Opinion

Anatole Kaletsky

The global return to pre-crisis growth strategies

Anatole Kaletsky
Jul 25, 2013 15:24 UTC

Margaret Thatcher used to say that “There is no alternative” to whatever policy she believed in. But there is always an alternative to banging your head against a brick wall — you can stop banging your head against a brick wall. The G20 Finance Ministers’ meeting in Moscow last weekend may have marked such a moment of revelation, when governments around the world gave up on fiscal and financial austerity, and recognized that growth based on consumption, borrowing and rising house prices is better than no growth at all.

It is now nearly five years since the Lehman crisis and throughout this period politicians and economists have been obsessed with avoiding the mistakes that supposedly produced the crisis. They have been trying to reduce debts, both in the public and the private sectors; to make their banks behave more cautiously; and to “rebalance their economies” away from their over-dependence on consumption, services and finance in favor of supposedly more sustainable economic activities such as saving, exporting and manufacturing. The virtues of saving, exporting and manufacturing are so much taken for granted these days that it is easy to forget the novelty and implausibility of the rebalancing concept.

Until 2007 conventional wisdom among economists was that manufacturing nations like Germany and Japan should restructure their economies to resemble the U.S. and Britain. It was only after the Lehman debacle that economic fashion shifted decisively against Anglo-Saxon “bubble” economies, based on debt-fueled consumption, property speculation, financial engineering and other frivolous service activities like coffee shops and computer games. Instead every nation has tried to emulate the solid virtues of the Germanic economic model, powered by exports, investment and manufacturing. Angela Merkel’s slogan that “you cannot cure debt with debt” has become an international motto, despite the fact that central banks were printing money like there was no tomorrow, and governments have committed themselves to deleveraging by homeowners, banks and the public sector, all at the same time.

In the past few months, the pendulum of economic fashion has started swinging back from austerity and towards credit-fueled consumption growth. The G20 communique made this plain, stating that growth is now a higher priority than debt reduction in every major nation.

More important than mere words and phrases have been the actions of governments around the world. One country after another has accepted the U.S. injunction to stop relying on exports for recovery and instead to promote domestic consumption growth, if necessary financed by debt. In Japan, we have seen the launch of Abenomics, with its enormous spending programs and monetary expansion. In Britain, the government started deliberately inflating a housing bubble in its last budget by creating a subprime mortgage market backed by unprecedented government guarantees — and the results have already become apparent in an upsurge of house prices and consumer confidence.

The new long-term bull market ahead

Anatole Kaletsky
Jul 18, 2013 15:06 UTC

The bull market in global equities that started in the dark days of early 2009 passed a historic milestone this week. When the Standard & Poor’s 500 Index closed on Monday at 1682.5, this did not just represent a new record high and a full recovery from the swoon that Wall Street suffered after Ben Bernanke’s “tapering” comments in late May. More importantly, Monday’s record close marked the first time this key Wall Street index exceeded by more than 10 percent its peak at the climax of the last great bull market in March 2000.

Why is this important? Because a breakout this large from a trading range that has confined the stock market’s movements for many years is historically a rare event. In fact, there have only been three occasions in the past 100 years when prices have risen 10 percent above previous long-term peaks (which I define as peaks that have remained unbroken for at least five years). Each of these major breaks —  in July 1925, December 1954 and October 1980 — has confirmed a structural bull market and been followed by very large gains for long-term equity investors: 189 percent from 1925 to 1929, 245 percent from 1954 to 1973 and more than 1,000 percent from 1981 to 2000. Of course, past performance is not necessarily a guide to future results and three events are insufficient to draw statistically reliable conclusions. Nevertheless, the shattering of Wall Street records this week seems significant in several ways.

The S&P 500 is by far the most important stock market index and tends to set the direction for all other markets around the world — and history reveals that large breakthroughs, like the one that occurred this week, are very different from marginal new highs, which have been much more common and have often given false signals. There have been dozens of cases where long-standing records were broken by 2 or 3 percent and several of these were followed by large losses instead of further gains. This happened most recently in 2007, when the S&P 500 squeaked through to a new high just 2.5 percent above the 2000 record and then promptly collapsed during the Lehman crisis.  By contrast, large breakouts of 10 percent or more have consistently produced large gains.

Were Bernanke’s comments a fire drill or a false alarm?

Anatole Kaletsky
Jul 11, 2013 14:14 UTC

Whenever Alan Greenspan was praised for delivering a clear message on U.S. monetary policy, he liked to reply something along the lines of: “If you think that, you have misunderstood what I said.” Ben Bernanke prefers the opposite approach. On May 22, he triggered one of biggest financial panics since 2008 by raising the possibility of reducing the Fed’s record-breaking monetary stimulus, while admitting that he had no idea when to start this process. He spent the subsequent six weeks trying to clear up the mess that he had created by explaining in painstaking detail the precise timing and conditions under which “tapering” might or might not take place. In the process he created even greater confusion and financial volatility. It now appears that he would have done much better for the world economy — and for his own reputation — by saving his breath and imitating Greenspan’s obfuscation.

The Fed minutes published on Wednesday revealed so many divergent opinions on the conditions, timing and even direction of any change in monetary policy, that all the recent speeches and press conferences on tapering could reasonably be described as white noise. Which raises the question of why investors reacted so strongly to all this confusion. Recent market behavior around the world suggests an explanation: while Fed tapering was not in itself a very important issue, Bernanke’s comments acted as a financial alarm bell, drawing attention to risks in the world economy that were forgotten or ignored. When we hear a fire alarm we naturally ask ourselves three questions: Is it a false alarm? Is it a fire drill? Or is it a real fire — and if so, where?

Similar questions may shed some light on the tapering scare. For the U.S. stock market, Bernanke’s May comments were clearly a false alarm, since the Fed was nowhere near a decision to tighten monetary policy, as we now know officially from the minutes. It is not surprising, therefore, that U.S. equity prices have rebounded to their pre-Bernanke record highs. But looking beyond the U.S. stock market, tapering speculation seems more like a fire drill than a false alarm.

Who will get credit for Britain’s economic turnaround?

Anatole Kaletsky
Jul 5, 2013 17:38 UTC

Mark Carney, the former head of the Bank of Canada who has just taken over as governor of the Bank of England, presided Thursday over his first monthly meeting of Britain’s Monetary Policy Committee (MPC). The meeting produced no change in monetary policy, yet Carney is already being hailed as Britain’s economic savior. The BBC even paid him the greatest compliment that any middle-aged white male could wish for, when it compared his appearance and hairstyle to George Clooney’s. Carney may continue basking in this adulation because he is lucky enough to be in the right place at the right time.

He has arrived at the BoE at the precise moment when the economic figures have started to suggest that the British economy is pulling out of its longest and deepest recession on record. One of the main reasons for this turnaround has been a sudden pickup in housing prices and mortgage lending, the traditional driving forces of the British economy. This improvement, in turn, has reflected a bold new government-backed borrowing program, whereby the British Treasury is guaranteeing up to £600,000 of new mortgage debt for anyone who can put up 5 percent of equity into buying a home. While this audacious policy attracted surprisingly little attention in the media when George Osborne announced it in his March budget, British homeowners and bankers were quick to catch on. As a result, house prices are rising rapidly across Britain, mortgage lending has rebounded to its highest level since the Lehman crisis and homebuilders’ shares have almost doubled. And all this is before the government incentives are expanded from newly-built houses to secondhand properties and remortgages in January 2014. For the moment, house prices are being bid up by cash-rich buyers who are front-running the government subsidies, in the confident expectation that a full-scale property boom will begin in 2014.

Given the powerful response to the government’s mortgage subsidies, the additional quantitative easing that was widely expected from Mark Carney’s “monetary activism” may no longer be required. It may be enough for the BoE to provide commercial banks with liquidity to finance the government’s planned credit expansion and to keep short-term rates near zero. Instead of trying to persuade the hawks on the MPC who repeatedly thwarted his predecessor Mervyn King’s requests for more QE, Carney may succeed in reviving the British economy simply by making a few speeches — the “forward guidance” he used in Canada to convince investors that interest rates would stay near zero for several years ahead.

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