Monthly Archives: September 2010

The elephant in the G20 meeting room

September 29, 2010 2:37 pm by Gavyn Davies

Martin Wolf argues in his column this morning that the world’s two superpowers are in conflict over the dollar/yuan exchange rate, and that “when such elephants fight, bystanders are likely to be trampled”. Yet in preparations for the G20 summit in Korea in November, there is no sign that any of the other participating countries – especially the Europeans – want to join the US in talking specifically about the question of yuan overvaluation. According to reports, the US is likely to be “a posse of one” on this question.

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Posted in China, Currencies, Macroeconomics, US |

Two currency blocs — same problem, different solutions

September 27, 2010 3:03 pm by Gavyn Davies

There are two massive fixed exchange rate blocs operating in the world economy today, and both of them face severe strains and conflicts. The eurozone is beset by problems which are typical of fixed rate blocs in the past, with the main surplus country (Germany) refusing to increase aggregate demand, thus forcing the deficit countries to reduce demand in order to stay within the currency arrangement. This, they appear willing to do, or at least to try.

Meanwhile, the China/US bloc also has a (nearly) fixed exchange rate, and once again the surplus country (China) is refusing, or is unable, to expand domestic demand enough to eliminate the trade imbalance. But, in this case, the deficit country (the US) is increasingly unwilling to accept the consequences, and is adopting policies which are designed to break up the bloc altogether. Two blocs with somewhat similar problems, but very different responses and outcomes for the deficit countries.

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Posted in China, Currencies, Eurozone, Germany, IMF, Macroeconomics, Monetary policy, US |

The Fed breaks a taboo on inflation

September 22, 2010 4:08 pm by Gavyn Davies

The Federal Reserve broke a taboo yesterday when it said quite baldly that inflation in the US is now below the level “consistent with its mandate”. In other words, it is too low. This is a very big statement for any central banker to make, since the greatest feather in their collective cap is that they successfully combated inflation after the 1970s debacle. Led by the Fed’s Paul Volcker, they re-asserted the importance of monetary policy, after two decades of failed wage and price controls. Since that period, most central bankers have been careful to avoid any language which even hints that a rise in inflation is acceptable to them. I can certainly find no previous record of the FOMC saying that inflation is too low, so it was a jolt to see this stated so starkly in the Fed statement yesterday.

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Posted in Macroeconomics, US |

Where the Fed leads, the rest are forced to follow

September 20, 2010 2:53 pm by Gavyn Davies

Although the US economy is no longer quite as dominant as it once was in the global economy, there is no sign that the Federal Reserve is losing its primacy among the major central banks – at least, not as far as the financial markets are concerned. In fact, the Fed is possibly even more important than it used to be, because it is now setting monetary policy not just for the US but for many other countries as well, via exchange rate links. In a world where output is generally subdued and demand is insufficient, no country wants to accept a rise in its real exchange rate. A global game of pass-the-parcel is underway, with many countries being forced to follow the Fed’s lead in monetary easing in order to prevent unwanted currency appreciation. Among other effects, this is clearly acting as a powerful support for equities and other risk assets at the moment.

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Posted in Asia, Macroeconomics, Monetary policy, US |

Is the UK’s fiscal plan contingent on economic recovery?

September 17, 2010 1:05 pm by Gavyn Davies

Mervyn King’s speech to the TUC this week reiterated his strong support for the fiscal retrenchment plan announced by the coalition government in the UK. Some people have said that it is not the role of the central bank Governor to comment on fiscal policy, which they argue should be confined to the political arena. However, the Fed Chairman and the President of the ECB frequently comment on government debt and budget deficits, so it is hard to see why Mr King should be criticised for expressing his opinion. A much more important question is what his speech tells us about the likely course of fiscal policy and its relationship with monetary policy.

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Posted in Macroeconomics, Monetary policy, UK |

China is back on a growth path

September 12, 2010 7:29 pm by Gavyn Davies

The August economic data for China were more eagerly awaited than usual, because there had been marked signs of a slow-down in the industrial sector during the spring and summer months. Coming on top of the drop in US growth, this triggered fears that both of the world’s largest two economies were slowing simultaneously. But the good news is that the August data in China were unequivocally strong, and probably stronger than has been recognised from the headline figures

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Posted in China, Macroeconomics |

The Revenue unveils its master plan

September 10, 2010 12:15 pm by Gavyn Davies

Anyone who has taken a basic course in the theory of taxation will remember that taxes should be designed so that they have a minimal effect on the behaviour of firms and households.

This rules out most taxes in the real world, since they tend to be directly and predictably related to income, expenditure or wealth, thus changing the incentives which people face when they determine their behaviour.

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Posted in Macroeconomics |

The puzzling success of trend-following investment strategies

September 8, 2010 3:24 pm by Gavyn Davies

Andrew Haldane is an economist at the Bank of England who writes some of the most interesting stuff available on the (mis)behaviour of the financial sector, and I recommend his recent speech on Patience and Finance. This argues that patience (or long-sightedness) is an economic virtue, the exercise of which should lead to faster GDP growth, higher returns to fund managers, and a sounder financial system. However, the part of his speech which I found most fascinating seemed to contradict this conclusion. This is an assessment of investment strategies which are based on momentum in asset prices, rather than long term economic fundamentals. Momentum wins the race hands down.

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Posted in Macroeconomics |

When long-term unemployment becomes structural

September 3, 2010 4:14 pm by Gavyn Davies

On payroll day, the markets usually focus on the the nitty-gritty of the monthly data, searching for lessons on the near term movement of the US economy. This is frequently a forlorn task, since the initial estimates of US employment (covering more than 130 million workers, some of whom are just assumptions in the models of the official statisticians) are so uncertain. For example, in today’s better-than-expected numbers, the revisions to the last two months’ estimates were bigger than the estimated change in employment in August. Too much focus on the short term can obscure the bigger picture, which in the end is more important for the economy and markets. One crucial aspect of this bigger picture is the relationship between unemployment, long-term unemployment and structural unemployment.

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Posted in Macroeconomics, US |

Conflicting data on the US economy

September 2, 2010 2:05 pm by Gavyn Davies

The equity markets have all enjoyed a strong bounce since the US purchasing managers’ index for August was published yesterday. Expected to decline on the month, perhaps by a sizeable amount, the PMI actually rose from 55.5 to 56.3. After a long string of weak data, this is a sufficiently large surprise to pose the question: is the US economy really slowing as much as many of us thought? Maybe I am just stubborn, but this indicator has not been enough to persuade me to change my basic view.

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Posted in Macroeconomics, US |

Gavyn Davies

on macroeconomics

About this blog About Gavyn Blog guide
A blog on macroeconomics, economic policymaking and the financial markets. Gavyn usually writes about a key topic of the week on Sunday.

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Gavyn Davies is a macroeconomist who is now chairman of Fulcrum Asset Management and co-founder of Prisma Capital Partners. He was the head of the global economics department at Goldman Sachs from 1987-2001, and was chairman of the BBC from 2001-2004.

He has also served as an economic policy adviser in No 10 Downing Street, an external adviser to the British Treasury, and as a visiting professor at the London School of Economics.

Gavyn Davies is an active investor and may have financial interests and holdings in any of the topics about which he writes. The views expressed are solely those of Mr Davies and in no way reflect the views of Prisma Capital Partners LP, Fulcrum Asset Management LLP, their respective affiliates or representatives. This material is not intended to provide, and should not be relied upon for, investment advice or recommendations. Readers are urged to seek professional advice before making any investments.

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