Monthly Archives: August 2010

The exceptionally strong German GDP figures for 2010 Q2 have triggered a lot of commentary on whether Germany has coped better with the recent recession than other countries, especially the US. 

The much awaited speech by Ben Bernanke at Jackson Hole was largely a holding operation. He did not deviate much, if at all, from the tone of the statement issued after the August meeting of the FOMC, which is understandable given that his policy committee contains several members who do not want the Fed chairman to offer any strong hints about further policy easing at this stage.  

Ben Bernanke’s speech at Jackson Hole on Friday will reportedly discuss the pros and cons of further monetary easing in the US. This debate has suddenly taken on a new sense of urgency, because the weakening in US economic data seems to have accelerated quite markedly during August.  

I am becoming increasingly concerned about the extent of the slowdown which is now underway in the US economy, a trend which has not yet been fully recognised by the Federal Reserve. 

The battle to avoid deflation in the developed world could prove to be a long one, with twists and turns which could last for many years. In July, the core CPI data in the eurozone were somewhat firmer than expected, as were the core PPI data in the US. This has led some economists to suggest that underlying price pressures are beginning to rise again, and that the deflation scare is over. Would that that were true. Some interesting new evidence from the IMF suggests that while outright deflation might be avoided, at least for a time, the developed economies could soon get stuck in a kind of limbo land, with inflation remaining unhealthily close to zero for a very long period. 

Weird, wild, wonderful – that is how the official US PGA website describes the end of the fourth major golf championship of the year, won by the German Martin Kaymer on Sunday. Kaymer was impeccable, in his play and his behaviour, in winning one of the most remarkable championships in golf history. But what everyone will remember will be a decision by the rules officials which prevented American Dustin Johnson from qualifying for a play-off for the title with Kaymer and fellow American Bubba Watson. Johnson took the decision like the true sportsman he is, but most American golf fans believe he was robbed of his tilt at the title. They are wrong. The rules were clear, and were correctly applied. Once again, golf has taught us more about how to live our lives than just about how to play a daft game in a field. 

If the eurozone were a genuine single economy, like the US, then the buoyant second quarter GDP figures, published today, would be a cause for unbridled celebrations. The increase of 1.0 per cent in GDP in Q2 was nearly double the growth rate in the US and, if maintained, it would be more than enough to bring down the unemployment rate in Europe. Yet much of the market reaction has focused not on the fact that the eurozone as a whole enjoyed a fantastic quarter, but on the widening gaps which are developing between the healthy German economy and the ailing economies on the periphery of the bloc, and which leave the troubles of the euro far from resolved. 

The shift in market prices since the Fed meeting on Tuesday has been very minor in the great scheme of things, but it has obviously got some people worried that it is the start of a much bigger move in the coming weeks.  

The Fed decision announced last night seems to have disappointed markets, yet it will surely come to be seen as a clear win for the doves. Prior to yesterday, the default option at the Fed was to allow the size of its balance sheet to decline whenever its holdings of mortgage debt matured. Although this would not have led to much shrinkage of the balance sheet in the near future, it signalled that the Fed was looking for opportunities to reverse its policy of unconventional easing. That bias has now been removed, though not yet reversed. 

Edmund Phelps wrote an op ed piece in the New York Times on August 6 arguing that much of the recent rise in US unemployment (and, by implication, global unemployment) has been structural in nature, and therefore will not be amenable to correction simply by boosting aggregate demand. I predict that we are going to hear a lot more about structural unemployment in the near future, and the work of Phelps (who won the Nobel Prize in 2006 for his lifelong dedication to employment and innovation theory) is a good place to start. Basically, he says that we will only get unemployment back down to pre-recession levels if we think much more radically about supply-side labour market solutions than we have done to date.