on how to raise the additional revenues or how to cut public spending by enough to restore public debt sustainability. Exaggerating slightly, the Democrats will veto any future public spending cuts and the Republicans will veto any future tax increases.
These figures should not come as a surprise. Obama's plans for public expenditure are conventional, middle-of-the road social democratic spending plans. You cannot have social democratic spending ambitions if you are not able to impose social democratic tax burdens.
My fears about the sustainability of the US public finances is based on my belief that the US public believes there is a Santa Claus: that you can have the higher benefit levels and higher-quality provision of public goods and services without paying the price in the form of higher taxes or user charges. The US polity is so polarised, that it is not likely that a compromise will be achieved in the years and decades to come, on how to raise the additional revenues or how to cut public spending by enough to restore public debt sustainability. Exaggerating slightly, the Democrats will veto any future public spending cuts and the Republicans will veto any future tax increases.
Two economic historians, Barry Eichengreen of the University of California at Berkeley and Kevin O'Rourke of Trinity College, Dublin, have provided pictures worth more than a thousand words (see charts).* In their paper, Profs Eichengreen and O'Rourke date the beginning of the current global recession to April 2008 and that of the Great Depression to June 1929. So what are their conclusions on where we are a little over a year into the recession? The bad news is that this recession fully matches the early part of the Great Depression. The good news is that the worst can still be averted. ... Profs Eichengreen and O'Rourke describe this contrast. During the Great Depression, the weighted average discount rate of the seven leading economies never fell below 3 per cent. Today it is close to zero. Even the European Central Bank, most hawkish of the big central banks, has lowered its rate to 1 per cent. Again, during the Great Depression, money supply collapsed. But this time it has continued to rise. Indeed, the combination of strong monetary growth with deep recession raises doubts about the monetarist explanation for the Great Depression. Finally, fiscal policy has been far more aggressive this time. In the early 1930s the weighted average deficit for 24 significant countries remained smaller than 4 per cent of gross domestic product. Today, fiscal deficits will be far higher. In the US, the general government deficit is expected to be almost 14 per cent of GDP. ... The great likelihood is that the world economy will need aggressive monetary and fiscal policies far longer than many believe. That is going to be make policymakers - and investors - nervous.
Profs Eichengreen and O'Rourke describe this contrast. During the Great Depression, the weighted average discount rate of the seven leading economies never fell below 3 per cent. Today it is close to zero. Even the European Central Bank, most hawkish of the big central banks, has lowered its rate to 1 per cent. Again, during the Great Depression, money supply collapsed. But this time it has continued to rise. Indeed, the combination of strong monetary growth with deep recession raises doubts about the monetarist explanation for the Great Depression. Finally, fiscal policy has been far more aggressive this time. In the early 1930s the weighted average deficit for 24 significant countries remained smaller than 4 per cent of gross domestic product. Today, fiscal deficits will be far higher. In the US, the general government deficit is expected to be almost 14 per cent of GDP.
The great likelihood is that the world economy will need aggressive monetary and fiscal policies far longer than many believe. That is going to be make policymakers - and investors - nervous.
