Sunday, Sep 27, 2009

Call this a "V-shaped" recovery if you want. Markets are pricing in economic growth that is not occu

The Telegraph: Money figures show there's trouble ahead

Private credit is contracting on both sides of the Atlantic. The M3 money data is flashing early warning signals of a deflation crisis next year in nearly half the world economy. Emergency schemes that have propped up spending are being withdrawn, gently or otherwise.

Posted by devo @ 12:57 AM (1225 views)
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11 Comments

1. devo said...

rring.

Sunday, September 27, 2009 12:59AM Report Comment
 

2. letsgetreadytotumble said...

Have a read of comment,

NorrieC
on September 26, 2009
at 10:35 PM

His explanation seems to make sense to me.
His last sentence, "The conclusion is inevitable. The only debate is how long it will take to get there."

What is the conclusion? Where does this end up?
Do we end up in a massive deflationary spiral, massive unemployment and no spending. Then do we wait for the wealth production curve to get closer to the debt curve which could take years?

Sunday, September 27, 2009 02:48AM Report Comment
 

3. techieman said...

In general i love the way that an assumption is made that there will be recovery, whether thats Vshaped W shaped or any other shape.

Perhaps there may not be a recovery, perhaps we have seen the top of the global economy in our lifetimes? Can you have continual growth with blips to the downside? Just because we have had ever increasing prosperity will we always? Arent things finite? Sometimes perhaps trying to maintain the status quo and/or a more equal distribution of wealth we have is a good idea? Isnt that "going for growth" what has caused the problem when the growth rates forced were unsustainable?

I suppose the "L" shape deals with that - although people still see an "L" shape as a recovery - :-).

Is this just a sunday morning rambling to get me in the mood to go to the gym or is there more substance in what i am saying? I am not saying what my view is i just find it interesting that everyone assumes that (even if we are not out of the woods) there will be a recovery of sorts and an assumption that in however many years the shenanigans of 2008 / 9 will be seen in retrospect as a countertrend blip in a forever rising trend!

Sunday, September 27, 2009 10:04AM Report Comment
 

4. paul said...

techieman, the 'L-shaped recovery' is a parody on the -shaped recovery.

It is also the most truthful. The credit crunch is now two years in and counting, and the recovery is always 6 moths away.

Sunday, September 27, 2009 10:19AM Report Comment
 

5. Fallingbuzzard said...

People got carried away with the hyperinflation scam. QE only serves to recapitalise banks and pay for government covering banking system losses and build up reserves in banks. None of the new money gets into the real economy. It sits in the finance sector and you can't introduce -ve rates on reserves at central banks because it would collapse a currency. I fear that the West is finding out what Japan already did. QE doesn't work in terms of loosening credit.

Sunday, September 27, 2009 12:20PM Report Comment
 

6. bellwether said...

Credit growth is not limitless and that is what we are finding. As Techie says there may be no recovery, and we do we assume there must be one, we do we think it is constant growth - which itself contains paradoxes when we consider our finite resources.

I find it difficult to sympathise with outright monetisation but one of the commentators to Ambrose's article makes a good pro monetization point which I quote below. Is he right? I have no idea.

"I think you had better consider carefully what could happen if there were an unrestrained deflationary collapse.

Normally, commercial banks take central bank money as deposits, and use these as a base to create their own bank credit. Total money in an economy is base credit plus bank credit. The more banks lever (multiply) the bank credit, the more profit they can make.

Trouble is, they have levered too much, and lent to people who cannot repay. Like a boat that has sailed too close to the wind, the banks jave tipped over into the sea. They either have no capital, or the fear of the consequences of other banks going under means that those who remain solvent will have to delever. The amount that they have to delever is much greater than is shown in the statistics because a lot of credit forwarded by banks is in default, but not acknowledged on their books.

As banks withdraw credit, this reduces the total amount of money in the economy. As some business cannot get credit, they cannot repay other business, who in turn go bust, which in turn brings down other banks.

The whole system can collapse completely.

Whatever you do with your savings, if that were to occur, would not preserve your wealth. Even if you kept your money under the mattress, it wouldnt buy anything like what it can today. Our privately managed logistics systems that can sell you a good pair of jeans for less than a fiver would fall apart much quicker than the jeans.

It wouldnt be pretty, but that is an outcome that remains a possibility.

Lets just hope the Austrian economists dont manage to get anyone into a position of power, then we would see the majesty of such an implosion"

Sunday, September 27, 2009 01:51PM Report Comment
 

7. bellwether said...

six

Sunday, September 27, 2009 02:35PM Report Comment
 

8. uncle tom said...

There isn't a letter that fits my perception of where the economy is headed.

We've seen about a third of the likely GDP contraction so far, which has been followed by a nearly flat line, very slightly veering upward.

Next we will see another contraction, as people (and governments) come to terms with the fact that money really doesn't grow on trees.

That may be followed by another faint appearance of recovery, before the economy slumps again toward a sustainable base.

Thereafter, we need to get used to the idea that underlying GDP growth - the ability to achieve more for less effort - has been slowing, and will continue to do so, probably to around 0.5% p.a. The consequences of an aging population could easily push that figure down to around zero, or even very slightly negative.

Inflation is inevitable. Be ready for high inflation and higher interest rates.

Sunday, September 27, 2009 03:27PM Report Comment
 

9. alan_540 said...

UT - why is inflation inevitable? Is it because of QE? Higher interest rates as well, why do they have to be higher? And also, do you have a time scale in mind for this to all pan out in?

Sunday, September 27, 2009 03:46PM Report Comment
 

10. uncle tom said...

Alan,

The devil is always in the timing, but I see it as being virtually unavoiodable now.

Try to create an exit strategy for QE that doesn't require a flight of fancy when it comes to future GDP, and you'll see where I'm coming from.

Limiting inflation to a debt eroding, but manageable, 5%, would be the ideal outcome; but I'm far from convinced that our future leaders will be able to manage that.

QE is effectively devaluing Sterling by well over 1% per month. To reduce that requires either dramatic spending cuts, creating mass unemployment, and attendant benefit claims; - or a rise in interest rates to the point where UK soveriegn debt becomes attactive to overseas investors again.

The right way forward is a limited measure of both factors, coupled to an immediate and major house building program; to create employment.

However, there seems no chance of the current Government going down that route.

Continued QE will feed through into the continued weakening of sterling, making imports more expensive. As other countries emerge from recession, demand for commodities will rise, making a wide range of products very much more expensive. that in turn will feed through into price rises in the shops.

If you look at what is left of the UK's manufacturing base, you realise that while cheaper exports may translate into better profits for our few remaining exporters; the volume of exports will not increase with any great speed, nor will our dependancy on imports tail off readily either, so Sterling devaluation will do much more harm than good; worsen our balance of payments crisis, and propel inflation.

Come the next election, Sterling will probably have been devalued by a further 10% or more, and there is a serious risk that a lack of confidence in Sterling will require the rate of QE to be accelerated.

Runaway inflation is clearly is a major threat, but one that could be avoided.

The problem is our electoral timing - what is good for the UK is not good for Labour.

The country needs some nasty medicine, and now, not later - it won't taste nice, but without it, our economic health could get very much worse..

Sunday, September 27, 2009 05:52PM Report Comment
 

11. techieman said...

UT are you saying that the falls in Sterling will be the reason for the increase in inflation. In other words is it only the UK you see as having inflation or do you think that there will be worldwide commodity price inflation that will be exasperated by the weakness in the pound.

I am sometimes concerned that your posts contradict themselves. The other day you were saying that things arent as bad because companies have cut the fat from their operations. Now you seem to be saying that inflation is inevitable and that that would ideally decrease the debt - or deflate it if you like. However if we reinstate a worldwide contraction - if thats what you are getting at - then you must think that the pound can be sold off more creating inflation in a worldwide deflationary environment.

First im not sure thats right and second even if it is, arent you making an assumption that price inflation on goods will inevitably create wage / price spiral [wage mostly] so that the debt can be reduced in real terms. My view is if there is inflation - it will just squeeze peoples incomes, and not enable them to increase wages which means that there wont be a reduction of real debt. I think the inflation call - if right - will differentiate between prices and wages. This aint the 70s.

Perhaps you argue that the supply side has contracted so much and so quickly that the demand - although lower - will still create inflationary pressures. If so i can still square that with an HPC - because the demand will be for inelastic things such as food and fuel - and not credit for other things such as HPs. Basically i am still in the deflation camp - although i would be interested in your counter arguments to what i have said.

Cheers

Sunday, September 27, 2009 06:54PM Report Comment
 

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