Things to watch out for ... (in haste)
I kind of knew this would happen and that I could not stay away from blogging (see previous post). It was actually very easy since my hotel did not have anything remotely resembling internet but as I walked by a Starbucks, I thought; hmm I wonder whether it did not have a wirless hotspot ... and wouldn't you know it :).
A lot of things is going on the econsphere and by all means I won't report on all of them but still I would like to point you to some things to watch out for and read up on ...
First off we have the recent ECB (UK cb) rate hike and the story, at least, from the Economist is the same; a sustainable Eurozone recovery justifies a due raise based on vigilance.
'Predictable* would be an understatement. In early July Jean-Claude Trichet, president of the European Central Bank ( ECB ), had made it pretty plain that euro-area interest rates would rise this week. He mentioned “vigilance” a lot, which markets saw as barely disguised code, and said that rather than confer by telephone, the usual August practice, rate-setters would swap swimwear for suits and gather in Frankfurt on August 3rd. Press conference to follow, in case you needed another hint. Rates duly went up by a quarter of a percentage point, to 3%. (Mr Trichet met the media after The Economist had gone to press.)'
I do not have time now but I just do not get this analysis ... how can they be so sure?!
'For a start, policy is still loose by any measure: after allowing for inflation, rates are no more than 0.5%. Inflation stayed at 2.5% last month, according to a first estimate published this week, well above the ECB 's target of below but close to 2%.
Nor does inflationary pressure look like easing, and not just because of the risk posed by oil prices. The ECB pays far more attention to monetary developments than other central banks, seeing in fast money growth warning signs about asset prices as well as consumer-price inflation. Although credit growth slowed last month, notably for house purchases, it is still much faster than the ECB would like.'
Perhaps all that inflation is not prompted by strengthening growth but a creeping supply shock effect from oil and rising import prices from East Asia ...
'But inflation is running at 2.5%, well over the ECB’s target of near, but less than, 2%. Much of the inflation that is starting to worry America and Britain, as well as Europe, is a result of soaring fuel prices rather than excessively loose monetary policy. And higher energy costs are beginning to creep into the prices of goods and services. The experience of the 1970s warns against letting dearer oil touch off an inflationary spiral.'
The new kid on the blog Eurozone Watch also reports on the raise ... and quite frankly you need to read Sebastian's analysis on this because he is so right in looking at the fiscal perspective here ...
'While this step might look prudent from a monetarists’ point of view given the still strong growth in the money supply M3, in my eyes it is a dangerous gamble which risks to damage not only the upswing in the euro-area, but also the ECB’s year-long crusade for sound public finances.'
Pay special attention to ...
'Thus, there is now an increased risk of growth in the eurozone falling below potential next year due to a combination of external factors and policy over-tightening.'
Ok this was it about the Eurozone for now ... Meanwhile the Roubini show troddles on and Nouriel is upping the pressure.
'In a matter of days, my out-of-consensus recession call has become more mainstream and is being picked up and amplified all over the press. Even super-blogger and star academic macroeconomist Brad DeLong has joined my doom & doom club, now predicting - with 30% odds - something worse than a U.S. recession, rather a major financial "meltdown". So, Daniel Gros: you can now add DeLong to your list of distinguished "gloomy forecasters" that includes folks such as Mike Mussa and the chief U.S. economist at Merrill Lynch. And my now popular Recession Barometer (the Google News mention of terms such as Recession, U.S. Recession and Stagflation) is up to 5,310 mentions for Recession from 4,850 last week.'
This now mainstream "decoupling" view (a term most strongly pushed by Goldman Sachs) takes different definitions depending on the source of it: JP Morgan calls it the "rotation in global growth leadership", i.e. the idea that the center of global growth will rotate from the US to Asia and Europe; others refer to it as the switch in the global growth "locomotive", again from the sputtering US locomotive to the now allegedly perky Asian and European locomotives. But, regardless of the labels - "decoupling" or "rotation" or "locomotive" switch - the new conventional wisdom is that the world will somehow keep on growing at a sustained rate even in a US economic slowdown.
I have already conceptually refuted this "decoupling" or "rotation" fairy tale in my long analysis "12 Reasons Why the World Will Not De-Couple From the Coming U.S. Growth Slowdown…Or Why When the U.S. Sneezes the World Gets the Cold". I will leave it to interested folks to read the details of this analysis, but the reasons why a U.S. slowdwon will lead to a global slowdown are clear to any student of 101 economics:'
And lastly on a bright note The Economist chooses to acknowledge and describe the rising influence and effect of blogging economists - hat tip New Economist. Of course Brad Delong (see blogroll) is cited but also the excellent Brad Setser (see blogroll) is mentioned; and many others as well.
'The 3 August edition of The Economist discusses economists' blogs: The invisible hand on the keyboard. The piece asks a good qustion: why do economists spend valuable time blogging? I'm not sure the answers below are especially insightful - Brad DeLong's notion of the 'invisible college', for example, is barely alluded to. Nonetheless, regular readers of econoblogs should find something of interest here:'
Now back to the vivid nightlife of Montréal ... see you soon!
Here is another important one ... it seems as if the the latest bearish discourse amongst prominent economists have been heard as the Fed takes from its tightening cycle. Although caution is advised I also recommend you to pay attention to Nouriel Roubini's discourse on this matter; he is really laying it out but he is also right in much of what he says. Especially the point about how the rest of the world will not decouple from a US recession is very on the spot I think and a point I have also argued on several occasions. Where you might want to be cautious though is whether or not to believe his narrative on the severity of the coming US slowdown.
(From the FT on the Fed raise)
'The Federal Reserve on Tuesday held US interest rates at 5.25 per cent, ending an unbroken series of rises that began in June 2004.
Financial markets appeared uncertain about how to react to what is – at least at this stage – only a pause in the rate-tightening cycle. Equities, bonds and the dollar were all whipsawed by the announcement.
The Fed statement signalled that it still saw inflation risks and could raise rates further. But it did not go out of its way to emphasise its hawkish intentions. One member of the policy making committee, Jeffrey Lacker, president of the Richmond Fed, broke ranks and voted for a rate increase – the first formal dissent since Ben Bernanke became Fed chairman this year.
Bonds rallied, and short dated yields fell, unwinding the inversion of the bond market yield curve. Meanwhile, the dollar traded lower against the euro. But overall, reaction was muted.
The Fed statement explained why it had ended its sequence of 17 successive rate increases.
In the past it only said there were suggestions of a slowdown but this time it said “growth has moderated from its quite strong pace earlier this year”.
It acknowledged, as in previous statements, that core inflation has been “elevated”, and that the combination of high levels of resource utilisation and energy prices “have the potential to sustain inflation pressures”.