Saturday, 21 November 2009

The debate elsewhere

Michael Taft: With the Government and opposition parties all supporting another round of fiscal contraction (with the exception of Sinn Fein), it's worth noting the success of stimlulus programmes in other counries and the continuing debate on whether they intensify those efforts: see this piece in the New York Times.


Michael Burke said...

Michael, thanks for that.

My favourite passage was, "While some conservatives remain as skeptical as ever that big increases in government spending give the economy a jolt that is worth the cost, Martin Feldstein, a conservative Harvard economist who served in the Reagan administration, said the problem with the package was that some of its tax cuts and spending programs were of a variety that did little to spur the economy.

“There should have been more direct federal spending that would have added to aggregate demand,” he said."

Now, I know some purport that the Irish economy is little more than a sponge for imports, but it might give pause for thought that even some leading Reaganite economists argue(correctly, in my view) for different stimulus, but not no stimulus at all.

Cearbhall O Dalaigh said...

I am getting the impression that the stimulus packages are coming to a close.

Apparently there is a fear of hyperinflation in many developed economies. This is difficult for us in Ireland to understand as we appear to be going into a Japanese style deflationary spiral.
There are a number of straws in the wind indicating the onset of inflation again. The spot gold price is at an all time high of about $1,150 an ounce, copper which was $3,000 a ton in January is now at about $7,000, an Andy Warhol painting which sold at auction in New York about a week ago had a pre auction estimate of $12 million and sold for $43 million.
The US economist, Nouriel Roubini, who has been reasonably accurate in his predictions over the past two years recently said; "There is a beginning of a bubble in financial markets,"

The jump in stock markets since March is also being attributed to an excess of liquidity as a result of all the money printing by the US Federal Reserve, the ECB and the Bank of England

Quantitative easing seems to be coming to an end.
Could this be the reason for the NAMA Special Purpose Vehicle, have they missed the boat in getting the ECB to accept €50 billion in NAMA bonds and are now attempting to get private capital to buy the Irish bank debt?

On Thursday US Treasury Secretary Tim Geitner came under tough questioning at the Joint Economic Committee, included one lawmaker calling on him to resign. Mr. Geithner was pressed to disclose the administration’s plan for dealing with the unpopular financial rescue program. Mr. Geitner stated “We are winding it down and will close it as soon as we can.”
Also during the week, Senate Banking Committee Chairman Chris Dodd was asked by a journalist about the likelihood of Federal Reserve Chairman Ben Bernanke's confirmation for a second term said. He was asked if it was a foregone conclusion that Bernanke's nomination for a second term would be confirmed by the Senate, Dodd replied: "Not necessarily, not necessarily. We'll see how members react." Just six weeks earlier he told Reuters is was practically a done deal.
On Friday morning (20th Nov.) Mr. Trichet said that the ECB should gradually withdraw the emergency cash loans to the domestic banking system made during a time when a special situation demanded it. He seemed to be prescribing a clinical wind down program in order to prevent the private sector from becoming more addicted to the exceptional support provided by central banks.
Is the NAMA party over before it ever really got going?
Here we are, over a year after the bank guarantee was announced and there is no regime change at the banks. AIB and BOI both appointed insiders as CEO’s and 75% of their boards are intact.
It’s laughable to listen to commentators telling us that the banks must pay top dollar to get the best talent. We saw what the ‘talent’ did; they destroyed the wealth of some of the most valuable businesses in the country. Both Brian Goggin of Bank of Ireland and Eugene Sheehy of AIB ran their respective companies into the ground and walked away with millions, as did the highly paid so called ‘talent’ in many of the other banks.

Things are looking bad for Ireland, due mainly to vacillation on the part of government.
Anybody holding stocks would be well advised to take some profits off the table.

Michael Taft said...

Michael - absolutely. But, then, what so many people here don't appreciate is that the issue of stimulus is non-contentious across huge swathes of 'Left' and 'Right', business and trade union. While there may be debates about the content of stimulus, there is a broad acceptance that the state steps in when private markets break down. Except, of course, here - where we continue our fringe debates in splendid isolation from the European and North Amercian maintstream.

Cearbhall - I would agree but only up to a proint, re: slowing down stimulus. For many countries starting to emerge out of the recession, they are starting to look at wind-down. But much of their packages have yet to come through, so there is still a wait and see. On the other hand, Germany for instance is launching another debt-financed stimulus - and by a CDU/CSU/FPD government. The French have distanced themselves from any firm date on exit strategies. And the IMF has warned against premature exit - on the grounds that the recovery is still tenuous(or as the OECD has put it, 'thin'). As to the ECB, I've always suspected, and I'm open to correction, that Trichet was always a reluctant quantitative easer. Clearly, he had no choice and the ECB has thrown money all about the place, especially here. But I suspect that he can't want to get back to business as usual - finding inflation under the bed.

Exit strategies, when they come (and they wil have to come) will have to be executed with considerable skill and with some international cooperation. Otherwise, we risk the US experience in the late 1930s where in their mistiming they caused a recession in a depression - or as they say now, a double-dip. Of course, here in Ireland we get the exit without ever been allowed to enter.

Just a question: I should know this as my home town was founded by prospectors, but I always assumed rising gold prices was a sign of investor nervousness and seeking out the safest possible investment. Taking your point about liquidity pumping stock markets (which may end up being false rallies), how do we connect the two processes?

Anonymous said...

Is Fine Gael's NewERA plan - €11 billion new investment through a reformed semi-State sector to create 100,000 jobs by 2013 - not a stimulus plan?

Michael Taft said...

Anonymous - yes it is. In fact, it is probably the best proposal so far, in terms of a single-policy. Through an expanded public enterprise sector, their proposal would not only create jobs but address our infrastructural deficits and raise our productivity. There are some funding issues; for instance, half of their funding is intended to come from the Pension Fund which is probably no do-able given the calls that will be made on the Fund for bank capitalisation. On the back of that Pension Fund input, they want to privatise several of the new public enterprises and current ones; which is merely repeating past mistakes. Still, these objections aren't fatal to the proposals which are positive and forward thinking.

Cearbhall O Dalaigh said...

To Michael: - - - “I always assumed rising gold prices was a sign of investor nervousness and seeking out the safest possible investment. Taking your point about liquidity pumping stock markets (which may end up being false rallies), how do we connect the two processes” - - -

You are correct to say that gold is a measure of nervousness in the economy and therefore regarded as a safe haven for flight capital.
But one of the clearest signs of inflation is a weak currency and Mr. Bernanke is debasing the US dollar by printing all this new money. The dollar peaked in February this year and the stock market began to rise in March. Since then the dollar has gone down and the stock market has gone up. So have lots of other assets, base metals, fine art, real-estate in the Asian economies (which did not have property bubbles).
We are now getting modern day protectionism in what is called ‘competitive devaluation’ by many currencies around the globe, as countries want to push their currency down to increase their exports, this can probably be seen as the fault of the Chinese who won’t allow their currency to float up.

So everybody who has cash, with current very low interest rates, run the risk of that currency becoming worth much less in the future. For example if you were 100% cash in dollars since last March you would now have to pay 50% more to buy shares and 20% more to buy gold.
So there has been monetary depreciation occurring, especially in relation to the dollar.
Therefore if you are holding dollars in cash you can protect its value by purchasing gold. Because gold is priced in dollars, dollar inflation will be reflected in the price of gold.
So yes, gold can be a safe haven investment, but it can also be a store of value to protect against a currency which is being debased as a result of printing too much money and keeping interest rates too low.
Mr. Bernanke is likely to keep interest rates too low for too long because to raise them, as he should do, would mean the interest payments on the incredible amount of US government debt would increase dramatically.

I hope that answers the question.

I also agree with you that we could be seeing a false stock market rally, as the dollar would appear to be at a near term bottom and there could well be a rebound. Although long term it's going down.

Anonymous said...

Very clear. Thank you.