MacroScope

The global economic crisis has prompted  a number of economists to argue that the world will from now on experience lower trend growth, that is, roughly, that normal growth will be lower. The argument is that the current crisis is structural, not cyclical.

UBS is the latest to latch on to this view. In a client note, the bank’s economists say they have revised their 10-year average global real growth estimates to 3.4 percent from 3.8 percent. They have done the same for most of the big economies. The U.S. economy is now seen averaging 2.3 percent versus about 2.8 percent; China goes to 7.5 percent from 8.0 percent.

Does this matter? In at least one area it does — calculating the needed yield for U.S. Treasuries to be attractive over stocks. The lower the growth rate the lower the needed yield.

Alan Brown, who as chief investment officer of fund firm Schroders steers around $161 billion in worldwide assets, reckons U.S. trend growth is now 2.5 percent. With that 2.5 percent and other factors such as moderate inflation, he calculates that long-term U.S. Treasury yields should be heading towards 6 percent. Today’s yield is 2.8 percent, meaning trouble waiting to happen.

A lower trend growth rate such as UBS estimates would lower that long-term yield. But not that much.  Even at 5.8 percent (if UBS is right) U.S. paper could be in for what Brown reckons is a “painful” retreat, could it not?.

U.S. Representative Barney Frank is rarely shy about expressing his opinions. Just yesterday he said it may be time to fire some people at AIG. Now he’s accusing China of bluffing after Premier Wen Jiabao expressed “some worries” about the value of U.S. bond holdings.

Here’s what Frank, the chairman of the House Financial Services Committee, had to say:

“We do want foreign capital to come in here and we want private capital. We just had the Chinese raising the specter of not buying our Treasuries. Well, that would be troubling. I think they’re bluffing, personally.”

Emerging market ministers, particularly those from the BRIC economies — Brazil, Russia, India and China — are painting this weekend’s G20 meeting as a victory in dragging them out of the shadows of global policy-making.

The finance ministers’ statement included the promise of more money for the International Monetary Fund and regional development banks, on whom struggling emerging economies rely for support.

It accelerated a review of IMF quotas by two years to 2011, which should give emerging economies more say in the running of the multilateral lender. It also suggested that the headship of IFIs — international financial institutions — would no longer be guaranteed to Americans or Europeans. 

Goldman Sachs has long been a keen advocate of the BRICs — Brazil, Russia, India and China – as a new power tool for world growth. Indeed, it is credited with coining the phrase.

In a note, the firm says that even though the group is being hit differently by the global slowdown — Russia suffering most,  India least — a uniform drive from the four will return as soon as the cycle starts to turn.

It is predicting big things as early as next year.  It says China’s economy is already the third largest in the world and it sees it eclipsing current No. 2  Japan as early as 2010. Furthermore, as a group, the four countries are set to be dominant.

Trade protectionism – or at least the threat of it — has raised it head as the global economy has declined, bringing with it all the historical fears about the Great Depression. Consider the flurry of concern about a “Buy American” clause in one of the U.S. stimulus bills.

It is traditionally assumed that widespread protectionism would most hurt the biggest economies, the United States and Japan. But Barclays Capital analyst David Woo says this is not so and that Russia, Canada, Australia and Sweden are the most vulnerable.

Woo studied various factors that would play on the effect of protectionism on a country, from openness and flexibility to its dependence on trade and it savings.

Good session on the "Frugal American," an as yet undiscovered species that is coming to a global economy near you.

You know the general idea, a decade or so of living beyond their means, borrowing money against their rising house values to finance consumption is coming to a grinding halt. That's called a recession, but how long will this frugal thing last?

Ian Davis, the MD from consultants McKinsey & Co was blunt:

"Americans have no option but to be relatively more frugal over the next 10-20 years." This is irrespective of the crisis and is a structural issue due to overspending in the past and the huge host of baby boomers who are now moving into what they fondly hope will be their retirement years. Old people buy fewer ipods and ski boots apparently, and are less likely to remodel their kitchens and bathrooms. That is a problem for the global economy.

America caught a cold and now China has one too. 

IMF chief Dominique Strauss-Kahn said on Monday that the Fund could cut its forecast for China's economic growth in 2009 to around  5 percent. To think that only last year China was galloping at a double-digit clip. It's staggering, and it's worrying.

Worrying, for one thing, because  - as the Heritage Foundation's Derek Scissors puts it - "the American economic slump is running into the Chinese economic slump, creating the conditions for a face-off between Beijing and the U.S. Congress, possibly leading to destabilization of the world's most important bilateral economic relationship". 

He argues that the new U.S. administration, confronted with a record-breaking bilateral deficit and soaring unemployment, could impose prohibitive tariffs or erect other barriers to Chinese goods. The EU, Japan and others would then be permitted by WTO rules to raise barriers against a diversion of Chinese goods to protect their markets, and "some form of Chinese retaliation is certain".

It's not often that economists turn their attention to military hardware, but Deutsche Bank has done just that in its latest world outlook. The subject is aircraft carriers and what it sees as the strange desire among a number of countries to build them.

Russia has suggested it may build up to six carriers, DB notes, while China plans one and Britain and France three between them. Like the true economists they are, DB first questions the need, saying such boats are vulnerable, make no sense for coastal defence and are for projecting offensive power over long distances. Then comes the cost:
  

"To build a serious aircraft carrier costs well above $5 billion. But then you need to build half a dozen escort vessels and the aircraft to produce a battle unit that will require upwards of 10,000 sailors. Since it is for distant power projection, to keep a single aircraft carrier group on constant deployment requires at least two and more likely three groups."