Financial crises like we had in 2008 before the Great Recession, and earlier in the 1930's before the Great Depression, are the triggers for big, long lasting economic downturns that require painfully long times from which to recover. They differ from ordinary economic recessions (i.e., two quarters of negative economic growth), which generally don't last more than a couple of years and are usually followed by good levels of growth. Financial crises are caused by liquidity shortages in the financial system. When major banks and other financial institutions cannot obtain ready access to loans, especially short term loans, the financial system can teeter, and in worst case scenarios, collapse.
Recent news articles report that European banks are under stress because of the decline in oil prices (http://www.cnbc.com/2016/02/08/european-banks-face-major-cash-crunch.html), and because of low interest rates and legal costs, as well as oil prices (http://money.cnn.com/2016/02/05/investing/bank-stocks-worse-than-oil/index.html?iid=EL). Things got so shaky today that Deutsche Bank, Germany's largest, felt compelled to put out a statement reassuring shareholders about its financial condition. http://www.reuters.com/article/us-deutsche-bank-stocks-idUSKCN0VI1WI. If Europe's major banks begin to encounter liquidity shortfalls, we could have a problem. If not addressed properly, it could be a big problem.
Europe's big banks are in general not as well capitalized as America's big banks, so it's not surprising that the Europeans might encounter turbulence sooner. But if Europe's big banks teeter, America's big banks will, because of the interconnections between all major banks worldwide, at least feel pretty nauseated. Of course, in such a scenario, the European Central Bank and U.S. Federal Reserve will mount up and ride to the rescue. But not even the Brobdingnagian bailouts of 2008 prevented the Great Recession.
If the financial system stays sound, the slowdown in China and the other BRICS may cause a recession, but probably not a catastrophe. But if the financial system dives into the septic tank, as it did in 2008, then we can expect a stinky mess. So watch the banks.
Showing posts with label Great Recession. Show all posts
Showing posts with label Great Recession. Show all posts
Tuesday, February 9, 2016
Sunday, October 2, 2011
The New Stagflation
The Wall Street Journal reported on Saturday (October 1, 2011, p. A10) that consumer prices in Europe rose 3% over the past year, the fastest pace in three years. During the same time, prices in America rose 3.8% (measured by the CPI-U, without seasonal adjustment). In both Europe and America, the economies are stagnating, either barely growing or maybe nosing downward. Unemployment remains high, especially in America. Consumer confidence is flagging. Governments are dysfunctional. Markets look askance upon banks rumored to be facing EU sovereign debt exposure. Credit default swap dealers prosper.
The atmosphere is reminiscent of the stagflation of the 1970s, with its unrelenting malaise, lousy stock market, and embarrassing leisure suits (indeed, leisure suits have made a minor re-appearance recently). Some argue that today's conditions are far removed from the stagflation of yore, comparing the 13% inflation of 1979 to today's 3.8%. But that's not all the pertinent information.
Disposable income is stagnant, and even dropped 0.1% in August after adjustment for inflation. In other words, we're losing ground. Back in the 1970s, nominal incomes largely, but not entirely, kept pace with inflation. The net result was similar to current times: people gradually lost ground. The economy grew very slowly in the 1970s, around 1% a year, and unemployment levels, although not as bad as today, were high compared to the boom years of the 1950s and 1960s. Like the past decade, the 1970s experienced a falling stock market.
When you get to the bottom line, history is rhyming pretty well even though it's not a carbon copy of the disco era. This puts policy makers, especially central banks, in a tight spot. If they raise interest rates to tamp down inflation, they increase the potential for recession. If they ease monetary policy, they facilitate inflation. The European Central Bank is keenly aware of this dilemma, contending with fear of inflation in northern Europe and high unemployment in less vigorous parts of the EU. Its governing council meets next week, with no good options to consider.
The U.S. Federal Reserve, now a house divided, remains controlled by governors who view unemployment as a greater problem than inflation. Consumers should expect no relief from the Fed. While the Fed continues to insist that inflation poses no long term problem, that offers little comfort to those trying to pay this month's rent, as well as the grocery and gas bills. Nor is there much reason to believe that more intervention by the Fed will greatly affect employment levels. While the Fed acts like its mojo is working, reality is we're drifting in a new stagflation.
The atmosphere is reminiscent of the stagflation of the 1970s, with its unrelenting malaise, lousy stock market, and embarrassing leisure suits (indeed, leisure suits have made a minor re-appearance recently). Some argue that today's conditions are far removed from the stagflation of yore, comparing the 13% inflation of 1979 to today's 3.8%. But that's not all the pertinent information.
Disposable income is stagnant, and even dropped 0.1% in August after adjustment for inflation. In other words, we're losing ground. Back in the 1970s, nominal incomes largely, but not entirely, kept pace with inflation. The net result was similar to current times: people gradually lost ground. The economy grew very slowly in the 1970s, around 1% a year, and unemployment levels, although not as bad as today, were high compared to the boom years of the 1950s and 1960s. Like the past decade, the 1970s experienced a falling stock market.
When you get to the bottom line, history is rhyming pretty well even though it's not a carbon copy of the disco era. This puts policy makers, especially central banks, in a tight spot. If they raise interest rates to tamp down inflation, they increase the potential for recession. If they ease monetary policy, they facilitate inflation. The European Central Bank is keenly aware of this dilemma, contending with fear of inflation in northern Europe and high unemployment in less vigorous parts of the EU. Its governing council meets next week, with no good options to consider.
The U.S. Federal Reserve, now a house divided, remains controlled by governors who view unemployment as a greater problem than inflation. Consumers should expect no relief from the Fed. While the Fed continues to insist that inflation poses no long term problem, that offers little comfort to those trying to pay this month's rent, as well as the grocery and gas bills. Nor is there much reason to believe that more intervention by the Fed will greatly affect employment levels. While the Fed acts like its mojo is working, reality is we're drifting in a new stagflation.
Sunday, January 23, 2011
The Fed and Foreign Policy
The Fed's easy money policies have spurred inflation and rising real estate prices in China. China's informal link of the yuan to the dollar in effect imports U.S. monetary policy into China. Even though the slack in the U.S. economy from the Great Recession has held prices down here, the red hot Chinese economy reacted to excess liquidity by pushing up prices there.
The Chinese have a deep fear of inflation, having experienced far worse in their four millenia of existence as a civilization than anything Americans have seen. They're imposing monetary constraints, and even resorting to price controls. The Fed is meeting this Tuesday and Wednesday, and is expected to continue running its money printing press at full throttle. With its inflationary implications for the yuan, the Fed's current stance provides China a reason to de-link the yuan from the dollar. Once the yuan is de-linked, China can regain control of its own monetary policies.
The dissatisfaction of Chinese consumers with inflation has much more influence on Beijing's thinking than all the haranguing of the U.S. and European governments. Thus, the yuan is edging up in value, and is becoming more freely tradeable in international currency markets. Its continued rise against the dollar can be expected, albeit at a carefully managed rate. Among other things, a rising yuan makes it easier for China to buy oil and other commodities traded in dollars. Greater Chinese demand would push up the dollar-denominated price of those commodities.
This will be a mixed bag for America. As the yuan rises, U.S. exports to China may increase, creating jobs here. But a falling dollar also means a loss of buying power. America imports a lot from China, and as the yuan rises, those imports become more expensive. Cheaper substitutes may be available in some instances--Southeast and South Asia offer lower cost alternatives for manufacturing clothes. But the manufacture of high tech components that go into computers, cell phones, PDAs, tablet computers and what not can't easily be shifted to new suppliers. And rising oil and other commodities prices have obvious implications for American consumers. A rising yuan, bottom line, means falling wealth levels in America.
It may be that the Fed intends to engineer a drop in the dollar's value. That would be one way it can discharge its statutory mandate to foster full employment. America's wealth levels during the past decade were puffed up by the profligate borrowing that funded the nation's consumption. Debt-fueled "prosperity" can't go on indefinitely, and America's wealth was at risk for a fall.
As the dollar drops against the yuan, the Chinese government will take losses on its vast portfolio of dollar-denominated investments. It would likely be willing to take these losses in order to hold inflation in check and keep its citizens from becoming overly restive.
Many Americans would consider jobs for some of the unemployed at the expense of less buying power for all to be a fair trade. High unemployment has many social costs, ranging from increased government spending to discouraging consumption to familial distress and breakdowns. Fair or not, however, as the yuan rises, American living standards could be squeezed.
The Chinese have a deep fear of inflation, having experienced far worse in their four millenia of existence as a civilization than anything Americans have seen. They're imposing monetary constraints, and even resorting to price controls. The Fed is meeting this Tuesday and Wednesday, and is expected to continue running its money printing press at full throttle. With its inflationary implications for the yuan, the Fed's current stance provides China a reason to de-link the yuan from the dollar. Once the yuan is de-linked, China can regain control of its own monetary policies.
The dissatisfaction of Chinese consumers with inflation has much more influence on Beijing's thinking than all the haranguing of the U.S. and European governments. Thus, the yuan is edging up in value, and is becoming more freely tradeable in international currency markets. Its continued rise against the dollar can be expected, albeit at a carefully managed rate. Among other things, a rising yuan makes it easier for China to buy oil and other commodities traded in dollars. Greater Chinese demand would push up the dollar-denominated price of those commodities.
This will be a mixed bag for America. As the yuan rises, U.S. exports to China may increase, creating jobs here. But a falling dollar also means a loss of buying power. America imports a lot from China, and as the yuan rises, those imports become more expensive. Cheaper substitutes may be available in some instances--Southeast and South Asia offer lower cost alternatives for manufacturing clothes. But the manufacture of high tech components that go into computers, cell phones, PDAs, tablet computers and what not can't easily be shifted to new suppliers. And rising oil and other commodities prices have obvious implications for American consumers. A rising yuan, bottom line, means falling wealth levels in America.
It may be that the Fed intends to engineer a drop in the dollar's value. That would be one way it can discharge its statutory mandate to foster full employment. America's wealth levels during the past decade were puffed up by the profligate borrowing that funded the nation's consumption. Debt-fueled "prosperity" can't go on indefinitely, and America's wealth was at risk for a fall.
As the dollar drops against the yuan, the Chinese government will take losses on its vast portfolio of dollar-denominated investments. It would likely be willing to take these losses in order to hold inflation in check and keep its citizens from becoming overly restive.
Many Americans would consider jobs for some of the unemployed at the expense of less buying power for all to be a fair trade. High unemployment has many social costs, ranging from increased government spending to discouraging consumption to familial distress and breakdowns. Fair or not, however, as the yuan rises, American living standards could be squeezed.
Monday, January 3, 2011
A Tale of Two Recoveries
Near unanimity reigns on Wall Street that the economy will keep expanding and the stock market will rise further this year. Corporate profits are growing as worker productivity improves. Commodities prices are levitating. Retail sales have moderately increased. Even junk bond yields are relatively benign. Stock market investors, even if still shell shocked from two years ago, are doing better. In the tonier parts of Standard Metropolitan Statistical Areas, things are looking up.
Evidence of recovery is harder to find elsewhere. Food banks remain heavily patronized. Unemployment levels cling tenaciously near the 10% level. The long term unemployed are becoming entrenched in joblessness. Wages are stagnant. Many unemployed who find jobs have to accept lower incomes. Real estate prices are dropping again, after a brief and shallow upswing. Mortgage rates have risen off record lows, dampening refinancings and home purchases.
There has never been a lasting economic recovery without a restoration of full employment and a strong housing market. Neither seems to be in the offing, not for years. America is dividing into two camps. There are the relatively few well-off, who own most of the assets and are the least likely to be laid off. They have more resources to ride out the bad times and greater opportunities to profit from a rebound. Then, there is everyone else, for whom the Great Recession continues.
Today's politics only exacerbate the divide. Many moderate and middle income taxpayers, frustrated by the disparate impact of the recovery, became Tea Partiers and voted Republican. But the resurgent Republicans made sure that the wealthy were protected in the tax deal they cut with President Obama this past fall. The same tax deal also gave everyone a 2% cut in Social Security taxes, while the more progressive $400 Making Work Pay tax credit wasn't renewed. The first legislative maneuver by the new Republican majority in the House is to schedule a vote to repeal last year's health insurance reform law. This symbolic digital salute will do nothing to improve the economy or help the unemployed.
Deficit reduction is on every politician's list of resolutions for this year. But you know how it goes with New Year's resolutions. There's more water to be found in the Sahara than spending cuts in Washington. Last fall's tax deal, the first major product of the new bipartisanship, widened the deficit. The only way to truly reduce the deficit is to cut Social Security and Medicare spending, and/or raise taxes. Recent polls show that a large majority of Americans, from Millenials to the World War II generation, oppose cuts in either program. Yet there is no way today's Republican-controlled House would sign off on tax increases (even though a recent poll shows most Americans favor increasing taxes on the well-to-do in order to balance the budget). So the new bipartisanship will produce, at best, nominal deficit reductions in highly visible ways (a la the two-year pay freeze for federal employees, which hardly affects the deficit but sounds good in press releases). Given that today's recovery is largely due to deficit spending and the slackest monetary policy ever adopted by the Fed, there is little incentive in Washington to control deficits. No politician wants to be the grinch that stole the recovery.
But for most Americans (i.e., the majority trapped in stagnation), there hasn't been much of a recovery to steal. Current projections are for high unemployment and depressed real estate prices to linger for years after 2012. America may be morphing into a society where a small group of elites enjoy prosperity while everyone else just gets by (or not). That's not a good development for a nation dedicated to the pursuit of happiness. America was founded by immigrants aspiring for better lives. If hope dies, the essence of the nation is lost. The damage from the Great Recession will be great, indeed, if the nation loses its heart.
Evidence of recovery is harder to find elsewhere. Food banks remain heavily patronized. Unemployment levels cling tenaciously near the 10% level. The long term unemployed are becoming entrenched in joblessness. Wages are stagnant. Many unemployed who find jobs have to accept lower incomes. Real estate prices are dropping again, after a brief and shallow upswing. Mortgage rates have risen off record lows, dampening refinancings and home purchases.
There has never been a lasting economic recovery without a restoration of full employment and a strong housing market. Neither seems to be in the offing, not for years. America is dividing into two camps. There are the relatively few well-off, who own most of the assets and are the least likely to be laid off. They have more resources to ride out the bad times and greater opportunities to profit from a rebound. Then, there is everyone else, for whom the Great Recession continues.
Today's politics only exacerbate the divide. Many moderate and middle income taxpayers, frustrated by the disparate impact of the recovery, became Tea Partiers and voted Republican. But the resurgent Republicans made sure that the wealthy were protected in the tax deal they cut with President Obama this past fall. The same tax deal also gave everyone a 2% cut in Social Security taxes, while the more progressive $400 Making Work Pay tax credit wasn't renewed. The first legislative maneuver by the new Republican majority in the House is to schedule a vote to repeal last year's health insurance reform law. This symbolic digital salute will do nothing to improve the economy or help the unemployed.
Deficit reduction is on every politician's list of resolutions for this year. But you know how it goes with New Year's resolutions. There's more water to be found in the Sahara than spending cuts in Washington. Last fall's tax deal, the first major product of the new bipartisanship, widened the deficit. The only way to truly reduce the deficit is to cut Social Security and Medicare spending, and/or raise taxes. Recent polls show that a large majority of Americans, from Millenials to the World War II generation, oppose cuts in either program. Yet there is no way today's Republican-controlled House would sign off on tax increases (even though a recent poll shows most Americans favor increasing taxes on the well-to-do in order to balance the budget). So the new bipartisanship will produce, at best, nominal deficit reductions in highly visible ways (a la the two-year pay freeze for federal employees, which hardly affects the deficit but sounds good in press releases). Given that today's recovery is largely due to deficit spending and the slackest monetary policy ever adopted by the Fed, there is little incentive in Washington to control deficits. No politician wants to be the grinch that stole the recovery.
But for most Americans (i.e., the majority trapped in stagnation), there hasn't been much of a recovery to steal. Current projections are for high unemployment and depressed real estate prices to linger for years after 2012. America may be morphing into a society where a small group of elites enjoy prosperity while everyone else just gets by (or not). That's not a good development for a nation dedicated to the pursuit of happiness. America was founded by immigrants aspiring for better lives. If hope dies, the essence of the nation is lost. The damage from the Great Recession will be great, indeed, if the nation loses its heart.
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