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Caixin Online
Aug. 22, 2010, 8:25 p.m. EDT · Recommend (9) · Post:
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China's crude steel production rises
First Take "º
Women take to the stores -- and pay full price
By Andy Xie
BEIJING (Caixin Online) -- In the wake of a barrage of bad economic data, the yield on two-year U.S. Treasury notes has tumbled to 0.5% and the 10-year note to 2.8%, almost reaching the levels after Lehman's collapse. Pundits in the U.S. and other Western countries are talking about deflation again.
The decline in the consumer price index for the past three months gives this view ammunition. The Fed is coming under pressure to resume quantitative easing (QE). In anticipation of the Fed resuming QE -- nicknamed "QE 2" -- the dollar has declined quickly by 10% from its recent high. Both the Treasury and currency markets have already priced in "QE 2."
The Fed just downgraded the U.S.'s economic outlook and decided to reinvest its proceeds from its huge mortgage-bond holdings in Treasurys. It is not quite "QE 2," as it doesn't involve additional QE, just maintaining the past liquidity injection. But it leaves much for the market to imagine.
Economic news from Europe has been surprisingly positive. This is to be expected.
First, its short-term economic problems are less serious than the U.S.'s. The property bubble was restricted to Ireland and Spain. Second, the sovereign-debt crisis is mostly about small southern countries and is less serious than the fiscal crisis of the state governments in the U.S. And, the average budget deficit is much lower than the U.S.'s. Third, the euro's decline has boosted export-oriented economies like Germany.
While Europe's long-term problems remain serious, it looks better than the U.S. or Japan in the short term. This is why euro has performed well lately.
But, Europe's economic performance may deteriorate in the next 12 months. The euro has rebounded and won't help its exports like before. Its fiscal contractions will negatively affect its domestic demand.
Europe's employment situation has always been poor. The U.S.'s employment data have been poor relative to its past but is still better than Europe's. The U.S.'s private sector is still adding jobs. The odds are that Europe's private sector will still lose jobs.
Similarly, Japan's situation has improved but remains poor. Its nominal gross domestic product has stopped declining. But, if the yen remains as strong as it is now, it could decline again.
Japan's employment has stabilized, thanks to strong exports. As the yen's strength drags down its exports, employment will resume its decline. With national debt above 200% of GDP and annual fiscal deficits at 8% of GDP, Japan urgently needs to rein in its debt growth. Hence, if its economy improves, it will likely increase its consumption tax to decrease its fiscal deficit, which would slow the economy. Japan is essentially structured to not have a good economy.
The developed world is essentially competing on bad economic news. Major currencies move on who is worse at the moment. The Greek debt crisis caused the euro to plunge. Now the weak employment and resuming property weaknesses have caused the dollar to plunge. Maybe the yen is next.
On the other side of the world, inflation is sweeping over the emerging economies. Oil has climbed above $80 per barrel again. Copper is back above $7,000 per ton, closing in on the pre-crisis peak. The prices of agricultural commodities are gapping up. India is seeing double-digit inflation.
Emerging economies as a whole are experiencing inflation rates above 5% on average. India, Korea, and Taiwan have recently raised their interest rates, fearing accelerating inflation and an overheated property market. China has taken steps to rein in the overheating property market. It is still reporting moderate inflation. But, as the data lose touch with what people feel on the street, the pressure for rate hikes may become too strong to resist. Inflation and asset bubbles dominate the concerns of emerging economies.
The global economy seems to be bifurcating into the ice-cold developed economies and red-hot developing economies. Will the bifurcation persist? If the two sides converge, which side will dominate?
Let me write the conclusions first: Inflation, not deflation, will dominate the global economy. The deflation scare causes the central banks in the developed economies to sustain a loose monetary policy. It will fuel inflation in emerging economies. Through trade, currency markets, and ultimately inflationary expectations, inflation will hit developed economies.
We are seeing the interplay between the forces of globalization and policy mistakes. Globalization has severely restricted the effectiveness of economic stimulus. Trade plus FDI are half of the global GDP. Trade is visible in terms of stimulus leakage. But, where investment occurs in response to demand growth is far more important. Multinationals can invest anywhere in response to demand. It cuts the linkage between demand stimulus and investment response. The latter is crucial to employment growth, which is necessary for sustaining demand growth beyond stimulus.
Essentially, demand is local, but supply is global. This is why the old assumptions on stimulus are no longer reliable.
The above analysis always applies to a small, open economy. A typical macroeconomics textbook will study the extreme cases of a small, open economy and a large, closed economy. In the former, the leakage is so powerful that stimulus is futile. The latter has no leakage and has maximum stimulus effectiveness.
The female shopper has returned, and she's ready to buy, at least judging by the latest results from AnnTaylor, writes Angela Moore.
12:19 p.m. Aug. 20, 2010 | Comments: 113
- SavCD | 7:45 p.m. Aug. 22, 2010
"European stocks open with modest gains; M&A again in focus http://on.mktw.net/cds8Qb" 2:10 a.m. EDT, Aug. 23, 2010 from MarketWatch
"Hong Kong shares edge higher, but financials, mainland shares lag; Hang Seng Index up 0.2% http://on.mktw.net/aYoLaZ" 9:06 p.m. EDT, Aug. 22, 2010 from MarketWatch
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"Blog: IPods, environmental noise eyed as teens' hearing loss rises http://bit.ly/9nWt6P" 4:25 p.m. EDT, Aug. 20, 2010 from MarketWatch
"Ann Taylor swings to profit, expands buyback http://bit.ly/aUZYNA" 3:40 p.m. EDT, Aug. 20, 2010 from MarketWatch
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