Steady Economic Recovery is Not a Given
From the weekly Financial Times news summary sent to my email inbox:
“Italian shares fell 5 per cent, the FTSE 100 in London and Germany’s Dax-30 both dropped 3.4 per cent while the S&P 500 lost nearly 4.8 per cent, ‘a bigger fall than on the first trading day after the collapse of Lehman Brothers’. European bank shares also plummeted with Lloyds TSB down 10 per cent, Barclays 8 per cent and Italy’s UniCredit 9 per cent.”
“Gold hit another record of $1,681.67 while 2-year US Treasuries fell to 0.26 per cent, a new all-time low yield.”
What is notable here is that we are now in what is called, in the equities markets, “correction” territory. Equities selloffs and bond market gains along with overheating commodities prices will be following certain established patterns as market reality and market expectations embark on a feedback loop of sorts. This is generally where governments choose to find ways to calm market jitters and stimulate economic growth, acting through central banks and other fiscal governmental and quasi-governmental monetary authorities.
But interest rates are already at historic lows, leaving the Fed with very little room to maneuver on rates. The Fed’s balance sheet is not available at this time, for reasons of budgetary and fiscal policy, so there will be no asset purchases in the foreseeable future (the much ballyhooed “QE3”). The European Central Bank and the Swiss National Bank are faced with diametrically opposite currency issues, Spanish banks are having problems funding operations as other banks are reluctant to lend to them in the interbank markets (central bank deposits have been increasing in volume, indicating that banks are loathe to take on the credit risk of other banks, preferring to leave their cash at very low rates with a governmental counterparty).
The stunning disregard for economic reality on display in Congress these past weeks has not helped matters. But the reality is that there are no arrows left in the US fiscal quiver to encourage growth, and even if there were, the dynamic of the market correction and the inertia of the US labor market may be too much to overcome at this juncture. The best we can hope for is that the US finds a way at least to encourage economic expansion without actively stimulating or supporting it, and that the European sovereign and banking issues do not worsen significantly. The so-called BRIC (Brazil, Russia, India, China) economies will be crucial in driving global economic recovery. This fact should inform not only US economic policy, but also foreign policy. Pakistan may be a necessary ally in the “war on terror”, but India is a much more important ally in the “war on economic stagnation”. Taiwan may be a strong political ally, but China has a population of 1.3 billion.
Overall, economic recovery is not in the hands of the White House, or Congress, alone. We will hear a lot of noise about the failure of the Obama administration to create a healthy recovery, but really, BHO showed up with a fiscal knife to an economic gunfight. It will be up to our politicians to realize that despite the size of the US economy, the reality is that we cannot drive the direction of the global economy alone. BHO made mistakes, but it is unlikely that the US was going to engineer an economic recovery that would prevent the developments in Greece, Ireland, Spain and Portugal. Gold has been going nowhere but up for at least 5 years (on average). The dollar has been going nowhere but down for the same period. We have fundamental structural issues in our labor markets that predate this administration. Congress and the White House need to look forward, past the 2012 elections, and find a path that will allow the national economy to right itself over a 5-10 year time frame.
Far-sighted politicians are our main hope. We might be doomed.
This UPDATE: Positive US jobs data lifts markets. A better-than-expected 117,000 jobs were added to payrolls in July, compared with the 85,000 jobs that were expected. But this is still far less than the 250,000 new jobs required to make significant inroads on the unemployment rate (now at 9.1%).
CNBC has more here:
According to a Bureau of Labor Statistics breakdown, there were 139,296,000 people working in July, compared to 139,334,000 the month before, or a drop of 38,000.
But the job creation number was positive and the unemployment rate went down, right? So how does that work?
It’s a product of something the government calls “discouraged workers,” or those who were unemployed but not out looking for work during the reporting period.