This week Washington and Wall Street is “Down and Out in Paris and London,” to borrow the title from the autobiography of George Orwell. We are attending the Paris meeting of the Global Interdependence Center in Philadelphia, which is hosted again so graciously by the Banque de France. On Wednesday, we will travel to London by train to meet with more observers of the global scene.
More on that leg of the trip later this week.
Today’s session at the GIS was extremely significant, both for what it said and what it did not. Timo Tyrvainen, Chief Economist, Aktia Bank; Daniel Fermon, Head of Cross Asset Thematic Research, Société Générale Corporate & Investment Banking; Joshua Rosner, Managing Director, Graham Fisher & Co; and Moderator John Silvia, Chief Economist, Wells Fargo & Co. held forth on the return of global protectionism.
Fermon stated bluntly that the growth prospects for emerging markets are vastly overstated. “Strong growth from emerging markets is over,” he noted. “When there is a global consensus [on growth targets] it is never good.” He made clear that the end of the US import engine for the rest of the world implies significant adjustments for emerging markets, including China.
Rosner talked about Argentina in sobering terms that should serve as a cautionary tale for American liberals who think that raising subsidies for the poor and taxes on the wealthy is somehow going to lead to a rosy economic scenario. At the turn of the last century, Argentina was the eighth-largest economy in the world. Today the country is:
- 73rd in real per capita income;
- 106 out of 177 countries in Transparency International’s corruption index;
- 124 out of 185 countries in the World Bank’s cost of “Doing Business” index; and
- In the bottom fifteen countries in the World Index of Economic Freedom.
Indeed, Argentina is now devoting about 10% of public spending to subsidies for the poor, has no access to the global capital markets, and is headed for another default on its foreign debt. Rosner notes:
A decade after the largest sovereign default in history, Argentina remains isolated and increasingly reliant on distortive and protectionist policies. These problems are the result of a political choice in favor of disengagement from the global community and a refusal to: (1) Settle disputes with all foreign claimants; (2) address manipulation of official statistics as demanded by the IMF; and (3) Settle outstanding disputes with holdout bondholders. Unless the country embraces its obligations quickly, economically distortive policies will drive the country back to crisis.
Moving on to the next panel at the GIC event, Banque de France Governor Christian Noyer and Philadelphia Federal Reserve President Charles Plosser spent a great deal of time telling the audience, reading between the lines, that none of the major G-10 central banks has a clue as to why it is following a given policy. Noyer talked about how difficult it is to measure confidence, then proceeded to explain that the EU is using “confidence” as a major determinant of monetary policy.
When a member of the audience asked why it was that most of the G-10 central banks had decided that a 2% inflation target was a good idea, both Noyer and Plosser essentially said that this convenient happenstance is evidence of coordination among the global central banks. OK. The fact that the deflationary bank capital and fiscal policies being followed in the G-10 nations make achieving even 2% inflation a fanciful goal was not addressed.
At one point, Noyer noted that “when inflation is too low, it carries significant risks… [the] 2% target is cushion against deflation.” So when are the esteemed members of the G-10 going to realize that the current mix of bank capital and fiscal policies make it impossible for any of the major industrial nations to generate 2% inflation? Noyer and Plosser are two very smart, conservative central bankers, but watching them try to dance around the idiotic policy mix being followed in Washington and the other G-10 capitals was sickening.
The fact is that seven years since the subprime crisis rocked the global economy, the crisis continues. Central bankers from Washington to Tokyo want us to believe that the crisis has ended, but the reality is that zero interest rates from the Fed and similar policies in the rest of the G-10 have merely put the crisis on ice. And the core of the crisis, the unspoken problem, is tens of billions of dollars in bad debts that cannot be repaid.
On Tuesday in Paris, I will be presenting at Day 2 of the GIC and talking about the US housing market. The bottom line for me is that the current “recovery” in US housing prices is a function of (1) supply constraints and (2) cash buyers. Notice that I have not mentioned first-time home buyers. You can see the slides for the GIC presentation by clicking here. I will be giving a longer presentation at AEI later this month on the same topic. My view is that US housing prices peaked in Q2 2013 and will start to decline in 2014.
Bottom line is that the G-10 nations cannot generate inflation, or more jobs, or higher consumer spending, or a permanent recovery in home prices if all of their policy actions are designed to retard growth and subsidize debtors. The only way to generate higher growth is to restructure bad debts, including the 10-15 million households in the US that are currently underwater on their mortgages. From Buenos Aires to Washington to Berlin to Beijing the problem is the same – bad debts that cannot be paid – but is anyone listening?