Opinion

Anatole Kaletsky

Is the current market optimism justified?

Anatole Kaletsky
Jan 31, 2013 18:39 UTC

The U.S. economy has just suffered its first contraction since 2009, consumer confidence has plunged since November’s election and Americans’ paychecks are only just starting to reflect an increase in payroll taxes averaging $70 per month. Across the Atlantic, the euro zone and Britain seem to be sinking back into recession. And conditions in Japan have become so desperate that newly elected prime minister Shinzo Abe is openly devaluing the currency and threatening to take direct control of the central bank.

At the same time, stock markets around the world are approaching or exceeding records. Money is flowing into equity mutual funds at the fastest rate since the end of the last bull market in 2000. And business sentiment, as reported from Davos, seems to be more optimistic than at any time since the global financial crisis of 2008.

Is there a rational way to explain these contradictions? Will the business and market optimism be sustainable? Or is this sudden euphoria just another financial bubble, sure to be punctured if the grim message from recent economic indicators sinks in? The likely answer to all these questions is yes.

Let us begin with the last question, on recent economic figures. If these grim statistics – especially Wednesday’s unexpected report of a 0.1 percent decline in U.S. gross domestic product in the fourth quarter – give an accurate picture of global economic conditions, then financial markets and optimistic business leaders are headed for a fall. The markets and executives, however, are betting they understand conditions better than the statisticians, or, to be more precise, that the weakness implied by the figures is an aberration that lays the foundation for a strong economic rebound in the months ahead.

Regarding the much-worse-than-expected U.S. GDP statistics, this contrarian view is almost certainly right. The figures were severely distorted not only by superstorm Sandy but also by huge cutbacks in government spending, especially on defense equipment, that were probably related to November’s election and precautionary moves ahead of the yearend “fiscal cliff.”

Cooperation isn’t coming to Washington – it’s already arrived

Anatole Kaletsky
Jan 23, 2013 23:50 UTC

The House of Representatives decision to suspend the U.S. Treasury debt limit is the most important political event in America since President Barack Obama was first elected in 2008.  As anticipated in this column immediately after the 2012 election, Washington seems to have broken its addiction to deadly games of economic chicken. That, in turn, should mean an orderly resolution of all U.S. fiscal problems and perhaps even an outbreak of bipartisan political cooperation, at least on economic issues, of a kind not seen in Washington since the early 1990s.

None of these favorable outcomes is yet acknowledged as true in Washington or Wall Street. Political analysts and market pundits have almost unanimously described the House decision as a diversionary tactic, simply designed to shift the high-noon confrontation with Obama to a new battleground more favorable to the Republican side: the March 1 date for automatic spending cuts under the sequestration procedure, or the March 27 expiration date of current government budgets.

This cynicism will almost certainly be proved wrong. The obvious reason is that an army in full retreat, as the Republicans have been since the election and fiscal cliff fiasco, finds it hard to regroup against an enemy enjoying strong momentum. And when such a battered force does attempt a last stand, this usually results in a rout. In this case, however, there are more specific reasons for the Republicans to seek peaceful coexistence instead of the fight-to-the-death over borrowing and spending that many pundits still predict. To see why House leaders decided to unilaterally disarm their nuclear weapons — first the fiscal cliff and now the debt ceiling — one has to understand the transformation in U.S. political dynamics that occurred the moment the votes were counted on Nov. 6.

David Cameron pushes his EU luck

Anatole Kaletsky
Jan 17, 2013 17:16 UTC

Editor’s note: After this column was published, Cameron announced he would be delaying his speech in Amsterdam due to the hostage crisis in Algeria.

Some think the prospect impossible. Many think the outcome inevitable. Most think the question irrelevant.

Will Britain pull out of the European Union or fundamentally renegotiate the terms of its EU membership?

2013: When economic optimism will finally be vindicated

Anatole Kaletsky
Jan 10, 2013 17:31 UTC

Will the world economy be in better shape in 2013 than 2012? The Economist asked me to debate this question with Mohamed El-Erian, chief executive officer of PIMCO, the world’s biggest bond fund. El-Erian is the author of When Markets Collide, a brilliant book that coined the term “New Normal” to describe the world’s inevitable descent into a Japanese-style era of stagnation after the 2008 financial crisis. I was delighted by the invitation because I wrote a book at about the same time, taking a very different view of the crisis – and many of my predictions finally look like they will be realized in 2013.

In Capitalism 4.0, I argued that the crisis would create a new model of global capitalism, one based neither on the blind faith in market forces that followed the Great Inflation of the 1970s nor on the excessive government intervention inspired by the Great Depression of the 1930s. While this new species of capitalism would doubtless go through a painful period of evolution, its character would be fundamentally optimistic because it would be driven by four historic transformations. Those transformations helped trigger the 2008 crisis, but their roots are in the demolition of the Berlin Wall in 1989.

First, the end of the initial wave of communism created a world that was unified under a single property-based economic system. Second, the opening of China and India added 3 billion producers and consumers to global markets. Third, the revolution in information technology made globalization possible by slashing communications and logistics costs. Fourth, the worldwide adoption of pure paper money ‑ money not backed by gold, silver, currency pegs or any other arbitrary standards of value ‑ allowed governments to stabilize macroeconomic cycles to a previously unimaginable degree.

The fiscal cliff deal proves Congress is working

Anatole Kaletsky
Jan 2, 2013 22:42 UTC

The U.S. fiscal cliff was dodged in pretty much the way that seemed most likely after November’s election: a bipartisan deal in which pragmatic Republicans, no longer focused on ending the presidency of Barack Obama, joined moderate Democrats to prevent economic sabotage by extremists from both ends of the political spectrum. On Wall Street, the immediate reaction was euphoria. But among mainstream economists and political commentators in Washington, it was cynicism.

While stock markets around the world approached their highest levels since the 2008 financial crisis, media headlines emphasized grim forebodings: Fresh stand-off looms after US cliff deal (Financial Times); Budget deal passes, debt ceiling looms (Wall Street Journal); Deal done but threats remain (Washington Post); Bigger showdowns loom after fiscal cliff deal (Reuters); House backs tax deal as next fight looms (Bloomberg).

Investors’ initial reactions are often misguided, especially to complex political events, but this time the markets will probably be proved right, and the pundits wrong. This week’s deal marked a genuine, and most likely sustainable, breakthrough for reasons of both politics and economics.

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