Monthly Archives: November 2010

European sovereign debt is not really sovereign

November 30, 2010 10:28 am by Gavyn Davies

The events of the last few weeks have shone a very harsh searchlight on the nature of sovereign debt within the European Monetary Union. Although critics of EMU have always argued that monetary union without fiscal union is “impossible”, it was only when Angela Merkel started to call for a procedure to handle a possible default on the sovereign debt of a member state that the markets began to focus on the fact that such a default really is possible. In substance, nothing much has changed with Mrs Merkel’s remarks: it always was possible for a sovereign state within the EMU to default. But now that the markets have realised that some key elements of “sovereignty” are missing from the EMU member states, market psychology has changed. It will be very hard to put this genie back into the bottle.

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Posted in Eurozone, Macroeconomics |

I am feeling fine, thank you, prime minister

November 26, 2010 10:21 am by Gavyn Davies

David Cameron took a gamble yesterday with his promise that the UK will in future publish official statistics for national well being.

The Office for National Statistics will shortly be asking us, on his behalf, how we are feeling. They will then report the results in a measure of well being which is broader than the GDP statistics. This idea has already been met with howls of derision from those who suspect that this is all a political ruse to deflect attention from the economic consequences of the planned public expenditure cuts. Others retort that the relatively well off simply cannot understand the value of money to those who do not have enough of it. This sentiment is easy to understand. But I still think that the prime minister is barking up the right tree with this proposal.

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Posted in Macroeconomics, UK |

QE or not QE, that is the question

November 23, 2010 5:01 pm by Gavyn Davies

Today’s publication of the latest FOMC minutes will probably unveil significant downward revisions to the Committee’s inflation and gross domestic product forecasts for 2011, as well as a large upward revision to its unemployment forecast. More interestingly, the minutes will show whether the FOMC is broadly united on the strategy of quantitative easing which it has now adopted. Is the FOMC clear about how QE is intended to work? I raise the question because Mr Bernanke’s most recent speech made the rather startling claim that the policy should not even be called “quantitative easing” in the first place. Not all of his colleagues on the FOMC, and few of his outside critics, appear to agree with him.

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Posted in japan, Macroeconomics, US |

Inflation up in China, down in the US

November 18, 2010 12:21 am by Gavyn Davies

Consumer price inflation has started to diverge sharply in China and the US in recent months. Although this may be distorted by the higher weight given to rising food prices in China’s CPI data, it may also be due in part to China’s determination to keep the yuan down against the dollar.

The policy of currency intervention is starting to bring with it some definite costs for China, and their attempts to square the circle – keeping inflation low, while simultaneously keeping the exchange rate stable – can really only work in a controlled, non-market system. As China develops further towards a market economy, squaring this circle will become more and more difficult.

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Posted in Macroeconomics |

Europe must compromise to solve its debt crisis

November 16, 2010 10:13 am by Gavyn Davies

The twists and turns in the European sovereign debt crisis have been more than usually bewildering in recent days, so I thought it would be useful to take a step back and look at the longer term budgetary fundamentals which will ultimately decide whether the troubled sovereigns in the eurozone can avoid default. The eurozone as a whole is in better fiscal shape than other developed economies (notably the US and Japan), and even the most indebted economies could yet dig themselves out of the hole they are in. But the eurozone is still plagued by the contradictions of trying to operate a monetary union without supporting this with a fiscal union.

Continue reading: “Europe must compromise to solve its debt crisis”

Posted in Eurozone, Macroeconomics |

The gold price is not a very useful signal for the G20

November 11, 2010 3:31 pm by Gavyn Davies

Robert Zoellick, president of the World Bank, has said that gold is the “elephant in the G20 meeting room” and has suggested that the metal should be given a role in any fundamental reshaping of the global monetary system which may emerge from current international discussions. Although this was initially interpreted as a call for a return to the gold standard, Mr Zoellick on Wednesday said that this would be impractical. Instead, he seems to believe that gold should act as a kind of signalling mechanism, which flashes warning signs when uncertainty is rising, and confidence is falling, in the global economy. Maybe, but I am struggling to understand how this could be made to work in practice.

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Posted in Macroeconomics |

Friedman, Bernanke and the Fed’s libertarian critics

November 9, 2010 3:34 pm by Gavyn Davies

If he were still alive today, what would Milton Friedman think of his disciple, Ben Bernanke? This is a matter of some concern to the Fed chairman, who is reported as saying to colleagues on Saturday: “I grasp the mantle of Milton Friedman…I think we are doing everything (he) would have us do.” With libertarian economists tending to be among those most critical of QE2, Mr Bernanke is relying on Friedman’s halo effect to enhance the legitimacy of the Fed’s recent actions. Friedman’s friends say that his opinions were unpredictable, which is what made them interesting. But some some free market economists, like Allan Meltzer, claim that Friedman would have strongly disapproved of QE2. Are they right?

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Posted in Macroeconomics, US |

What we should learn from a big week in the US economy

November 5, 2010 3:39 pm by Gavyn Davies

After a week which has been replete with important economic and political news from the US, the bulk of the incoming information has confirmed what we knew already. The Fed has embarked on QE2, more or less exactly as expected. The Republicans took the House but not the Senate, and the President’s initial reaction suggests that the Bush tax cuts will probably be extended, which was the central case before the election. And the economy continues to grow at a pace which is neither fast enough to bring unemployment down, nor slow enough to threaten a double dip. While all of this was broadly as expected, there have been some interesting (and mostly encouraging) developments which are worth noting.

So what do we know today that we did not know a week ago? Three things:

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Posted in Macroeconomics, US |

QE2 is about asset prices, not the economy

November 3, 2010 8:13 pm by Gavyn Davies

The Fed statement just released indicates that the central bank intends to purchase a net total of $600bn of longer term Treasury securities between now and the end of 2011 Q2, at a pace of around $75bn per month. This was almost exactly in line with what the market had been led to expect, so there was no surprise in the extent and timing of QE2. However, there was no further softening in the Fed’s statement that interest rates are likely to remain exceptionally low for an “extended period”, which may have disappointed some observers who were looking for this language to shift in a dovish direction. Overall, the markets initial reaction was a shrug of acceptance that the Fed has done just about what it told us it would do, but certainly no more.

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Posted in Global economy, Macroeconomics, Monetary policy, Regulation, US |

Better news from global manufacturing

November 2, 2010 1:34 pm by Gavyn Davies

The major global manufacturing surveys for the month of October have now been published, and they are considerably more buoyant than they had been in previous months. Although it could be foolhardy to place too much weight on one month’s data – and survey data at that – these results are certainly not what would be expected if the major economies were headed towards a period of retrenchment in the manufacturing sector. This is a pleasant surprise, since earlier data had suggested that manufacturing growth could peter out during the winter months. This now seems a lot less likely.

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Posted in China, Eurozone, japan, 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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