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A truly global slump. Do not look to the emerging economies for good news …

by Brad Setser
January 26, 2009

Only a few months ago it was common to argue that growth in the emerging world would prevent a global recession. That forecast looks increasingly wide of the mark. The slowdown in the emerging world now looks to be as severe – and potentially more severe – than the slowdown in the advanced economies.

Morgan Stanley’s currency team recently observed that “Brazil’s growth collapsed in 4Q08, with several activity indicators displaying the worst decline on record.” Earlier this year Brazil was growing strongly on the back of both strong domestic demand and strong global demand for its commodities. The domestic growth dynamic (and the improved state of the balance sheet of Brazil’s government) made me think it might be able to ride out this crisis relatively well. Guess not.

Russia is in even worse shape. Output is poised to fall sharply. Danske Bank expects a 3% fall. That might be optimistic. Moving from a budget that balances at $70 oil to a budget based on $41 a barrel isn’t fun even if Russia uses its fiscal reserve to adjust gradually. Eastern European economies that relied on large capital inflows rather than high commodity prices to support their growth aren’t doing any better.

The Gulf is in better shape than Russia, but that isn’t saying all that much. $40 a barrel oil requires the Gulf to dip into its foreign assets, but most countries still have plenty of spare cash (though not as much as before). Still, all of the Gulf is slowing. And the most exuberant bits of the Gulf – Dubai in particular – are in real trouble. Most of the Gulf’s sovereign funds under-estimated their countries need for emergency liquidity. They aren’t quite in the same position as Dubai’s Istithmar (looking to sell Barneys for cash as demand for luxury goods falls), but they presumably do wish that they had more liquid assets — and more assets that weren’t correlated with oil.

The commodity-importing BRICs aren’t doing much better. India is slowing. And China is really slowing. Stephen Green of Standard Chartered has constructed an indicator of Chinese economic activity that isn’t based on the government’s reported GDP data. It suggests a far bigger fall in Chinese output than in 1998.*

Chinese output shrank in the fourth quarter. The first quarter isn’t going to be any better.

China isn’t alone. The fall in Korea’s output in the fourth quarter was quite large. Even larger than the fall in output in UK, or Japan. Yuka Hayashi of the Wall Street Journal:

South Korea’s economy last quarter shrank 5.6% from the July-September period, or an annualized rate of 20.8%, according to J.P. Morgan, the sharpest contraction since the Asian financial crisis a decade ago.

Singapore and Taiwan are also contracting sharply. Singapore’s economy contracted an annualized rate of 12.5% in q4, and the huge fall in Taiwan’s exports cannot be good for its economic performance. Japan isn’t an emerging economy, but it too saw a sharp fall in output. It isn’t a stretch to think that Asian output could fall more in 2009 than in the 1997-98 Asian crisis.

Emerging economies who thought that they had protected themselves from sudden swings in capital flows by maintaining large reserves and running large external surpluses are discovering that their efforts to reduce their exposure to volatile global capital flows added to their exposure to a global slump in trade.

Emerging economies were growing faster than the mature economies prior to the crisis. But at this stage I wouldn’t rule out the possibility of an outright contraction in the output of the emerging world in 2009. And that could imply that a crisis in the US and Europe could end up producing a bigger absolute swing in activity in the emerging world than in the world’s mature economies …

* This graph was reproduced with permission from Stephen Green.

79 Comments

  • Posted by Indian Investor

    Dr. Krugman has proposed a good new reading style. In one of his posts he first notes that “the answer” was to do away with the capital gains tax. “What was the question?” he asks later.
    Reading the Economist article on the Indian economy in this style the answers are as follows:
    1) Open the financial sector to globalization
    2) Sell a few of the state’s many companies (loss-making, to boot!)
    3) Do away with all the state subsidies. (If people can’t afford kerosene, they can burn those tattered clothes they’re wearing in that photo instead.)
    4) Reform the ‘throttling’ labor laws. You can see the state of the labor in that Economist photographs. It’s fairly obvious how much Government of India is doing for its labor with these ‘throttling’ labor laws.
    Drilling down into 1) and 2) you get
    a) Open state owned banks to more private ownership (current limit is 20%)
    b) Privatization of public enterprises (e.g. in coal and sugar)

    And what were the Economist’s questions, again, anyone?

    Twofish who do you think pays for this kind of stuff? The same Treasury Security wheeler dealers. The IMF economists are all on their payroll, and all these kind of materials aren’t about India’s economy or anything. Get those banks to buy up the country, till then the people will remain dirt poor, is the basic theme here.

  • Posted by ab initio

    We are having a global economic contraction caused by an implosion of Wall Street finance. There are no ports in the storm.

    Since the punditry is all Keynesian however there is a massive global reflationary effort. Monetary policy is beyond all ZIRP all the time when even the Swiss National Bank is willing to take “extraordinary” measures and trying to compete with HeliBen’s no collateral is bad enough to lend against. Then we have the governments around the world fighting to outdo each other to see who can come up with the largest stimulus package as a percent of GDP. Under threat of instant calamity they inform their publics that there is no bank bailout they don’t like except of course to liquidate insolvent banks and make their shareholders and bondholders take a haircut.

    So we have all the dud assets piling up on taxpayer balance sheets in another Ponzi scheme with off balance sheet entities, opaque central bank and treasury transactions and kabuki theater by politicians claiming their latest rescue/stimulus/confidence generating package will do the trick. The reason for this lack of transparency according to the omniscient central banker is that if the poor working stiff found out how he and his descendants were being bankrupted there would be a loss of confidence and unfair runs on the hapless banks. What they really mean to say is that there could be a storming of the bastille.

    Now do you notice that there are no investigations and prosecutions for fraud and racketeering of the banksters and their regulatory capture accomplices. The loot must be hidden and malfeasance obfuscated.

    The question to all the geeks who gather around this oasis is are there sufficient savings to finance all these bridges to nowhere and impaired assets and most importantly those billions in bonuses to our most deserving banksters? What happens as every sovereign taps the debt markets in the next quarter to restart their economies? What’s the story as the Chinese and Putin and the PetroSheiks need to draw down their “reserves”? What role will the now modernized all electronic printing press play in all this?

  • Posted by Twofish

    Indian Investor: In case you haven’t noticed, no one is really listening to to the Economist now a days.

    Indian Investor:he same Treasury Security wheeler dealers. The IMF economists are all on their payroll, and all these kind of materials aren’t about India’s economy or anything. Get those banks to buy up the country, till then the people will remain dirt poor, is the basic theme here.

    This is where I disagree with you. If this whole thing was part of a master evil conspiracy then all you have to do is to be near one of the conspirators, and you are relatively safe.

    On the other hand, if this is the result of stupidity and incompetence, then things are really scary because nowhere is safe. You can be best friends with the head of the IMF and the heads of all of the banks, and if they are incompetent fools rather than evil masters, then they will end up shooting your head off while they are blowing their own heads off.

    You have got to get out of this notion that there are some evil puppet masters controlling things otherwise you have no sense of how serious the situation really is.

  • Posted by GreenAB

    Dr. Setser,

    pardon the interruption.
    since there´s no way to contact you i make use of the comments.

    in one of your coming posts could you please comment on the statistics cited in this economists article, that there is an unexplained gap between added global surpluses and dueficits?

    http://www.economist.com/displaystory.cfm?story_id=12972083

    if this issue has already been discusse, could anyone provide a link please?

    thanks a lot!

  • Posted by Twofish

    The question now is not whether or not there will a slump. The big question is whether or not we are looking at a nasty but brief recession or are we looking at no economic growth for a generation or something in between, and that question depends on decisions that haven’t been made yet.

  • Posted by Indian Investor

    @ Twofish: I’m all in favor of having Americans invest in India, and having good trade relations with them, etc. The common man in India doesn’t want the power to be cut off, doesn’t want the irrigation channel to end suddenly somewhere, doesn’t want to drive two hours through permanently clogged roads in streets, etc. It makes little difference to the man on the street whether he is getting his loans from the State Bank of India branch or from the Citibank branch on that street.
    The point is that the whole attitude of forcing big legal changes, trying to win unfair concessions from the government against the local businessmen, etc creates a big hurdle to the growth and development of business for everybody.
    There is plenty of business to be done in India, the list of profitable things to be done is so vast not only in the infrastrcuture but in every sector. If the American firms are going to rely on these arm twisting techniques, it will be a long time before they really get going with the work. It’s so much easier to form some joint ventures , make some investments where it’s already possible.
    How can American firms generate export revenue in India if their stooge pigeons are busy describing the local government policies as “profiligacy”?

  • Posted by Indian Investor

    @Twofish: Look at the excessive focus on buying shares from the State Bank of India. The Public Sector Banks do hold around 70% of the commercial banking assets. But the Public Sector “Commercial Banks” aren’t operating in very highly profitable segments, such as auto loans, credit card loans, real estate loans in cities etc. A large chunk of their lending is to sectors like agriculture and to small-scale industries. Buying up all the shares in the State Bank of India doesn’t help create a single American job, and doesn’t generate a single cent of export revenue.
    The Government of India has danced to the Dick Cheney tune on the Power sector issue. They have had long negotiations around the world and got ratification with US help for the American Nuclear Power firms to build the new plants in India. Clearly this is in preference to setting up their own state owned nuclear reactors. There are already state owned Nuclear Power plants in India, like the one in Kaiga. One contract has been given to Westinghouse electric Company. This is in preference to the French player Areva and the other big player General Electric.
    Now it’s being demanded that India should hand over the whole Kashmir State to the Islamic Republic of Pakistan.
    The Islamic Pakistanis were demanding the Indian State of Punjab throughout the 1980s, causing a great number of terror attacks similar to the Mumbai ones. Later they shifted to Kashmir again. Handing over Indian States to Pakistan is a never ending cycle. No Government in Delhi can have even a slim hope of staying in power after talking vaguely about Kashmir.
    By getting the oil company interests in Pakistan to be a greater foreign policy focus than the General Electric in India, the American export industry is just losing out after a great deal of hard work.
    As I recounted before, Jeff Immlet of GE was the one who came up with the idea of building private nuclear power plants in India in the first place. After going through the vexatious process of the Left parties withdrawing support to the coalition Government, long negotiations around the world, explaining the peaceful intentions to all comers, and sacrificing some further signature lines on the CTBT Treaty documents, the whole thing is now stuck in a dumb-ass Islamic demand for Kashmir.
    And what, may I know is The Islamic Republic of Pakistan offering to the oil companies? Absolutely nothing! The oil companies want to build petroleum and petroluem gas pipelines through the Pakistan territory. There isn’t any local competition, or state owned competition for that.
    In exchange for letting the oil pipelines come up peacefully, the Islamic Republic is demanding the accession of a whole Indian State. And once you hand over one full state, after losing half that state in a bloody war, they will keep on and on with these demands.
    Kashmir gives them a direct corridor into Western China. Xingjiang will the next Kashmir.
    Did you read my to-do laundry list for the Communist Party? They have to act now and seal their Western border. Or else it will be too late. We’re talking from experience here.

  • Posted by Twofish

    Indian Investor: The point is that the whole attitude of forcing big legal changes, trying to win unfair concessions from the government against the local businessmen, etc creates a big hurdle to the growth and development of business for everybody.

    So just say no. If a banker comes and doesn’t give you a good deal, just slam the door in their face until they come back with a good deal. You don’t have to apologize, you really don’t have to explain, just say no.

    Also, it’s far, far too early to say whether emerging markets policies to boost reserves were wrong headed. Thus far, I haven’t seen any third world riots in the streets or any third world governments collapse like they did in 1998. This may happen next week or not at all. My belief is that having large foreign reserves will help emerging markets get through this mess with a lot less pain that was the case in 1998, but we’ll see how silly this sounds in three to six months. In particular, emerging markets are now in a position to throw money from helicopters and they can ignore the IMF.

    Indian Investor: How can American firms generate
    export revenue in India if their stooge pigeons are busy describing the local government policies as “profiligacy”?

    If you have a pool of domestic savings, then India can pretty much ignore what America thinks. It doesn’t make any sense to me to finance Indian infrastructure with American money. Figure out a way of financing Indian infrastructure with Indian money.

  • Posted by Rien Huizer

    Twofish,

    Correct . It is either a long, shallow recession or a sharp short one. We could have a “corrective” output change (I do not like terms like recession and depresion) (say world output falling to world levels of, say, 2002. The trick would be to make it stop there. World 2002 output (per capita) did not contain too much finance-dependent nonsense (like overproduction of residences in the wrong place, or luxury consumption on the back of unrealistic household wealth (not income) perceptions. So that year might be a decent fall back level. But that would mean a 5-7% real gdp/capita decline from last year’s levels (including the emerging economies who do not deserve such a fall), or up to 10-12 for the OECD plus a few others (Brazil, Russia, GCC) . But as far as I can see, that would be considered catastrophic by our governments if it happened fast (like seems to be the case now), so they will try and hold the slide to say, 1-2% p.a. for a couple of years, inflate as much as possible, and maybe hope that stagflation might be less bad than stagnation plus deflation.

    I do not expect a lot of growth until the financial system is has the capacity and the managerial incentives to operate entrepreneurially (with some prudent regulation of course). Nationalization and other forms of gvt intervention will not work well enough.

  • Posted by Twofish

    Indian Investor: Twofish who do you think pays for this kind of stuff? The same Treasury Security wheeler dealers.

    Actually they don’t. One thing that I’ve found interesting about neoliberal is that just like the people who were loudest about going to war in Iraq had never really been in a war, the people that tend to be loudest about “privatize everything and markets uber alles” have never really worked in capital markets.

    As far as the Indian government goes, if the Indian government is going to agree to everything that that the United States wants or that any US bank wants, then you really should find a new group of people to run the country.

    You should expect that any banker that wants to you do something does so for their profit, and that anything that the US wants India to do is for the US interest, and neither the US or the banks really care what happens to India. At that point you just listen to their sales pitch, and if it doesn’t make sense, say no. And if you are in a position that you can’t say no, then you need to work at getting yourself in a position that you can.

    There’s really no point in complaining that US banks or the US government are self-serving and hypocritical. They are. Now deal with it.

  • Posted by Indian Investor

    @Twofish:
    I checked the numbers on the Bank of Russia web site and so far Russia is actually doing pretty well. Both exports and imports are growing. The interest rate was hiked in 2008 from 10% to 13%, while increasing the money supply by reducing the reserve requirements with Bank of Russia. There are reports of unemployment in Russia but I’m not sure how severa that is.
    Russia responds to oil price reduction by hiking petroleum gas prices. There’s a big tussle on over Russia’s petroleum gas exports, as I’ve described before.
    I don’t see how much Russia is vulnerable to the credit crisis. External credit to Russia’s banks has reduced but that tide has been stemmed through the central bank policies, the fall in forex reserves in January isn’t much at all, the Russian rouble has stabilized. Russia isn’t anywhere close to a currency crisis or sovereign solvency crisis a la 1998.
    Russian nuclear power firms have made very good export profits building reactors for the controversial Iran nuclear program.
    So barring the oil price, that is set off by increasing petroleum gas prices there absolutely isn’t anything in the crisis that hits Russia so badly, in my humble opinion.

  • Posted by DJC

    Geithner blows up the world
    January 22nd, 2009
    By David Goldman

    Geithner’s comment today that President Obama believes that China is “manipulating the yuan” takes us straight into Great Depression territory. With Paul Volcker at his side, I had hoped that Obama would be perspicacious enough not to touch the third rail of global economics, namely protectionism. Nothing, absolutely nothing that Obama might have done could be worse than this. If the US looks at the global jobs market as a zero-sum game in which the US has to claw back manufacturing jobs which China has taken away, we are back to beggar-thy-neighbor and the 1930s.

    Notice that the 10-year Treasury has backed up from a low of 2.05% to 2.65% today, even while the stock market and the economic outlook have cratered. During the past several days, the market has sold off essentially everything: stocks, credit, and Treasuries. Only oil and gold are up. The cost of credit protection on the leading sovereigns, including the US, has jumped.

  • Posted by Indian Investor

    @Twofish:
    I’d like to know your opinion on why countries like India and China historically never spent much on infrastructure?
    On January 26, 1950 the Republic of India was formed and the Constitution has ensured a stable democracy in India for nearly 59 years now.
    I think the reason was first the original Bretton Woods fixed exchange rate, then followed by the Balance of Payments crisis in 1991, and further the Bretton Woods II regime after that.
    You point out that Indian infrastructure should be funded from “Indian money”. The only large “savings” that can be characterized as “Indian money” is lying in the personal net worth of a few entrepreneurs and large business. Here you’re counting a few billions amongst a limited number of old Bombay Club people and some new IT/Telecom people. And these entrepreneurs are busy working on their existing businesses and preserving the stock prices, which is where their “savings” lie.
    The forex reserve in India isn’t much. The Government Coffers show a deficit, and there is a trade deficit as well.
    If you’re looking at any kind of large infrastructure spend, such a real network of highways, more ports, airports, ensuring uninterrupted power supply, electrifying all villages, good telecom connectivity, you’re talking about some serious money that can’t come from an “Indian money” or “savings” anywhere.
    The Americans deliberately built a system where many people in countries like India and China were forced to become cheap labor in export oriented companies. That business yielded a margin only because of the cheap labor. The margin and accumulation wasn’t anything huge in absolute terms.
    Goods and services were produced with hard work by very cheap labor and sold at throwaway prices in the United States, the UK, and most of the so-called “wealthy” nations of the world. It was completely, totally a neo-colonial world.
    The Americans spent everything they earned from the retail business and the financial business on consuming these cheap imports.
    But there are Americans who aren’t in the working class. Big bankers, industrialists, etc … those are the people who’re sitting on all of the world’s “savings”.
    And what they’re demanding is that they won’t invest or proceed, unless the emerging market sovereigns sell their family silver to them, and give them concessions that put them ahead of the local companies.

  • Posted by Indian Investor

    @Twofish:
    The idea of trying to get a correct understanding as to what’s happened before and what’s going on right now is just to have the right focus on the future.
    The important questions are:
    1) What is the likely future profitability of enterprises that are based on employing cheap labor in China and India and selling the output in the United States and Europe?

    2) What are the sectors that can result in a profitable export from the United States and other European firms to these emerging market countries?

  • Posted by Twofish

    Indian Investor: I’d like to know your opinion on why countries like India and China historically never spent much on infrastructure?

    I don’t know about India, but China has been an infrastructure driven economy for the last 15 years. Before 1993 or so, China didn’t spend very much on infrastructure because it didn’t have a tax system that could support massive infrastructure spending.

    One other thing, the Indian and Chinese economies are very, very different from each other.

    Indian Investor: The Americans deliberately built a system where many people in countries like India and China were forced to become cheap labor in export oriented companies.

    I don’t think that it was very deliberate. In any case, one of the goals of the Chinese government has been to get out of the cheap labor in export oriented companies mode of production since that wasn’t going to last much longer anyway.

    In any case, China’s big advantage in manufacturing wasn’t solely cheap labor. There are lots of other places in the world with cheap labor. It was cheap labor + good basic education + very good infrastructure + local capital.

    Indian Investor: That business yielded a margin only because of the cheap labor. The margin and accumulation wasn’t anything huge in absolute terms.

    In the case of China, the acculumation was huge in absolute terms.

    Indian Investor: But there are Americans who aren’t in the working class. Big bankers, industrialists, etc … those are the people who’re sitting on all of the world’s “savings”.

    No. Big bankers and industrialists are dependent to a large degree on Chinese and Arab money, that gets China and the Middle East a seat at the table when the world economy is discussed. If the big bankers and industrialists control the world, then you want your country to have its share of bankers and industrialists.

    Indian Investor: And what they’re demanding is that they won’t invest or proceed, unless the emerging market sovereigns sell their family silver to them, and give them concessions that put them ahead of the local companies.

    Well of course they are doing to do that. If they terms aren’t good then, say no.

  • Posted by Twofish

    Indian Investor: 1) What is the likely future profitability of enterprises that are based on employing cheap labor in China and India and selling the output in the United States and Europe?

    In the near term, bad. In the long term, worse. Even after we get ourselves out of this recession, I think it is highly improbable that the United States and Europe can drive economic growth in China and India. That cow is out of milk.

    At this point China isn’t in a bad situation since it has lots of factories, lots of money, and lots of people. Someone is going to figure out how to combine those.

    Indian Investor: 2) What are the sectors that can result in a profitable export from the United States and other European firms to these emerging market countries.

    I don’t really understand the question. The goal of the Chinese government is to have “global firms.” Look at an American or European firm that does something, and the Chinese government wants a Chinese firm doing something similar.

    I don’t think that the big fights over the next ten years are really going to be over trade, since there is a system in place that no one seems to want to massively change right now. The big fights are going to be over capital.

  • Posted by bsetser

    Indian investor — if you think Russia is doing well, you really didn’t look very closely.

    Can we return to discussing the issues Rien Huizer spelled out, namely the shape of the current downturn? Any estimates for the likely y/y fall in global growth in 09? Or will the global economy eke out positive growth (I don’t quite see how, but i am assuming zero or only modestly positive y/y growth in China, which is out-of-consensus.

  • Posted by Albion

    There is an unanimous front of denial when it comes to natural cycles , I guess only farmers have to accept them as they sometimes leave the earth in peace.
    Getting back to the shape of the downturn cycles I would be inclined to vote for …wwww as explained through Mr Kasriel Asha Bengalore post.
    Emphasize should be given to corticoids and making sure that the patient will not die of an overdose, that means project financing with interest rates simulations, cash flows, and no gambling on capital gains. I assume that banks will have to remember the basic of their jobs (that is my strong assumption feel free to criticise)
    http://www.safehaven.com/article-12412.htm

  • Posted by bsetser

    actually, modern farming is about using fertilizer to escape from the limits imposed by the earth’s natural cycles. Land in the productive bits of the Midwest isn’t left fallow for example — tho rotating corn and beans (which as legumes fix nitrogen) still is necessary.

  • Posted by Albion

    Brad

    There has already been a rotating of labour and capital, I guess one may try to rotate from capital to labour with more success this time!

  • Posted by tyaresun

    Albion,

    Increasing productivity was indeed rotating from labor to capital. Outsourcing to emerging markets was rotating from capital to labor. We need to rotate from labor to capital once again to bring back some balance.

  • Posted by Indian Investor

    Yes, and growing apples the size of watermelons, and watching to see if Dr. Craig Venter becomes biologically immortal or not.

  • Posted by Twofish

    bsetser: I don’t quite see how, but i am assuming zero or only modestly positive y/y growth in China, which is out-of-consensus.

    The thing to note about the SCB graph is that the drop in output started in 12/07 with a three month average which suggests that it clearly isn’t the result of the export slowdown which didn’t start until 11/08.

    That suggests that the cause of the slowdown was PBC hitting the brakes in 12/07, and right now they’ve taken the foot off the brakes and are slamming on the accelerator.

    The other thing that makes me really suspicious about the SCB graph is how smooth it is before ’07. It doesn’t include known slowdowns in the Chinese economy (i.e. the 89-91 recession and the 97-99 recession) which makes me really wonder about methodology.

  • Posted by Twofish

    bsetser: actually, modern farming is about using fertilizer to escape from the limits imposed by the earth’s natural cycles.

    Same is true for Chinese farmers. Calling Chinese farmers “peasants” makes them seem more pastoral than they really are. In fact, Chinese farmers massively use (and probably overuse) chemical fertilizers and pesticides.

  • Posted by Twofish

    Rien Huizer: I do not expect a lot of growth until the financial system is has the capacity and the managerial incentives to operate entrepreneurially (with some prudent regulation of course). Nationalization and other forms of gvt intervention will not work well enough.

    I’m an empiricist which means that I can only say that if X is true then Y results. I don’t know if X is true or not. If Keynes is right and if it turns out that we really do have a good understanding of what caused the Great Depression, then we should be out of the recession by mid-2010. Right now people are operating under the assumption that Keynes is right because no one has offered any credible alternative plan of action.

  • Posted by Glen M

    I see a global slump with China getting hit the hardest for a couple of reasons.

    Ignoring GDP, one of the real determining factors in play is going to be discretionary spending. Despite the recent crisis, this subset of GDP is still dominated by the west. If trade restrictions come to pass, which I wager they will, the West can adopt means to combat mercantilism and restore trade balances.

    It also appears that there is going to be some competition among the dollar pegging nations to see how will go the furthest to maintain market share.

    Furthermore, if while much has been made of China’s role as the US’s source of capital, ignored is the multiplier effect of the cost of such. If the US becomes savers, and can offset foreign treasury purchases, the multiplier for the income on treasuries is recycled locally. I am often surprised why the multiplier effect is ignored in such an area.

  • Posted by Olkon

    re Russian budget, with the budget based on 70$ a barrel, one has to consider that it also was based on exchange rate around 25. so oil at 40$ doesn’t necessary mean Russia cannot balance its budget. the ruble has already devalued (from 25 to 33 per dollar). Though the budget still will be in deficit, as spending(bailouts etc.) will be higher than initially planned and devaluation was relatively modest
    that’s a significant difference between Russia and the Gulf, where currencies are pegged to the dollar

  • Posted by ReformerRay

    DJC says Obama should not try to “claw back the manufacturing jobs from China”.

    Why not? China took the jobs from us.

    Beggar thy neighbor policy applies to any country that aims to achieve a trade SURPLUS. Why? Because equal trade is the trade policy that will insure that all nations benefit from trade. The U.S. needs to have a strong push to get to equal trade. Including clawing back manufacturing jobs from China, if that is where we can get them.

    I think Germany and Japan are more likely to suffer if the U.S. manufacturing sector revives.

  • Posted by Peter

    What is the y-axis scale on the “China is slowing rapidly” chart?

    It is labelled y/y %, but the pre-crisis average is about 1.5 according to the chart.

  • Posted by Indian Investor

    Can anyone please tell me which all famous firms are there in the US manufacturing sector? I can start off by naming a few. Weyerhaeuser is one, wood products, mostly engineered wood. The main reason there was no “Chinese competition” in the US housing sector was because Weyerhaeuser knows too much about Core Veneer, and the like, and the Chinese presumably don’t build houses out of wood at all, so they just didn’t have the technology to compete there.
    Then you have 3M corporation, which makes a lot of unique products starting with its deep understanding of various kinds of adhesives, and its invention of post-its.
    Boeing, Hq’ed in Washington state, somewhere in the same vicinity as Redmond, the Microsoft HQ, is another big manufacturer of civilian aircraft. You have the Lockheed Martin biggie, which had to change its entire accounting system to double-entry bookkeeping from the government-style of accounting maybe a decade and a half back. We’re talking guns.
    Ford is making cars that can park themselves when you press a switch. Toyota etc I’m not sure if that can be called as “US manufacturing”. Cars.
    I’m curious to know about the construction equipment sector. Volvo is almost a generic for public transport buses in India, the better kind of them. Volvo is entrenched in selling all kinds of construction equipment here. So also Asea Brown Boveri, the other Swedish Engineering giant. Siemens competes with them in some areas.
    Which is the American constrcution equipment firm that has a global brand name, or even a well known local brand name?
    You have the cigarette manufacturing firms. Phillip Morrison, British American Tobacco, etc. The tobacco comes from all over, places like Malawi, Zimbabwe, Brazil, Argentina, India, etc and then you have small stockist manufacturers who process the raw tobacco in the South. Then you get the big cigaerette rolling companies as named above.
    I forget there are some auto component firms like Johnson Controls they were in some trouble in 2006 and I’m not sure of their latest, but that’s proper US Manufacturing you have there.
    There are the seed companies, Syngenta-Swiss, Monsanto – not sure, whatever happened to Cargill, anyone? There might be some agri-biotech seed firms in the US, not sure if it’s there and don’t know if there’s any “US Manufacturing” there.
    hmmm … textiles … I believe Wrangler has some manufacturing, but not sure about that, mostly Wrangler is a retail firm, is my impression, but there’s an entity with some other name … basically blue jeans ..
    You have Disney, and all the other famous entertainment firms who every year make movies and music etc American entertainment is a great popular hit around the world. – music and movie “manufacturing”.
    There are a few paper mills run by a company called International Paper – not sure of the extent of this. But Paper mills, – paper reams – I think are good to think of as something that can viably be done and exported from the US, just a small possibility there.
    In case of Dell and Xerox, I’m not sure if they manufacture in the US, as far as I know they don’t. Let’s not talk about electronics.
    But I’ve noticed that in case of office equipment, such as staplers, and various kinds of clever stationery accessories, you don’t these things actually being used outside of the US much, even in Europe it’s sometimes hard to see an electric-powered automatic stapling machine.
    It would be nice to know if there’s any US Manufacturing of office equipment.
    I’m quite sure I’m missing a lot this is all from casual memory … would be very useful to find out how the US can export itself out of the deficits, and if we’re assuming no protectionism that task is quite important.
    Oh, my much -written about nuclear power companies. And all across the GE’s 16 business lines – Everything from Aircraft Engines, Nuclear Power Reactors, Medical Systems, etc Medical Equipment , I believe would be a big export sector for the US.
    CAT scan machines to check the China Communist Party and Congress Sarkar mindset :-) Ok here goes, hoping for some really good ideas form you folks.

  • Posted by phaedrus

    “Emerging economies were growing faster than the mature economies prior to the crisis. But at this stage I wouldn’t rule out the possibility of an outright contraction in the output of the emerging world in 2009. And that could imply that a crisis in the US and Europe could end up producing a bigger absolute swing in activity in the emerging world than in the world’s mature economies …”

    Interesting conclusion – could you elaborate on the contraction bit ? IMF should be coming up with their revised projections very soon, – http://www.imf.org/external/pubs/ft/weo/2008/update/03/index.htm

    …but would they adjust their projections so drastically ? Growth in emerging world estimated at about 5.1% in 2009, for this to become negative ????

    We could safely assume that – a) export dependent economies will feel the pinch of consumer de-leveraging in the developed world, as debt gives way to savings. b) If the credit crunch continues, capital flows into emerging economies will dry up.

    Asia and few other countries still have the cushion of high savings rates/reserves – companies with good fundamentals/cash flows will weather the storm better and garner higher market share ? Emerging economies share of global GDP set to grow rapidly ?

    US has the benefit of being the world’s printing press for the time being and Europe has few economies like Germany that are better off.

  • Posted by bsetser

    the y axis is SCB’s index. It correlates reasonably well with real growth, but shows a bit more voaltility over time than the official data. it is meant to provide an accurate indicator of economic conditions that doesn’t rely on the official data.

  • Posted by Ayyappan

    Great Analysis Dr. Setser, thanks a lot for the work.

  • Posted by Indian Investor

    Brad:
    Can we return to discussing the issues Rien Huizer spelled out, namely the shape of the current downturn?

    It may take 2 to 3 years to return to another growth cycle, I think. It would be good to know if there’s a shape that typically occurs in this timeframe.

  • Posted by Cedric Regula

    I like using the rear view mirror to get a handle on interpreting what I see thru the windshield.

    Back in the 2002-2003 time frame, CB Watchers were telling us CBs where engineering a Global Synchronized Boom. The way they do that of course is to provide ample amounts of cheap liquidity. Now we see how that got deployed.

    It started a housing boom/bubble in most developed countries (those that had a modern banking system with access to the “liquidity”).

    It started the banking system coming up with creative ways to profit from cheap money. Securitized mortgages, the highly leveraged carry trade from either existing bank’s operations, the shadow banking system, or the hundreds of hedge funds that sprang up around the developed world. The target of the carry ranged from higher yielding debt instruments around the entire world, EM stock markets, or commodities.

    If any regulations were in the way, Congress shot them down. Any limits on F&F conforming loan limits, Congress voted them up. Need a Home ATM machine? No problem.

    So the 2002 recession was “fixed” and we and the EMs are happily chugging along. I do remember looking at OECD current account data in 2005. I added up the surpluses and deficits of all the OECD countries and got a net deficit of 30% !!!!! That is how large the surplus was going to non OECD countries.

    But it’s important to identify why this “worked”. Back in 2002, consumer debt was probably historically large, but still manageable. Now it is very large and home equity probably won’t come to the rescue. Government debt in the US was not too high. Tax cuts were OK. Now the US and Europe are close to catching up to Italy and soon 100% of GDP government debt levels will be the norm rather than the exception.

    So I think what should be allowed to happen by governments is we do the adjustment that Rien mentioned. Some refer to that as a L shaped recession, but I think that puts a negative spin on the concept and I prefer to think of it as sanity.

    But we are getting stimulus programs and if we just want to look at GDP numbers, we know its possible to borrow from the future and spend it now and make the GDP number go up. No magic there. So then I think it’s very possible to have a string of these ….WWWWWW . But I just don’t know how many.

  • Posted by Ying

    I pull the two headlines of Brad’s blog together:

    “The US placed about $1.3 trillion of Treasuries with non-Chinese investors in 2008″

    “A truly global slump. Do not look to the emerging economies for good news …”

    It shows the advantages of US dollar functioning as the major international reserve currency for US economy at crisis. The global financial system has been largely beneficial to the US economy in the past and right now. US monetary and fiscal policies has a dire impact on the downstream supply chain. I am wondering if US has any concern about being a responsible global player other than being responsible to its own citizens. The responsible talk of China doesn’t make great deal of sense at all.

  • Posted by Ben

    It is quite obvious that a big part of the downturn in Asia is being driven by a massive inventory reduction in both tech/consumer electronics and autos. That is why Taiwan and Japan in particular are suffering, combined with reductions in trade throughout the supply chain in Asia. The good thing is that this inventory reduction is so far at least significantly greater than the reduction in end-demand. So at some point we will see a resumption in supply building that will help the Asian economies, perhaps because they are down more now, bounce back faster than in developed markets. If I had to guess when this would happen, it is likely at least 3 quarters out. But the point here is that we are seeing a classic cyclical downturn in production and Asian economies are being impacted more because they are the producers in the world, so inventory corrections are more painful (at least in terms of nominal GDP) there than in the U.S. or other developed markets.

  • Posted by Twofish

    That graph looks very different from this other one….

    http://sgi.newamerica.net/blogs/sam-sherraden/grim-forecasts-china

    Anyone, if Stephen Green is using oil and electricity consumption, I think he is getting bad numbers because of the effect of price controls. The price of oil and electricity is state controlled, which means that if the market price drops below the state mandated price, then there is an incentive for the buyer and seller to collude and ship energy off the books. If the prices are above the state controlled price, then the buyer is going to demand that the seller sell the power or energy through recorded means.

    Because of this effect, I find estimates of Chinese GDP based on energy usage to be highly dubious.

  • Posted by Twofish

    Also oil smuggling would explain some of the drop in imports. Once the price of oil goes below the state price, then everyone starts selling oil under the table.

    There are two statistics that seem to indicate the Chinese economic isn’t falling apart. Growth in retail sales are strong, also sales of real estate seems to have picked up.

    Also here is an article by Stephen Green which despite it’s inflammatory title is a rather balanced article…

    http://forexdaily.org.ru/Dow_Jones/page.htm?id=425303

  • Posted by bsetser

    i am not at all convinced that the US benefitted from easy access to ext. financing from 02-mid 08 — excessive inflows at too low a price allowed vulnerabilities to build.

    the united states has benefited from a world where it doesn’t have to eliminate its CA deficit immmediately and thus has room for coutner-cyclical fiscal policy.

    but this isn’t tied — at least right now — the the dollar status as a reserve currency. global reserves ain’t growing, which means the us isn’t really drawing much on CBs for financing. what helped the US recently was that a host of investors offshore (private ones) needed $ liquidity.

    the us was drawing on the $’s reserve status FAR FAR more in late 07 and early 08, back when lots of capital was flowing into the emerging world (not the uS) and the US current account wasn’t adjusting …

  • Posted by Twofish

    One other thing to note is that local Chinese officials have a *very* strong incentive to argue that the Chinese economy is about to fall apart, because this makes it possible for them to argue for massive increases in infrastructure spending.

  • Posted by Barkley Rosser

    Twofish,

    Russian exports may be up due to the sharp decline of the rouble. Their stock market is down something like 80%, with many days it is closed due to sharp plunges.

    All,

    One part of the world that performed better in 2008 than in 2007 was certain better governed commodity exporters in sub-Saharan Africa, with Ghana’s stock market rising 60% last year. Of course with commodity prices down again somewhat those may be slowing, and they are a miniscule part of overall global growth (and also more immune to the global financial crises, given their general disconnection from those).

  • Posted by Indian Investor

    @Twofish:Is it possible to shed some light on the how the official unemployment measurement is done in the US? My understanding is that the reported unemployment percentage is the number of people claiming unemployment benefits with the social security administration, is this correct?
    I’ve also hear a few rumors about some method where a survey is done to estimate the duration it takes people to find a new job. If possible, could you elaborate?

  • Posted by Cedric Regula

    Jim Rogers weighs in with his less than soothing outlook.
    =================================

    The Euro Won’t Be around in 20 Years: Jim Rogers

    The euro will not be around in the next 20 years, but Britain would have been better off had it joined the single European currency when it had a chance, legendary investor Jim Rogers told a British newspaper.

    “Not being in the euro is a competitive disadvantage,” Rogers told UK paper “Metro.”

    “It makes it more expensive and more cumbersome to do business with the rest of the world. But I am not sure the euro (BIS: EUR-TN) will last 20 years,” he said. “The Italians and Germans will be in chaos because they have no plan B.”

    Also in the next 20 years China “may well be the largest economy in the world,” Rogers said.

    He reiterated his view that the pound (BIS: GBP-TN) will continue to weaken, as the City of London suffers because of the financial crisis and North Sea oil is drying up.

    Britain is “a deeply indebted nation, the government is spending gigantic amounts of taxpayer money propping up banks which should have been allowed to fail,” Rogers said. “If I was a British taxpayer I’d be totally outraged!”

    He could not forecast an end for the economic troubles.

    “We’re certainly not out of whatever we’re in and whatever we’re in is getting worse,” Rogers said.

    For those worried about their future prospects, his advice was: “if you speak Chinese, go to China. Or try farming. I’m more optimistic about agriculture than any other industry. If not farming, anything to do with raw materials or natural resources.”

  • Posted by gillies

    MODERN AGRICULTURE IS HEAVILY DEPENDENT UPON OIL,
    so ‘industrial agriculture’ might be a better name for it. the oil (or natural gas) is not only used to produce the fertiliser, but is also used in farm machinery, farm chemicals, plastics, food processing, food packaging, and food transporting. then the suburbanite drives to the supermarket !

    in fact more energy is put in to food than is got out of it.

    we may be at a ‘peak oil’ plateau but we are also at a peak soil and peak groundwater crisis as well.

    most economists take soil and water as a ‘given’ rather than as capital which we are rapidly exhausting.

    at some point the wwwww has to curve (my keyboard cannot do it for you) so that the cycles continue but the overall trend is a curve changing from gradual expansion over decades to gradual contraction.

    that is the picture in a finite world of finite non renewable resources.

    now add the ending of a leverage binge, and an associated change in the zeitgeist.

    now add the vulnerability in two leading economies, U S and U K, because their dependence upon financial services and british ability to rely upon their own oil supplies, is in decline. (adding particular local peak oil to the general global peak oil)

    now throw in the wild cards – limited nuclear war, the potential for a global computer virus, and the potential for unexpectrd domino or collapse of complexity effects . . . .

    the future is massively unpredictable – except that those who seek a ‘stimulus package’ to get things ‘back to normal’ have to realise that that 60 years of (interrupted) boom was not normal.

    the global growth project, always implied, never fully explained, is a version of ‘house prices always go up.’ to make it true you have to concentrate upon the short term.

    my best effort at prediction is not wwww but something you will have to imagine without letters – a global contraction of industrial civilisation interspersed with occasional growth rallies. a coming period comparable with the european middle ages, or the ancient egyptian ‘second intermediate period’ or the equivalent periods in chinese history.

  • Posted by Cedric Regula

    indian investor:

    Here’s official USG website that explains all about it. Also employment stats, which are really the more important ones, but everyone always argues about whether they are any good or not. People care about these because they are a good indicator that the economy is turning the corner. I think during the last recession everyone found out that the “Household Survey” stat worked better than the the “Official Survey” stat.

    http://www.dol.gov/dol/topic/statistics/employment.htm

    We had a “jobless recovery” for a while per the survey that used corporate input. But we had tons of illegal aliens building houses. No one told Greenspan, so he keep interest rates low waiting for employment to increase. He also told the financial community that interest rates would stay low for a “considerable period of time”. That signaled the green light for the 10y Treasury carry trade. Then Greenspan had his conundrum about why long rates stayed so low. Bernanke offered his Global Savings Glut thesis. Japan had ZIRP so we got all their carry traders. Swiss too. By then we were bouncing our home equity off the Chinese, and they were putting the dollars back where they came from.

    Conundrum solved.

    Remember, you heard it here first.

  • Posted by andi

    Dr setser rather diplomatically puts it as “india is slowing”.
    india like other bric/emerging participants saw credit orgy induced hypergrowth that would inevitably steal from future yrs. Current acccount deficit looms larger and total fiscal deficit has ballooned to ~10% of GDP.
    Beside the marquee sector of IT/BPO that attracted capital inflows & foreign dollar reserves now suddenly seems vulnerable as clouds of protectionism gathers force.

  • Posted by Indian Investor

    People who’re talking about “credit orgy induced hypergrowth” in India have never dealt with an Indian Bank Manager LOL :-) And probably they can’t imagine, even in their wildest dreams dealing with managers from those state owned Indian banks. LOL

  • Posted by Indian Investor

    @Cedric: Around 25% of the Americans don’t have jobs, this is just my common sense estimate. The data in the DOL statistics might be useful to see the changes in employment levels but not to see the more basic facts. They have fudged all the definitions of the data and the survey structure and everything. There isn’t a single straight answer to anything in the DOL data.

  • Posted by Indian Investor

    @ Cedric: By they I mean the Dept of Labor Secy, and so on. This has been done over time. Same thing with inflation statistics from the US govt. They measure inflation ex food and energy prices.
    All this misinformation is targeted at people who are generally unsophisticated and will believe everything the Government tells them to hide the level of trouble in the economy.

  • Posted by eb

    I’ve been an interested, but frustrated, reader of econ blogs for most of 2008 and I’m delighted to find an engaged community who, I hope, will share a little of their demonstrated patience with me.

    My first is a question that’s probably been long considered on this blog (if so, please link): how long can gross trade imbalances last? By my intuitive understanding of things, the US continues to borrow from the future with every budget deficit, thereby living artificially large today. Does this ultimately end when the US balance sheet reaches zero? And, are we over-estimating the size of the US economy by attributing to GDP the effect of this implicit stimulus?

    Next year’s deficit will set new records and I’m compelled by the argument made in another recent thread that the extraordinary supply/demand dynamics for treasuries next year will trump considerations of “on whom is the US dependent?”. The arguments that some of the oil economies will be net sellers along with Britain and other developed economies, all looking to simultaneously fund stimuli, similarly suggest that there will be much greater supply of debt than purchasers thereof. (Unless we can reliably convince ourselves that there is another $tr to come out of global risky investments? How would we estimate this?)

    A few questions follow:

    1) I’ve heard two alternatives discussed for how the US might position itself relative to its massive fiscal deficit next year: a) monetizing the debt and b) raising interest rates to some “market rate”. In the first case I’m curious how one would go about estimating the impact on inflation. E.g. suppose we were to estimate that demand for 0% treasuries fell $300bn short of requirements next year (like Germany’s failed bond offering last Fall, the US sells and no one buys). How do we estimate the impact on inflation and currencies if the Fed picks up the tab? How would China (and other dollar pegs) react to such a move, which devalues their dollar reserves?

    I have similar questions about the second option of moving to a market interest rate. There would be obvious objections from holders of existing treasuries, MBS, and other under-priced risks, who would be crushed if the risk free rate suddenly rose out of competitive necessity. But as-importantly: could the US sustain the debt payments of significantly higher interest rates?

    Finally linked to my last question on sustaining payments, I particularly liked Rien Huizer’s comment at 5:54: “…say world output falling to world levels of, say, 2002. The trick would be to make it stop there. World 2002 output (per capita) did not contain too much finance-dependent nonsense…”

    I’ve been trying for some time to wrap my head around how to estimate what “appropriate” US GDP is. That is, minus the effects of the spending orgy of the last six years. I like Rien’s model, but I think it’s optimistic: even in 2002 the US was benefiting hugely from cheap imports and consequently consumers had more money in their pockets to slosh around on other purposes in the US economy. Is such a starting point more appropriate for estimating the debt payments that the US can sustain?

    Finally a related question: we’ve talked extensively about what China or India “should do” as though they’re the only ones in serious trouble. I have a tremendously hard time seeing how the US (UK, Ireland, etc.) comes out of this without serious problems. What should the US do?

  • Posted by Ying

    Brad,

    I am just wondering if you can compare the credit ( or easy money) provided by foreign central bank to US government and the credit extended by US banking sector to its own consumers and businesses in US. I am just wondering which effect is bigger.

    In the past, US financial sector has been successfully monetized most illiquid assets such as loans, houses, equipments,factories to financial assets. Credits are extended on purchasing almost everything except groceries. Policies tilted towards pro-cyclical direction. This is probably what George Soros meant that sixty years credit expansion is probably going to end now.

    Credit and money are services provided by financial sector to its consumers and businesses. Shouldn’t the services of credit and money be subjected to public debate so people know the consequences of taking easy credit? I only see the failure of democracy.

    China didn’t do a very job in shifting economy away from export sector either. They have real estate bubble and financial asset bubble too. Not all slowdown can be attributed to the export sector.

  • Posted by Cedric Regula

    indian investor:

    I think data on unemployment is pretty straight forward to collect, they know how many they are paying, but employment data is extrapolated from surveys and is much more difficult.

    But I don’t think unemployment is anywhere near 25%. That would be noticeable when you walk down the street. Plus a lot of households are dual wage earners, with one spouse oftentimes not having a good paying carrier job. So if that’s the one lost, it means less household income but may still be survivable.

    But not having good employment data is disturbing because the Fed tells us that the two pieces of data they balance to arrive at interest rate policy are inflation and employment.

    We know inflation data is bogus. Plus we put lots of Chinese stuff in it and call it “our” inflation index. Then the Fed tells us if asset prices go up, that is NOT inflation. Then employment statistics are bogus and we don’t even know how many workers are in the country.

    So that is how the Captain at the Fed steers the ship.

  • Posted by seatru

    I doubt if a single index can predict any country’s economic trend in the next quarter, especially if the country is accused of manipulating its statistics deliberately.

  • Posted by FG

    Gillies: a global contraction of industrial civilisation interspersed with occasional growth rallies. a coming period comparable with the european middle ages

    I take it you are investing in machine guns makers and whiskey brewers?

    There is no real equivalent in the past. We have saturated the planet. At the current growth rate of 1.3%/y, humanity would reach 23 billions in 100 years. Of course it won’t happen. The ways in which it won’t happen is the question.

    The greatest limitation of mankind is its inability of understanding exponentials.

  • Posted by rkelly

    Brad,

    I think all we can say for certain right now is that 2008Q4 was abysmal for global growth – the combination of collapses in trade financing, commodity prices, and US consumers – that sets a lot of countries up for a very low starting point for growth in 2009. On the downside, we still have to deal with the risk of further banking surprises and hits to financing and credit. We also have to deal with the normal recession dynamics of bankruptcies, not just in advanced economies but all those commodity-dependent EMs that saw the price their goods fetch collapse and all those manufacturing centers like Asia that saw Japanese and American demand suddenly disappear. Maybe outside of Eastern Europe we don’t have to worry as much about fx mismatches or maturity mismatches (that we know of…but ain’t that always the kicker?), but such sharp moves in prices most certainly are going to reveal problems in local firms that overstretched themselves. And that process may play itself globally out over the next 12-18 months so that will take time.

    But, on the upside, there should be a wave of increased purchasing power showing up for imported energy dependent consumers (think US, Japan, and India). US incomes are falling, but guess what’s falling much, much faster? Inflation. And that means real incomes are rising. Most of what I’ve seen suggests there’s a good 2-3 quarter lag between spikes in oil prices and the biggest impact of the economy. That means the upward spike in 2008H1 fed through in 2008H2, and the downward spike in the second half of the year should try to work its way through in 2009H1. And until American consumers start spending again, Asian economies won’t be growing again.

    The pessimistic forecasts for advanced economies generally see them contracting a bit over 2% in 2009. Since they make up half of global GDP (PPP), that means EMs would have to grow by less than 2% to get global growth below 0% for 2009. That still seems like it might be difficult.

    The NICs were hit bad because of how leveraged they are to trade and will almost definitely contract in 2009. Russia is probably next most likely to contract in 2009, but if you look at their reported q/q GDP over the last several years, it looks more like a Madoff quarterly statement – way too stable – than growth of a commodity-dependent economy. Brazil is probably next in line with the same commodity dependencies as Russia but without much of the baggage and poor macro management. But Brazil may have contracted by something like 3.5% unannualized in 08Q4. That’s going to be a tough hole to dig out of in 2009, and you still have to worry about how the collapse of commodity export business’ profits feed through into the domestic economy, and is at least likely to come in under that 2% threshold in GDP growth needed to counterbalance the advanced contraction.

    But those regions get you less than 10% of global GDP (toss in Eastern Europe that will probably also contract and you still just get to 13.5ish%), while China and India make up almost 16% of the global economy and neither is likely to post 0% or sub-2% growth in 2009. India doesn’t look like it was hit as bad in Q4 and generally doesn’t have the same exposure to global trade as others. For China, you have to separate arguments of what China’s GDP REALLY is versus what is (and will be) reported. An issue with SCB’s index above is that it doesn’t look like it matches up well with official data (whether y/y or cumulative), especially over the last 5 years. The SCB’s index may say growth is running below 0%, but official data say Q4 y/y was 6.8% and with lending/credit data showing some sort of stabilization in December, you could probably pencil in something like 6% y/y GDP growth in Q1. It will be hard to get Chinese reported GDP below 0% or even close to 2%.

    So if China/India and their satellites can pull off a 4-5% growth rate in 2009, than the Russia/Brazil/NIC/EE/satellites can see -1% contractions in 2009 and you still pull off global growth of 0%. So global growth right around 0% seems a good bet, but it will take another big shock to get it much below that imho. Still, from 1960 to now, global growth has never been 0% so that’s not anything to be happy about.

  • Posted by locococo

    On a shorter term – before we all die_

    While weighting the »IMFs future projections«production industry s products please bear in mind they just finished having a crisis and are currently busy with engineering the new SDRs (backed by dollars) blast while searching for deficit countries to bail out all at the same time.

    Some of those migh even issue their reserve and the goodwill.

    On goodwill s goodwill:
    - nice comments to go with the fastest appearance of tonnes of new Treasuries, given the Treasury – with its new representative- has to beat the market to it. No doubts yet, it will.
    - as for derivatives, are we to understand that they – coupled with controlled schedule of credit events – are ensuring the dollar stays in the reserve? If true, then “the deficits truly won t matter” awaits down the road, as a….. surprise. Or an endless and limitless swap. In such end, this might turn out as an O – instead of an L – shaped recession.

    And then, there s also the gold – right at that spot for all the wrong reasons and all of the blunders. It want s to decouple and plots itself spot.

    It is not the whole world that turned Keynesian, just the people who think that they run it

  • Posted by locococo

    About the cycles – even the farmers have access to future markets to rotate and derive their presents. That tho don t mean that they know how to use them in a “proper”, “financial” kind of way.

    Of plotting the spot.

  • Posted by Waiting Out

    Brad,

    This is a question to you and perhaps someone you know in the inside of the new administration. What is the view of this “Currency Manipulation” charge of China by Tim G? What is your view of the counter-argument that if China is manipulating its currency it is in fact keeping the Yuan high because in the last a few months all the major currencies (par Yen and Yuan) have devalued by a large amount to the US dollar?

  • Posted by Cedric Regula

    EB:

    I’ll give some of the questions a try, at least how I see it. These take a while to type, so I’ll post as I go.

    1)”My first is a question that’s probably been long considered on this blog (if so, please link): how long can gross trade imbalances last? By my intuitive understanding of things, the US continues to borrow from the future with every budget deficit, thereby living artificially large today. Does this ultimately end when the US balance sheet reaches zero? And, are we over-estimating the size of the US economy by attributing to GDP the effect of this implicit stimulus?”

    The total current financing need of the US is the total of the fiscal deficit plus trade deficit. Then we also need to re-fi existing debt. What we have been doing is growing credit bubbles. We can break these down into segments. Consumer, corporate, muni, and federal. Outside of banking and probably auto, airline and casino industries, corporate debt was improving. Consumer debt got much worse. The federal debt ceiling is 11.4T. Last I saw US GDP was close to 14T so that ratio works out to 81% and we used to chastise European countries for being at that level. Plus going much higher than that can get a downgrade from Moody’s.

    US personal net worth is $50T which sounds like a reasonably cushy number for a USG debt of $11.4. But on the other hand, there was that recent movie out, IOUUSA or something like that, and there someone calculated if you throw in future liabilities (entitlements like SS, Medicare, pensions), total USG liabilities come to $55T. So that means we are broke already if we expect to ever see these entitlements.

    As far as the trade imbalances go, most of it outside of oil is stuff we can do without, or we already bought enough to last us a while. Oil is back to a more reasonable level. Then a lot of what we export is in less price sensitive products and much of it is tied to foreign government spending on equipment, infrastructure, transport, healthcare, defense, etc…. So we can just buy less imports if we want. But for job growth we need to export more. But thinking that will ever happen with price sensitive consumer products or mundane industrial products with direct Asian competition is not realistic.

    But we seem addicted to fiscal deficits and they mushrooming out of control. There will be much more global demand for financing this year. That should put upward pressure on interest rates. There will be much temptation among debtor nations to monetize the debt in the name of economic stimulus.

    How long that can go is anyone’s guess, but I’m just watching my chance of ever getting a SS check diminish with every Federal budget.

  • Posted by Observer

    Cedric,

    Regarding the unfunded liabilities of the US, Pete Peterson has been talking about it for years. I think the number that he worked up was $44 trillion in Medicare and SS over the next 75 years. There’s a youtube video of his interview with Charlie Rose back in ’04, where he mentioned Volcker as saying that there would be a hard landing of the dollar within the next five years.

    Mr. Peterson of course, was the Chair of the Council on Foreign Relations.

  • Posted by Twofish

    Indian Investor: All this misinformation is targeted at people who are generally unsophisticated and will believe everything the Government tells them to hide the level of trouble in the economy.

    Getting useful numbers out of statistics is a very difficult job, but I think it’s far overboard to say that there are meaningless. I’ve seen research papers that have gotten some useful findings from Soviet statistics from the 1930′s knowing full well that they were cooked. Even cooked statistics are very useful.

    Also I don’t see any particular reason why the US government would want to understate the seriousness of unemployment. If anything, the new administration would like to overstate those numbers since it provide more political justification to do what they want to do.

  • Posted by Cedric Regula

    EB questions: I’ve heard two alternatives discussed for how the US might position itself relative to its massive fiscal deficit next year: a) monetizing the debt and b) raising interest rates to some “market rate”. In the first case I’m curious how one would go about estimating the impact on inflation. E.g. suppose we were to estimate that demand for 0% treasuries fell $300bn short of requirements next year (like Germany’s failed bond offering last Fall, the US sells and no one buys). How do we estimate the impact on inflation and currencies if the Fed picks up the tab? How would China (and other dollar pegs) react to such a move, which devalues their dollar reserves?

    The impact of monetizing the debt is unpredictable, the market reaction is going to happen far sooner than we ever see what it does to inflation. Holders of treasuries shouldn’t like it and the dollar should weaken. A weaker dollar means pegers have to buy more treasuries to peg. Gold will probably be seen as an alternative. Maybe oil too, but you still need somewhere to ship the contract. But gauging the scope of the market reaction is pure guesswork. It may get the middle east to turn into gold bugs again. It may get the Chinese to decide its time to chew their arm off and escape the golden handcuffs holding them to the US. It may make interest rates go up if the Fed finds themselves as the only buyer for 11.4T of debt. It will certainly make people wonder if BW2 is still a good idea. If we weaken the dollar significantly we will add import inflation again to domestic inflation. Or maybe something more benign happens.

  • Posted by Twofish

    eb: I’ve been trying for some time to wrap my head around how to estimate what “appropriate” US GDP is.

    If you have massive layoffs, no inflation, and increasing unemployment, then GDP is too low since it would be higher if people were doing useful things.

    eb: Is such a starting point more appropriate for estimating the debt payments that the US can sustain?

    If you look at debt/GDP ratios then the US doesn’t have a particularly high debt amount. Let’s be clear that this financial crisis did not happen because people were unwilling to lend to the United States. If anything, this crisis has made people *more* willing to lend to the US. The financial crisis happened because the internal economy of the United States was badly structured, and the very real productivity gains of the last few years were not shared distributed well, and that the money that the US had been able to borrow was wasted.

    In this situation trying to get out of the problem by cutting debt will make the situation worse. If you cut debt, then GDP will fall faster than your debt, and you’ll end up in even worse shape.

    The time to cut debt is when times are good. Times are not good.

    The notion that the way out of a depression is to spend lots of money and get yourself in debt is very counterinituitive and because it is so counterinitutive, it’s why it took a decade to get out of the last depression.

  • Posted by Observer

    There’s a difference in pumping money into the financial system to prop up asset prices and preserve stability and pumping money into the goods and services market, where the money goes directly into the hands of consumers and corporations. To take an extreme example, the US gov’t could hire ten thousand people to dig holes in the middle of nowhere in California, and those who get hired to dig the useless holes would get paid handsomely, but no real good or service is produced, yet those workers will have greater purchasing power. In the short term, this will create an upsurge in demand, and a corresponding uptick in supply, but over the long run it would just lead to higher prices.

    When the Fed pumps money into the banking system, it was merely meeting the demand of people making a run on the bank, and those making a run aren’t likely to go out and spend their money but rather park them in gold or in the Treasuries. So in a way it’s a recycling process, but inflation does not immediate ensue because people are not demanding goods and services with their money.

  • Posted by Cedric Regula

    EB question:”I have similar questions about the second option of moving to a market interest rate. There would be obvious objections from holders of existing treasuries, MBS, and other under-priced risks, who would be crushed if the risk free rate suddenly rose out of competitive necessity. But as-importantly: could the US sustain the debt payments of significantly higher interest rates?”

    All debt securities would drop in response to a higher 10y rate, but you can still hold to maturity and you are OK then. That was the original idea behind issuing longer term debt. And if we get higher inflation instead then you are killed with having real loss, that is also taxable. So if we hear screams from the PIMCO trading desk, just ignore them.

    It would be a problem for banks that are holders of the stuff and have to mark-to-market. So that problem needs to be addressed somehow with a “bad bank” or one of those ideas.

    I think we would be headed for higher interest rates in a roundabout way anyway if they monetized the debt. The question of whether we can sustain the debt at higher interest rates needs to be addressed someday anyway. Having a downgrade from Moody’s won’t help. They might have to tax people more, cut spending, etc..

    Of course they always say can’t do those things in a bad economy. Then when the economy gets good they say they can’t do those things because that would make the economy get bad. Go figure.

  • Posted by Rien Huizer

    eb, twofish et al:

    Nice term, “appropriate GDP”. But, really, no idea. Sustainable GDP? Bubble-free GDP? Anayway, apart from the fact that a one-dimensional and flawed concept as GDP is not my favorite benchmark of economic performance (did not the new US president say something similar recently?) I was just trying to locate a past level of output that would be smaller than 2007/8 and less boosted by many of the things that have disappeared since then or were much less important then. Things like building and financing useless residences, fragile wealth (resulting from unsound financial engineering for instance), in general the real economy effects of a period of unusually irresponsible and epidemic finance in most of the developed world (and pretty much the same in the developed pockets of the NIC, BRICs etc.).

    We could go back further of course. Some asset markets have given up mote than 10 years of value growth (an interesting story by itself. Look at the direct effect of widespread technical insolvency of financials (easy to measure) plus the impact of far less private equity activity (removing a weird sort of put option from most stocks) and the disappearance of the easy money that fed the retailers and the automotive and construction industries).

    If we take the stock market as a leading indicator (perhaps with some adjustments for the rise and fall of the financial sector, historically speaking probably a cluster of outliers -a very interesting research topic, incidentally) and the stock market bottoms out at 1996 levels about now, and then languishes (i.e. not rallies in 2009/10) for a couple of decades, that would probably be associated with a a target output bottom (to be reached in a couple of years from now or later with keynesian painkillers) of , I would guess, at best 85% of current GDP, assuming not too much globalization. I am simply using the stock market as a kind of emotional leading indicator. (Yes I know that the stockmarket in the interwar period did not languish after the collapse). But in Japan, the only modern large -scale precedent in a very highly developed economy (the Asian and Scandinavian crises were more different) there was quite a bit of languishing, for reasons that people still argue about. No doubt Japan’s largely unchanged process of non-market allocation played a role in that, and the US does not have an equivalent (although it is pretty good at wasting taxpayers money too) but it is not impossible that we may see very little optimistic animal spirits and schumpeterian creators for a long time.

    So, I do not know what realistic target level would be, but I do not believe that artificially maintaining output will work in a downturn of this type, despite the collapse oil oil and industrial commodity prices and easy monetary policy. Re the effect of energy price fluctuations, recommend Killian’s article in the Journal of Economic Litterature, december 2008 issue.

  • Posted by Rien Huizer

    Observer:

    Actually people dig holes in the middle of the desert (or nowhere) all the time. They are called greenkeepers and golfers consider them useful.. One of the traps we tend to fall into when looking at keynesian policies is that no one knows what is useful, and what deserves to be stimulated in order that the economy is reverting back to growth. Just randomly removing budget constraints will get you a bubble. Directing money to the right kind (in whose opinion?) of productive assets may get you white elephants as an unintended consequence. Doing what is going on now will improve the employment and profit prospects in China and Mexico, but hardly in the US and EU, and employment and profit generate the taxes that must ultimately service the resulting debts..Relevant and reliable macroeconomic decisionmaking models that can be used to target government spending do not exist.

  • Posted by bsetser

    waiting out — see my next post. my strong sense is:

    a) speculative outflows out of china have increased
    b) China generated negative reserve growth in december by flirting with an rmb devaluation, which then led it to have to use its reserves to support its currency in the face of large outflows for the first time.

    get rid of the mini deval (which didn’t last in dec) and i am not sure china would have had to sell its reserves. but the pace of reserve growth has slowed.

    the yuan incidentally has deprecited v the yen, so that isn’t the issue. it has appreciated v the won. but the big problem china faces is the rmb’s appreciation v europe … and of course, the global contractoin in trade/ the fact that the more you gear your economy to exports the more exposed you are too a fall in global trade.

    over time tho i have trouble seeing how china could sustain a deval for long without renewed intervention, as the CA is in substantial surplus and the fall in commodity prices/ domestic invetment slump will keep the surplus up – -and barring a huge collapse in confidence, i don’t see sustained outflows equal to the ongoing surplus. for now flows are drive by an unwinding of the reval bet. but that will peter out …

    that at least is how i see it.

  • Posted by Twofish

    Observer: To take an extreme example, the US gov’t could hire ten thousand people to dig holes in the middle of nowhere in California, and those who get hired to dig the useless holes would get paid handsomely, but no real good or service is produced, yet those workers will have greater purchasing power.

    And right now it doesn’t matter. The economy is contracting so, it would be a good thing if people get paid to do anything. The problems start once the economy starts expanding. It’s a political economy problem. Once lots of people get paid lots of money to do something, they will have political power to continue to be paid to do it, even if it doesn’t make any sense. So while you have the option, you need to think a bit about what you want people to do.

    But don’t think too long.

    Rien Huizer: Some asset markets have given up mote than 10 years of value growth (an interesting story by itself.

    Which tells you that you shouldn’t always listen to markets since sometimes they are just crazy. Even with subprime stupidity, there have been lots of wealth generating advances that have existed in the last ten years.

    Rien Huizer: No doubt Japan’s largely unchanged process of non-market allocation played a role in that, and the US does not have an equivalent (although it is pretty good at wasting taxpayers money too) but it is not impossible that we may see very little optimistic animal spirits and schumpeterian creators for a long time.

    I think this is unlikely. Someone pointed out to me that Japan got into a protracted situation of economic stagnation partly out of political choice. People saw what needed to be done to have a dynamic economy, and they just didn’t like the trade-offs.

    But both the US and China are different, and the people in charge know it. It is unconceivable to me that the public in the US or China would tolerate extended diminished economic growth or cuts in standards of living. People just will not stand for it.

    If the current set of leaders don’t show any progress in a year or two, there will be a massive uprising to replace them with new leaders.

  • Posted by Twofish

    bsetser: b) China generated negative reserve growth in december by flirting with an rmb devaluation, which then led it to have to use its reserves to support its currency in the face of large outflows for the first time.

    I suspect that Geithner’s remarks on currency manipulation were mostly a shot across the bow, removing sustained devaluation from the list of Chinese policy alternatives. If China continues to peg at current rates and if trade deficits keep falling then I don’t think that there will be issues with currency.

    On the other hand if there is a sustained drop in the RMB, then at that point we are in a new situation. Personally, I seriously doubt that China is going to drop the RMB, because I can’t see any way that China benefits from that. If you do see a major devaluation in the RMB, then you will see the US react by increasing tariffs.

    I think that we may be back to 1998, when everyone *wanted* the PRC to peg to the dollar.

  • Posted by Rien Huizer

    Twofish,

    1. stockmarkets are a common leading indicator. All kinds of things may be wrong with financial markets but for the purposes of my argument (of where to look for a bottom), it may be a good idea to see when some asset markets (as proxy for wealth in a recession that seems to display severe wealth effect problems). It is far from scientific, but, OK that is not the purpose of bloging.
    2. Re Japan: what I meant includes political elements of course. And I hope you’re right about the intolerance for not-hardship-defeating leaders in the US and China. But kep in mind the public response to that type of leaders in Germany and Japan in the 1930s…
    3. Re US recession fighting measures: I guess that there is ood chance that by helping US consumers, the US gvt will get the unintended consequence of helping Chinese producers…If China helped Chinese consumers, would that help US producers??

  • Posted by locococo

    It s getting harder to balance the yield curve (refinancing at ridiculous rates) vs. the price of gold as assets classes risk reassessment and the resulting (asset class) re-shuffle is going on.

    It` s a race to beat the markets to issue before the above procedure blows some of the fog away.

  • Posted by Mari

    Bsteser: “Emerging economies who thought that they had protected themselves from sudden swings in capital flows by maintaining large reserves and running large external surpluses are discovering that their efforts to reduce their exposure to volatile global capital flows added to their exposure to a global slump in trade”.

    Great Synopsis of current EM problems…

    97-98 currency crisis = reserve accumulation result
    08-09 economic slowdown =????

    What’s next? – As a reader of this blog, I know you wish for them not subsidize the rich countries by “managing” exchange rates…but did you think the reserve accumulation answer when they went into 97-98 crisis? if so, whats their next move? if not – what else?

  • Posted by locococo

    Hey! Don t look there! There s trouble, see. See this chart. And this one. Trouble I say. As in r o u b l e with a t infront.

    It s here sir. Here we are. No problems here, see. Hell we invented this. Ok now Here you go sir, your truckload of our nice sounding words. It s all safely registerred, don t you worry a bit. It s Electronic. Just as seen in the commercial / presented by our new set of carefully handpicked – all Keynesian – trustlooking models. Now, hand over the money. All there, good. Do you want more sir? No? Sure? Ok, then, but …

    …you ll be back.
    Trust me 

    (American International Group Inc., the insurer saved from collapse by government money after losses on credit-default swaps, offered about $450 million in retention pay to employees of the unit that sold the derivatives)

  • Posted by phaedrus

    Well the new IMF projections are out and emerging economies still expected to grow vis a vis a contraction in the developed economies

    http://www.imf.org/external/pubs/ft/weo/2009/update/01/index.htm

    “• Advanced economies will experience their sharpest contraction in the post-war period, the Update said. The IMF expects real activity to contract by around 1½ percent in the United States, 2 percent in the euro area, and 2½ percent in Japan.

    • Though more resilient than in previous global downturns, emerging and developing economies will also suffer serious setbacks. For example, growth is expected to slow to 6¾ percent in China and 5 percent in India.

    • Global growth is projected to rebound in 2010 to 3.0 percent after falling sharply to just 0.5 percent in 2009, when measured in terms of purchasing power parity. The 2009 world growth forecast has been revised downward by 1.7 percent compared with the last IMF projection last November.”

  • Posted by Simon

    The similarities between what is happening now in the West and what has happened to some emerging economies in the past are striking.

    Similar crises brought about by the same protagonists within the same framework. Similar except that this time it’s global.

    Greed, incompetence, a passive or ignorant electorate or no real electorate, have allowed the princes of capitalism and their cohorts to bring death, starvation and misery, to the world this time.

  • Posted by Gears Manufacturers

    Thanks…well informed!!

  • Posted by London Mortgage Advisors

    The world still thrives on economic growth, and until this changes, conflict over such matters will continue.

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