James Saft

UK austerity vs U.S. muddle

Jan 27, 2011 19:39 UTC

The trans-Atlantic economic contrast is shaping up as pitting British austerity against, not U.S. investment, but a do-little American muddle.

President Obama’s State of the Union Address offered him the opportunity to hold up a beacon of policy that invests for the future while taking credible steps to control future deficits.

Speaking not long after Britain, in the process of making severe cuts in spending, reported a shrinking economy in the fourth quarter of 2010, Obama instead delivered a vague mix of un-costed investments and symbolic cuts in discretionary spending.

This of course is not entirely the U.S. administration’s fault; it must work with an austerity-happy Republican party that controls the House of Representatives and in service to an electorate which appears to have lost faith in the ability of its leaders to invest wisely. That virtually ensures a muddle in which serious cuts will be elusive and investments watery.

In contrast, even a delicate coalition like the one in power in Britain can ram through Parliament a full-bodied program of spending cuts and tax hikes.

A State of the Union the markets will like

Jan 26, 2011 03:13 UTC

This is probably a State of the Union the markets will like. That might not necessarily be such a good thing.

The markets will like that it is vague, that it is unobjectionable, that it makes a feint at diminishing the deficit without really cutting hard enough to hurt economic growth, and that it makes the right kinds of noises about corporate taxation.

In short, it does very little to upset the current dispensation; that the Federal Reserve is kicking asset markets uphill and that this is a “good thing.” In fact, in the speech President Obama cites the roaring of the stock market as his first piece of evidence of the economic recovery, and by extension of his competence as an economic manager. This is a grave mistake, just as would have been citing the booming housing prices in 2006 as evidence of a strong economy then.

Good-bye credit crunch, Hello slog

Jan 25, 2011 14:04 UTC

If you have forgotten the credit crunch it appears you have company: U.S. banks are lending again.

Bank earnings reports and data from the Federal Reserve confirm that, at long last, banks are beginning to step up lending, a much-needed ingredient for a stronger and more sustainable recovery.

The good news is that lending is growing to commercial and industrial companies — exactly where you want to see growth if the U.S. is going to address its unsustainable dependence on domestic consumption. That’s good so far as it goes, but with a fragile euro and an undervalued yuan the upside is decidedly limited.

The great 20-year-long elderly trade

Jan 20, 2011 13:16 UTC

The great trade of the next 20 years may be out of the things that the old sell — houses, stocks and bonds — and into what they continue to consume: food, energy and medical care.

An aging consumer is the enemy of asset prices because she sells down the things she has laid up over a lifetime of working in order to fund her retirement. That includes housing, as older people downsize either to profit or to save money, and also financial assets, which the elderly “eat” to finance ongoing consumption.

One school of thought has had it that the U.S. will do relatively well compared to the rest of an aging world. While the Japanese working age population is already shrinking and China’s will peak sometime in the next decade, the U.S. is forecast by the United Nations to enjoy a steady increase over the next 40 years.

Fed hits its 3rd mandate: rising shares

Jan 18, 2011 15:29 UTC

James Saft is a Reuters columnist. The opinions expressed are his own.

Apparently not satisfied with being unable to fulfill its dual target of price stability and maximum employment the Federal Reserve has set itself a third mandate: higher asset prices.

Speaking on CNBC at a Federal Deposit Insurance Corporation-sponsored forum on small business lending last week, Fed Chairman Ben Bernanke was asked how, in essence, his $600 billion quantitative easing programme could be called a success when interest rates and commodity prices had actually risen in response.

“We see the economy strengthening, its gotten better over the last three or four months, a 3-4 percent growth number for 2011 seems reasonable,” he said.

Much depends on, gulp, German consumer

Jan 13, 2011 13:10 UTC

If the euro is going to survive without a Depression, German consumers are going to have to behave in ways that are, well, distinctly un-German.

While attention is focused on the suffering that the euro zone debt debacle is inflicting on the weak and the political anger the costs of bailouts are engendering among the strong, it is important to understand that the belt-tightening won’t just be a Gaelic and Mediterranean phenomenon.

German consumers will (rightly) regard events as likely to increase their taxes while doing precious little for their incomes and job prospects. If they react to this like Americans and spend like there is no tomorrow, well then, perhaps the euro zone can handle the local recessions in the Austerity Provinces. If, on the other hand, Germans behave anything like the way they have in the past, they will save more and only increase spending marginally, if at all.

Ailing Belgium could be game changer

Jan 11, 2011 16:04 UTC

James Saft is a Reuters columnist. The opinions expressed are his own.

Just when it looked like Spain would force the euro zone to get serious about destroying its crippling debts, here comes plucky Belgium, hobbling its way to history.

While some are focusing on whether Portugal will take a bailout (hint: they will) and how to extinguish the burning firewall around Spain,  markets are steadily losing confidence in Belgium, which is big enough, ugly enough and heart-and-soul-of-Europe enough to change the game, potentially forcing sovereign defaults and bank recapitalization.

Investors imposed an all-time-high risk premium on Belgian bonds relative to German ones on Monday amid political chaos. Belgium’s parties have for the past 212 days been unable to agree a government, forcing King Albert II to step in and ask for a cost-cutting budget for 2011. Gross government debt is very high, hovering around 100 percent of GDP, leaving Belgium very vulnerable to a loss of market confidence.

Housing means QE is here to stay

Jan 6, 2011 17:45 UTC

James Saft is a Reuters columnist. The opinions expressed are his own.

A very poor outlook for housing will hold the U.S. economy back in coming months, making it very unlikely that the Federal Reserve will be able to step back from their emergency room monetary measures.

A genuinely encouraging run of data and very strong asset markets has encouraged some to argue that the Fed’s policy will prove to have been too much for too long, but housing stands out as the one asset market that has failed to respond encouragingly to the adrenaline of quantitative easing.

The Fed acknowledged this in the minutes of their December monetary policy meeting, listing a litany of factors holding housing back and stating:

The rise and rise of capital controls

Jan 4, 2011 15:37 UTC

James Saft is a Reuters columnist. The opinions expressed are his own.

Look for a flood of new capital controls in 2011 as emerging market states seek a measure of protection against the easy money being generated by the United States, Europe and Japan.

In the short term this raises the chances of trade and currency conflicts, and may prove to be a button that was better left unpressed.

A laundry list of emerging market countries — including Indonesia, Thailand, Brazil and Korea — have already begun imposing capital controls, limits on who can take money in or out of their countries, under what circumstances and at what costs.