Monthly Archives: October 2010

No sign of a double dip in this set of US GDP data

October 29, 2010 4:45 pm by Gavyn Davies

The US GDP data for the third quarter are a mixed bag. In some areas, they look truly encouraging; in other areas, much less so. What do they tell the Fed, which is preparing for its crucial meeting on QE, next Tuesday and Wednesday? They show an economy growing steadily, with no sign of a double dip, but at a rate which is slightly below trend, and which is clearly not sufficient to generate any marked recovery in private sector jobs. They show an economy where core inflation is stable around a 1 per cent rate. And they show an economy which is far too dependent on inventories, and far too vulnerable to increasing penetration from imports. All of that, the Fed will probably think it knew already.

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Posted in Macroeconomics, US |

Economic anecdotes from the world of private equity

October 28, 2010 2:47 pm by Gavyn Davies

For most of my life in macroeconomics, I have tended to be very dismissive of anecdotes from the world of business. They run the risk of exaggerating the importance of specific experiences in a small number of companies, and behavioural finance warns us that human beings tend to over-estimate the significance of events which happen directly to them, rather than to others. I also believe that business people are no better than anyone else at predicting the economy (which in my mind is tit-for-tat, since they certainly believe that economists cannot do it either). With that warning, here are a couple of anecdotes from my recent meetings with Nick Evans and Spencer Skinner, my partners at Active Private Equity. Maybe they are straws in the wind.

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Posted in China, Macroeconomics, UK |

Never up, never in, Mr Bernanke

October 27, 2010 2:56 pm by Gavyn Davies

In this blog in the Wall Street Journal, Sudeep Reddy reminds us of a Bernanke speech in 2004, in which the now-chairman of the Fed used a golf analogy to justify making a series of gradual changes in monetary policy when the authorities are unsure about the effectiveness of the policy weapon in use at the time.

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Posted in Macroeconomics, US |

UK GDP figures are good but not great

October 26, 2010 2:13 pm by Gavyn Davies

From now on, GDP figures in the UK will be watched with more than usual interest, because Britain is embarking upon the most significant fiscal tightening among the G7 nations. Can the economy withstand it?

Today’s GDP statistics for the third quarter, which show that the economy is growing at an annualised rate of 3.2 per cent, were much stronger than expected, and suggest that the economy is in better shape than many economists had predicted as the government is launching its fiscal retrenchment. However, the composition of the data is somewhat less encouraging than the picture painted by the headline figures.

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Posted in Macroeconomics, Monetary policy, UK |

A novel G20 proposal from Tim Geithner

October 22, 2010 5:34 pm by Gavyn Davies

US Treasury Secretary Tim Geithner has written to his G20 colleagues suggesting that they should adopt a new approach to managing external trade imbalances. Specifically, he wants the G20 to agree to a limit on their current account surpluses and deficits over a period of years, and also to correct these imbalances if they seem likely to drift away from the agreed targets. This is a good idea, because multilateral action on global imbalances would be vastly preferable to a disorderly bilateral dispute between the US and China. But the Geithner plan, as currently drafted, is fraught with difficulties.

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Posted in Currencies, Macroeconomics |

Will the UK spending cuts actually take place?

October 21, 2010 4:51 pm by Gavyn Davies

The public spending plans published by the UK government yesterday promise the most austere path for departmental spending on public services since the 1975-1980 period. And allowing for the cuts planned in welfare benefits, the overall settlement for total public spending is the most draconian since 1945. Even the NHS, which had been protected from cuts in real terms, has received the tightest settlement since 1951-1956. (Thanks to this IFS report for these figures.) There is little doubt that the chancellor, George Osborne, would like to be able to deliver these cuts in practice, thus achieving the £81bn of total annual savings shown in his plans for 2014/2015. But can he stick to his targets?

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Posted in Macroeconomics, UK |

Mr Bernanke spells out the Fed’s objectives for the economy

October 17, 2010 4:50 pm by Gavyn Davies

Ben Bernanke’s speech in Boston on Friday seems to have disappointed those who were expecting him to announce concrete measures to restart quantitative easing, but we already knew from the last set of FOMC minutes that the groundwork for such an announcement had not been undertaken. That announcement will come after the committee’s next meeting on November 2nd and 3rd. Nevertheless, Mr Bernanke has nailed his colours to the mast, even more clearly than he has done in recent speeches. This is a Fed Chairman who is very dissatisfied with the depressed state of the US economy, and who is not afraid to say so.

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Posted in Macroeconomics, US |

Should the Fed adopt a price level target?

October 14, 2010 10:37 am by Gavyn Davies

The minutes of the September meeting of the FOMC suggest that the Fed is considering how to communicate its policy message more clearly to the markets. This has thrown up some fairly radical ideas on what might be done next. One possibility, mentioned by William Dudley in his important speech last month (analysed in this previous blog), and given an honourable mention in the FOMC minutes, would be to introduce a price level target for the US. It will be interesting to see whether this is mentioned by Ben Bernanke in his speech on monetary policy in Boston on Friday.

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Posted in Macroeconomics, US |

The era of fiscal consolidation starts here

October 8, 2010 10:30 am by Gavyn Davies

Reading through the latest IMF economic forecasts, I was reminded of one very obvious fact: the expansionary fiscal response to the credit crunch is now well and truly over. The global economy is about to pass through an important inflexion point, in which the fiscal stance of the major developed nations is changing from broadly expansionary to broadly contractionary. Of course, everyone who has been paying the slightest bit of attention to economic events since 2007 knows that already. But the era of fiscal consolidation could be with us for a very long time, and the financial markets are only now begining to pay close attention to what this could imply.

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Posted in Macroeconomics |

New York Fed Chief lends his weight to the doves

October 4, 2010 3:48 pm by Gavyn Davies

William Dudley, the President of the New York Fed, is an intellectual heavyweight with whom I was fortunate enough to work for a couple of decades. Long experience has taught me not to ignore his views on the economy. He made an important speech last Friday,  spelling out the dovish view on monetary policy which is currently held by the most senior members of the FOMC, probably including Ben Bernanke.

Although the speech was careful to go no further than the statement which followed the last FOMC meeting in September, it explained in considerable detail why the Fed now believes that inflation is too low, and why he at least also believes that a further round of QE is the right response to the situation.

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Posted in Macroeconomics, Monetary policy, Recession |

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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