Tuesday, December 1, 2009

Some more Roundup for those green shoots

The powers that be have been claiming recovery for some time, of course. Certainly things aren't as bad as some were predicting; the TSX is doing very well, and other North American and European exchanges have generally closed up as well, as of this moment. But many economists, such as Jim Stanford, are wary:
Now Statistics Canada’s GDP report for the third quarter adds to the consensus that the recession is over. Led by public sector stimulus, a surge in auto production (tied to the U.S. “cash-for-clunkers” program, now finished), and a steady expansion of the financial industry, real GDP eked out an increase of just under 0.1% (rounded up) for the quarter. “Annualized” (that is, raised to the 4th power), that means growth at an annual pace of 0.4% (again, rounded up).

Qualitatively, this is within the statistical error of margin of zero growth. So again, while it is more evidence that the free-fall in economic activity which occurred from last autumn through this spring has been (thankfully) arrested, this report does not remotely indicate that anything approximating a “recovery” is underway. So don’t pop the champagne just yet.

Here are a few cationary nuggets buried within the StatsCan report:

  • Without public sector stimulus, GDP would still be contracting. Private sector GDP shrank marginally during the third quarter.
  • Of course, the finance industry is the brightest light in the private sector — partying like the good old days since the markets turned around in March. GDP in the FIRE sector grew a full percentage point in the third quarter. By contrast, private non-financial GDP (what I call the private “real economy”) was shrinking at an annualized rate of 1.4 percent.
  • A $1 billion boost in auto sector output (as Chrysler’s Canadian assembly plants came back on stream, and all auto exports were boosted by the U.S. incentives) accounts for 150% of the total expansion in Canada’s national GDP in the third quarter. So much for the Fraser Instutute’s claim that the rescue of GM and Chrysler was a gigantic waste of money. Never mind that it may not actually cost taxpayers a cent; without the auto turnaround, Canada’s GDP would have kept declining. I doubt that performance will be repeated in the months ahead.

Of course, whether the GDP is growing or not is hardly the ultimate arbiter of whether the economy is healthy, for all the reasons we know so well. But it is important. Yet even by this narrowest of criteria, we cannot say that the recovery has arrived. Without public sectior stimulus (both here and in America), and without the current rebound in financial exuberance (that is quite likely simply the onset of the next pointless boom-and-bust cycle), real GDP would still be falling.

The awkward thing is, if they don't keep up the stimulus, things could get dangerously out of control. On the other hand, if they keep it up for too long, they'll run into other problems -- inflation, deficits that can't be readily managed, and all that stuff. The thesis of the iTulip folks is something called "Ka-Poom theory" (I kid you not). What it is, basically, is that the current crisis will play itself out first with deflation or disinflation (the "ka") in which people sit on much of the stimulus money rather than spending it, followed by major inflation when the economy does recover and people start spending the cash they've been hoarding. I'm not so sure it will play itself out like that myself, though; most of the hoarding is being done by investors, so it will likely just go into long term investments rather than circulating freely through the economy. The situation has to be handled carefully, though.

It's worth noting that the current run the TSX is on is partly explicable by a flight from US dollars. The TSX is quite gold-heavy, and even setting that aside the Canadian dollar is seen by many investors as a potential safe haven, making Canadian-denominated stocks a good investment anyway. And the American dollar is making a lot of folks nervous:
During a recent visit to Tokyo, Timothy Geithner, the secretary of the US treasury, said that a strong dollar is "very important" to Washington, even as the American currency continued its noticeable depreciation.

This is a very curious statement as it seems to indicate that the US treasury is going to defend the dollar from any further slide in the near future. But this is highly unlikely as the US treasury does not have a history of intervening in foreign exchange markets.

It is true that the treasury's Exchange Stabilisation Fund (ESF) can be used to prop up the dollar, but it has never really been used for that purpose. The ESF, which right now has about $50bn, was originally created by the Roosevelt administration in the early 1930s to deal with currency upheavals as the Gold Standard was being dismantled.

The ESF was used only once in international financial markets and that was to defend the Mexican peso in 1994.

Therefore, the treasury's use of the ESF to defend the dollar can be ruled out.

In any case, it would take a lot more than $50bn to stabilise the greenback if there were to be a speculative attack on the dollar, like there was against the British pound in 1992.

Source. I wish the article went into more detail about why the Treasury won't use the ESF; the author implies that there's more factors at work than the fact that the fund isn't big enough to stave off the worst case scenario. Indeed, if it's no good for that, the sensible thing for the US to do would seem to be to use the fund now, to shore up the dollar before there's a big speculative attack.

The country that holds most of the cards, of course, is China. Thing is, they can't just dump their dollars all at once, or those dollars will depreciate before they can get rid of them all. So it's hard to say how this will play out.

If the US dollar does collapse in a big way, the effects on the world economy will be dramatic. Since they import so much energy, they'd be forced to buy that energy with depreciated dollars, which would limit their ability to buy cheap stuff made in China (or Canada, for that matter). But for that reason, a lot of people both in the US and elsewhere will pull out all the stops to avoid such an outcome. We'll have to see how things go...

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