There have never been this many articles openly questioning the central banks ability to combat a global downturn. There’s something in the wind:
“The world’s finance ministers and central-bank governors gathered this past weekend in Washington and looked out at a global economy badly in need of treatment…
“…the IMF calls it a “synchronized slowdown.” The revised outlook is already the weakest since the crash 10 years ago, and the risks in the forecast are very much, as economists say, to the downside.
“This would be concerning under any circumstances, but the prospect of recession under current conditions is truly alarming. The hesitant recovery of the past decade has depleted the conventional tools of macroeconomic policy. In many countries — not least the U.S. — fiscal stimulus and persistent budget deficits have boosted ratios of public debt to national income. Next time, governments will be reluctant to lean as heavily on extra public borrowing to raise demand, rightly or wrongly fearing lack of fiscal space.
Monetary policy is all but exhausted too, with interest rates either close to their effective lower bound (as in the U.S.) or slammed down against it (as in the European Union).“”
“”Another legacy of that previous recession, and the extraordinary measures taken to contain it, is heightened financial fragility. With abundant quantitative easing and super-low interest rates, financial conditions have been kept loose to support asset prices, press down on yields and strengthen demand. The measures were necessary, but the result is outlandish asset valuations and heightened credit risk. Recklessly inflated house prices were a main cause of the crash; in many countries, they’ve soared again on the back of cheap credit. Banks have added capital since 2009, but not enough to make them safe…”
“Buyback spending is plummeting as companies spend less amid growing global uncertainty. According to Goldman Sachs, buyback spending slowed 18% to $161 billion during the second quarter, and the firm anticipates that the slowdown will continue.
““During full-year 2019, we expect S&P 500 cash spending will decline by 6%, the sharpest annual decline since 2009,” the firm says.”
“JPMorgan Chase & Co. says the money-market stress that sent short-term borrowing rates surging last month is likely to get much worse despite the Federal Reserve’s attempts to inject billions of dollars into the financial system.
“The Fed has offered overnight loans and started buying up to $60 billion of U.S. Treasury bills a month in an effort to ease pressure in the vast repo market, where banks typically lend their assets in exchange for short-term financing.”
“Halliburton Co on Monday promised more cost cuts after reporting a bigger-than-expected drop in quarterly revenue as the oilfield services looks to counter weak demand from North American shale producers, sending its shares up about 7%.
“The biggest hydraulic fracking services provider, which earlier this month cut 650 jobs in North America, said it would take steps over the next few quarters that will lead to $300 million in annualized cost savings.”
“Ian Stewart, Deloitte’s Chief Economist in the UK:
“The global recovery started in 2009 and is long in the tooth. The world is overdue a slowdown. The fact that the IMF, and most economists, are forecasting a short-lived downturn, a classic ‘soft-landing’, might seem like good news.
“But when growth is softening, as it is now, forecasts are more than usually lagging and fallible. (The IMF, and most economists, did not forecast the last recession, which was the biggest since the 1930s, until it had almost arrived.)
“What matters more than the IMF’s forecasts is their analysis. It is downbeat… The risk of the slowdown becoming a recession is rising.”
“Germany has tumbled into recession as global trade tensions, disruption to the car industry and worries over Brexit take their toll, according to the country’s central bank.
“In a major setback for Chancellor Angela Merkel and the wider eurozone, the Bundesbank said the German economy contracted again in the third quarter of the year.”
“…running a bank in Europe, already an uphill struggle since the crisis, is about to get even harder.
““Bank executives in Europe are depressed, despondent and concerned; there’s a confluence of factors that is undermining profitability in the medium term,” said one adviser to several large European lenders.
““There are genuinely fundamental questions about their future.””
“UBS (UBSG.SW) reported a fall in income and pre-tax profit on Tuesday, as it warned that the global economy remains “challenging.”
“The Swiss bank reported pre-tax profit of $1.3bn for the third quarter, down 21% on the same quarter last year but above analysts expectations. Profit declined in all businesses except asset management. UBS blamed the “challenging environment” for the performance.”
“The European Central Bank is running low on sovereign bonds to buy — that undermines the credibility of its pledge to keep going until inflation picks up. If inflation takes two years to firm, the ECB could face a shortage of about 60 billion euros ($67 billion) in debt during the next phase of its asset-purchase program.
“At the present pace, the central bank could run out of bonds in little over a year, according to calculations by Bloomberg Economics.”
“Negative interest rates are now a fact of life in Europe and Japan, and multiple other countries including the United States are lowering their target policy rates.
““It is not really clear how we are going to get out of this,” Stanford University economics professor John Taylor said at a meeting of the Institute of International Finance.”
“Argentina’s bondholders are braced for steep losses when the government attempts to tackle its $101bn debt burden after downbeat meetings with IMF officials and associates of Alberto Fernández, the presidential frontrunner, in Washington last week.”
“Global rating agency Fitch Ratings on Tuesday said Indian banks might face a capital shortfall of about $50 billion in the event of a systemic crisis in the non-bank financial company (NBFC) sector.
“A stress test conducted on Indian banking entities showed that credit profiles of state banks would come under significant pressure.”
“The desire for good economic news has the [Australian] government and sections of the business community clinging to any meagre drop of hope.
“But while for the moment the suggestion of extreme monetary policy looks to be receding, the economy remains extremely weak – as weak as it has been since the last recession in 1990.”
“More than half of the world’s banks are too weak to survive a downturn, according to a survey from consultancy McKinsey & Co.
“A majority of banks globally may not be economically viable because their returns on equity aren’t keeping pace with costs, McKinsey said in its annual review of the industry released Monday.”
“Central bankers are doing their part, but the unintended consequences of easy money are rising, writes John Authers.
“And companies aren’t investing the way policymakers hoped, signaling anxiety about the economy. “
“In cities around the world, people are taking to the streets…”
Read the previous ‘Economic’ thread here and visit my Patreon page here.
Is monetary policy ‘exhausted’?
“High growth of real broad money is associated with rising asset prices and healthy balance sheets, and tends to precede above-growth trend in demand and output. In the five months to September US M3 (as measured by Shadow Government Statistics) increased at an annualised rate of 9.2%, in the context of sub-2% inflation. Real money growth was therefore unusually high, the highest in fact since 2007. In the Eurozone also recent money growth has been robust. In the six months to August the annualised rate of growth of M3 was 7.3%, with inflation at about 1%. Since the USA and the Eurozone together account for 40% of world output (in current prices and at current exchange rates), these developments argue against a recession in 2020. They suggest that, on the contrary, the world economy should start 2020 in good form. Admittedly, money growth may slow from here. (Money growth has also picked up in the last couple of months in Japan and the UK, but from low levels, and they of course matter less than the USA and the Eurozone.)
In China and India banks continue to expand their balance sheets at not much less than double-digit annualised rates. But in both these two big developing countries regulatory officialdom is disciplining the financial system, with attacks on shadow banks in China and on non-performing loans in India. (Moreover, India seems to suffer at present from a supply-side malaise [due perhaps to the over-active BJP government], with the car industry undergoing a sharp reverse.) Overall a sensible central assessment is that during 2020 the world economy will see roughly trend growth, with inflation staying at very low levels. If money growth remains close to recent highs in the USA and the Eurozone, a more positive forecast would be justified. “
I see that Tim Congdon is an advocate of MMT and apparently sees money-growth as a limitless stimulant for economic growth. I can’t say I agree – it is actually the amount of surplus energy available to any economy that is the primary and ultimate determinant of growth. Monetary trickery can work around energy-limits for a little bit but not indefinitely.
The nations most desperately in need of an economic boost could not get away with MMT. Can you imagine what would happen to, for example, Argentina’s borrowing costs and currency if it suddenly announced it was “cranking up the printing presses”? The IMF would have a cow.
Btw I’m not saying that trend-line growth is not impossible in 2020. A a more extensive trade war truce and a reasonable Brexit resolution could certainly facilitate that. Germany still has some room for fiscal stimulus. China, too, although I’m not sure how effective more Chinese stimulus would actually be.
But the flipside is that there is clearly a lot of downside risk, too – witness the growing socio-political upheaval and the risking risks in our debt-bloated and artificially manipulated financial system.