Mish's Global Economic Trend Analysis

Key Words of the Day: "Nothing", "Fiscal Cliff", "Later"; Bernanke Speech Template; U.S. Fiscal Cliff and What to Do About It

Posted: 07 Jun 2012 01:00 PM PDT

Everyone is pouring over the latest statements by Fed chairman Ben Bernanke and German chancellor Angela Merkel. But what did they really say?

The short answer is "nothing".

For example, Bloomberg reports Merkel Says Germany Ready to Back Use of Current Euro Tools.

"In view of the current difficulties, it's important to emphasize that we have created the instruments of support in the euro zone, that Germany is ready to work with these instruments whenever that is necessary and that this is an expression of our firm desire to keep the euro area stable," the chancellor said. Merkel didn't outline to which tools she was referring.

Four Questions, Four One-Word Answers

Is Merkel backing any new procedures? No
Is there a change of any kind? No
Did she even say what tools she was talking about? No
Was this even news? No

At first glance the Bloomberg headline looks significant. However, the words "current tools" say all you need to know.

I propose a more realistic headline: "Merkel Supports What Merkel Supports"

What did Bernanke Say?

The short answer is "nothing". The exceptionally long answer can be found in Chairman Ben Bernanke's Economic Outlook and Policy Before the Joint Economic Committee, U.S. Congress June 7, 2012.

Here is one key highlight regarding "fiscal cliffs" that merits further discussion:

Even as fiscal policymakers address the urgent issue of fiscal sustainability, a second objective should be to avoid unnecessarily impeding the current economic recovery. Indeed, a severe tightening of fiscal policy at the beginning of next year that is built into current law--the so-called fiscal cliff--would, if allowed to occur, pose a significant threat to the recovery. Moreover, uncertainty about the resolution of these fiscal issues could itself undermine business and household confidence. Fortunately, avoiding the fiscal cliff and achieving long-term fiscal sustainability are fully compatible and mutually reinforcing objectives. Preventing a sudden and severe contraction in fiscal policy will support the transition back to full employment, which should aid long-term fiscal sustainability. At the same time, a credible fiscal plan to put the federal budget on a longer-run sustainable path could help keep longer-term interest rates low and improve household and business confidence, thereby supporting improved economic performance today.

A third objective for fiscal policy is to promote a stronger economy in the medium and long term through the careful design of tax policies and spending programs. To the fullest extent possible, federal tax and spending policies should increase incentives to work and save, encourage investments in workforce skills, stimulate private capital formation, promote research and development, and provide necessary public infrastructure. Although we cannot expect our economy to grow its way out of federal budget imbalances without significant adjustment in fiscal policies, a more productive economy will ease the tradeoffs faced by fiscal policymakers.

Fiscal Cliff and What Bernanke Wants To Do About It

Ben Bernanke warns Congress that the U.S. faces a fiscal cliff. However, Bernanke does not want them to do anything about it now.

There is no change in stance here. Monetarist and Keynesian clowns never want to address fiscal cliffs in advance, bubbles in advance, regulations in advance, or anything else in advance, except of course when they are dead wrong about what to do.

As with Merkel, there is no change in Bernanke's stance, just a promise to do something later if the economy worsens. He also warned Congress they will need to do something about the U.S. fiscal cliff, but certainly not now.

Bernanke Speech Template

Blah blah blah, stimulus if needed, blah blah blah, fiscal cliff, blah blah blah, not now, blah blah blah, full employment, blah blah blah, depressed housing, blah blah blah, encouraging signs, blah blah blah, recovery,blah blah blah, maintain highly accommodative stance, blah blah blah, no inflation, blah blah blah.

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

Surprise Rate Cut in China; What's it Mean?

Posted: 07 Jun 2012 09:10 AM PDT

China surprised economists today with a surprise cut in interest rates by a quarter point, the first cut in rates since 2008.

Just a couple of months ago, few analysts had forecast that Beijing would cut rates, believing that China was on track for a "soft landing". But after growth slowed to 8.1 per cent in the first quarter, recent data showed the economy was on track for a sharp deceleration.

With the cut, China's benchmark one-year lending rate will now be 6.31 per cent, while the one-year deposit rate will be 3.25 per cent.

The People's Bank of China, which raised interest rates three times last year, had previously characterised its monetary stance this year as "fine tuning", arguing that nothing dramatic was needed to support the economy. The rate cut marks a definite change.

The question now is whether businesses and households will respond to the lower rates by borrowing more. Banks have reported weak loan demand over the past two months.

In an important move alongside the rate cut, the Chinese central bank said it would allow banks to set deposit rates 10 percent above the benchmark level and to set lending rates 20 per cent below the benchmark.

This is a step towards interest rate liberalisation – that is, letting banks decide for themselves, based on market conditions, the level at which they set rates. Analysts believe this is crucial to putting the economy on a more stable footing by ensuring that households earn a fair return on their bank savings, thus encouraging more income to be used for consumption.

What's it Mean?

The simple explanation is China is slowing far more than the soft-landing crowd expects.

China wants to stimulate growth but it has already exhausted every economically viable infrastructure project. All that is left is malinvestment opportunities. Moreover, new projects will add to delays in much-needed rebalancing efforts both within China and externally.

China will publish industrial output and sales data this weekend. PMI reports suggest the data will not be very good although there has been a huge discrepancy lately between "official" reports and PMI reports.

Look for the "official" reports to reflect the slowdown shown in the PMI, and perhaps much worse.

Should China march ahead with massive numbers of new infrastructure projects, more state-owned-enterprise bad debts will undoubtedly pile up and once again private citizens will pay the price for the cleanup.

Hard Landing Coming Up

On May 12, in Screeching Halt in China; Weak Trade Data; Imports and Exports Fall Way Short of Expectations; Credit Crunch Underway; Feeble Forecasts From Pimco, Others I stated China bulls are in for a multi-year shock because rebalancing from an economy overly dependent on exports is going to be far more painful, and last much longer than most think. Data is coming in much weaker than expected, but I propose this is only the very beginning.

I am sticking with 3.5% average growth for the rest of the decade, an idea proposed by Michael Pettis in a bet with The Economist. For details, please see 12 Predictions by Michael Pettis on China; Non-Food Commodity Prices Will Collapse Over Next Three to Four Years; Nails in the Hard Landing Coffin?

Perfect Demographic Storm

For more on China, please consider China's Population Poised to Crash in Perfect Demographic Storm

Also consider "Curbs Needed to Avoid China Property Chaos" Says China's Premier; Chinese Economy Already in Hard Landing? Regardless, It's Too Late to Prevent Chaos

Mike "Mish" Shedlock
http://globaleconomicanalysis.blogspot.com
Click Here To Scroll Thru My Recent Post List

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Thursday, June 7, 2012

Mish's Global Economic Trend Analysis

Mish's Global Economic Trend Analysis

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