Monday's Often a Day of Rest and Reflection
September 21, 2009
Monday tends to be the calendar day of the week with the fewest released economic indicators by the United States or other advanced economies. This week fits that norm, especially with Japan observing the first of three straight working day holidays.
One place to look for guidance on such Mondays is the marketplace, and Asia and Europe saw a spasm today of heightened risk aversion manifested in lower prices for stocks and commodities and a firmer dollar. These were the trends when the recession was most severe but had occurred sparingly more recently. While Sunday is a traditional day of rest, Monday often takes that role when little economic news arrives via released data or other major events. On such days, too, the written press assumes greater-than-usual influence both in highlighting major themes and in critiquing current events. At this cusp between two astronomical seasons, there are many themes from which to choose.
A Colossal Boo-Boo by Obama on Trade has been made. After former President Carter’s accusations, some might accuse The Economist cover of propagating more racial stereotyping, but the depicted metaphor seems appropriate. A cartoon shows President Obama, an African-American, walking away, back-turned, after plunging a U.S. flag-draped screwdriver into a flattened tire marked free trade, and the caption is Vandalism. A single act of vandalism is not serious crime, being inflicted against property, not people. The value of a tire is trivial next to the value of a whole vehicle, and it can be easily repaired leaving the vehicle as good as new. The cartoon refers to the 35% tariff imposed on Chinese tire imports, which reflect a very small slice of the Sino-American commercial relationship, let alone the whole U.S. or global trade picture. In size, the levy is not in the same league as the infamous Smoot-Hawley Tariff Act of June 1930 and indeed smaller than unilateral trade barriers imposed by other postwar U.S. presidents. In the cartoon, Obama is not at all dressed like a street punk but rather attired in a dark blue suit, signifying that he ought to have known better than to take a cheap shot at free trade in a fragile context.
- Obama campaigned against free trade. That’s not unusual for the Democratic Party leader, where union members are a core constituency and key source of campaign funding. But campaigning is one thing, governance is wholly different and requires representing the nation’s best interest.
- Trade flows were clobbered even more sharply in the Great Recession than the equivalent stage of the Great Depression. No cheap shot at free trade after such a horrific contraction of trade can be considered an inconsequential gamble. This was a very irresponsible decision.
- Unilateral trade barriers undermine the goal of restoring the confidence of other governments in American leadership and judgement. In a page two article of today’s Financial Times, the EU Trade Commissioner, Baroness Ashton, expresses concern that the Obama administration is too preoccupied with legislating health care reform to get solidly behind the effort to complete unfinished multilateral trade talks. Fact is that Obama has not promoted bilateral trade talks with any enthusiasm, either, and without a big effort from Washington, the cause of trade liberalization will flounder.
- Obama acted just before the third summit of G-20 leaders, which the United States is hosting. The tariffs are an unnecessary and needless provocation that defies the accord of G-20 finance ministers to promote free trade and not to undertake actions that spur one’s own growth at the expense of somebody else.
- The political problem in America is that government leaders are more extreme than the general population. The field of politics attracts social action zealots from the Far Left and Far Right. A litmus test of good governance in America is the approval ratings of centrists, because that gauges the president’s willingness to contain the extremes of his own party as well as in the opposition party. Bush43 flunked the test. Obama will do the same if he continues to playing a game of chicken with U.S. trade partners.
- David Rockefeller, the sole surviving grandson of John D. Rockefeller, and a former chairman of Chase Manhattan Bank, has an Op-Ed piece in today’s New York Times, which speaks from the perspective of somebody who personally lived through the depression and urges today’s U.S. political leaders not to repeat the same trade policy mistakes.
The United States has a chronic trade deficit that must be reduced for the sustained health of the world economy. A U.S. turn toward protectionism would impede that effort and, in my opinion, become a long-term negative factor for the dollar.
A second theme is the incredible stock market rebound since early March, which increasingly looks too good to be true. The lead story in Section C of the Wall Street Journal delves into this issue in depth, noting parallels to sharp, short-lived, and reversible rallies in the 1930’s and 1970’s. Very few economists look for trend- or above-trend growth in 2010 or 2011. Profits, to be sure, outpaced GDP expansion in the 1982-00 bull run, which is a reason for thinking there’s little scope for that disparity to persist. If sub-trend GDP growth continues, a continuing bull market would be hard to justify. Two other factors that could weigh on the performance of stocks are 1) the aforementioned greater U.S. predisposition toward trade protectionism and 2) the risk of accelerating inflation in the future as a result of expansionary monetary and fiscal policies. Higher gold and oil prices amid much slack in the world economy suggest that even though measures of expected near-term inflation are now contained, investors are hedging their long-term inflation bets. The main factor behind the oversized recovery of the market seems to be the extraordinarily low interest returns on other stores of financial wealth. That force only works in an environment of receding risk aversion. One of the more unusual elements of recent financial market activity is that bonds and stocks have rallied together instead of moving inversely, and such suggests that markets may not be experiencing a phase that will endure long.
Waiting for the result of a meeting is a third theme of this week. There are two big meetings, the FOMC on Wednesday and the G-20 summit on Thursday and Friday. A preview article of sorts in the WSJ notes that while the central bank policymakers do not appear ready to reverse policy yet, an internal debate has begun over what to say about the exit strategy particularly with respect to how quickly policy might change after the process begins. I would be surprised to see anything specific from the Fed about the possible speed of rate increases. How can officials address such without seeing how markets react? The process to some extent has to be interactive. As for the G-20 summit, one senses that markets will not be reassured by a repetition of what was said when G-20 leaders met in London in April. The promise of cohesion and aggressive action was sufficient when the sky seemed to be falling back then. The trickier issues of an exit strategy and its coordination will need to look credible. Further U.S. comments on trade policy could produce a volatile reaction.
Another theme concerns the recent election in Japan and the one in Germany next weekend. Based on comments from analysts and market chatter, opinions about the DPJ government in Japan seem to be fluid and indeed all over the map. For currency markets, yen policy holds particular interest.&n
bsp; One headline today was a forecast by an investment bank that the yen is likely to retreat back much closer to 100/$ before yearend. The composition of the next German government remains in considerable doubt, and the growing popularity of Far Left and Far Right parties at the expense of the major ones is disturbing. In 2005, the center-right CDU did worse than expected, and shifting opinion polls suggest that it may fail to secure the unqualified victory that Chancellor Merkel needs to implement further needed structural reforms.
Finally, I return to the popularity of President Obama, against who criticism isn’t just coming from the Republicans. The Wall Street Journal rarely lets a day go by without slamming some aspect of administration policy and Obama in particular. But today, Paul Krugman in his New York Times column calls Obama’s unwillingness to initiate concret action in the area of banker compensation bad politics as well as bad economics and casts this issue in the broader context of a pattern of stepping back from any stand that appears “populist.” As noted in this blog before, currencies act as a barometer of general perceptions about political leadership, not merely of a nation’s relative economic performance. When governments are courageous, currencies tend to perform well, and vice versa.
Copyright Larry Greenberg 2009. All rights reserved. No secondary distribution without express permission.
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