Monthly Archives: December 2010

Readers’ response to the graph of the year

December 30, 2010 12:32 pm by Gavyn Davies

In this earlier blog post on “the most important graph of the year”, I invited readers to comment on the financial imbalances in the US, and to send in alternative graphs of their own. Thank you for a very lively response, some of which is featured below. I have also received many graphs which I will use in future posts. Several people have argued that a deeper analysis of the private sector financial balance in the US can explain both the causation of the recession and the recovery, so I will start with that.

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Posted in Macroeconomics, US |

The most important graph of the year

December 22, 2010 4:40 pm by Gavyn Davies

Update: Read Gavyn’s response to your comments.

From the standpoint of a global macro economist, this is my nomination for the most important graph of the year. (See the end of this blog if you wish to suggest alternatives.) It explains why the world’s largest economy, the US, has defied the pessimists by mounting a decent recovery in 2010. It also explains the behaviour of the government deficit, and show why it has so far been easy to finance this deficit. And, most importantly, it shows why the US lost the Ryder Cup. (Well, actually it doesn’t, but you can’t have everything.)

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Posted in Global economy, Macroeconomics, US |

Is Germany acting in its own interests on sovereign debt?

December 19, 2010 11:14 pm by Gavyn Davies

Although the European Summit reached agreement on how to develop the bail-out mechanism for sovereign countries after 2013, it was an agreement about process rather than content. Germany remained adamant that there would be no fiscal transfers to troubled economies, and that the best way forward is further fiscal consolidation, along with plans for the private sector to share in any losses after a sovereign default. EU finance ministers have been charged with filling in the blanks by 31 March, 2011 – if the markets are ready to wait that long. I am not confident that they will be. Nor do I believe that the present path is necessarily in the best interests of Germany itself, let alone other EU member states.

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Posted in Eurozone, Germany, Macroeconomics |

Investing in commodities

December 16, 2010 2:20 pm by Gavyn Davies

Commodities are very volatile investments, which may be appropriate only for professional investors. Like all other asset classes, timing is what matters most. In this article, which appears in today’s FT, I outline three factors which are supportive of commodity investments in the period ahead. First, this is the stage of the economic cycle when commodities normally out-perform. Second, the shape of the futures curve in many commodities has shifted recently towards backwardation, which is normally good for total returns in the asset class. And, third, the introduction of commodities into a standard portfolio of equities and bonds is likely to bring diversification benefits, even though these have not been apparent in recent years. The main risk to the bullish case is that China may slow more rapidly than is generally assumed, under the impact of tighter monetary policy.

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Posted in Macroeconomics |

How the E-bond plan would work

December 12, 2010 10:47 pm by Gavyn Davies

The proposal to issue E-bonds, made in the FT by Jean-Claude Juncker and Giulio Tremonti, has sparked widespread controversy. Some observers (for example, Wolfgang Münchau) have said that it contains the kernel of a solution to the European debt crisis – which, under some circumstances, it might. But the initial response from Angela Merkel has been negative, exactly as it has been in many earlier rounds of this particular debate. The E-bond idea will obviously go nowhere without the support of Germany. But they have never before faced the real possibility that there could be a break-up of the euro if the sovereign debt crisis is not overcome. Maybe it is time for them to think again.

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Posted in Eurozone, Germany, Macroeconomics |

Honesty is the best policy – even for central bankers

December 10, 2010 8:00 am by Gavyn Davies

Both the Federal Reserve and the ECB are now purchasing government debt in large scale. Yet neither of them seems at all eager to admit that they are doing anything unconventional with their monetary policy. In fact, some of the recent statements by both Ben Bernanke and Jean-Claude Trichet are not as straightforward and transparent as they might have been.

In the US, this is probably because of the risk that Congress might actually intervene to stop the Fed from “printing money”. Therefore the Fed has started to make narrow technical arguments which obfuscate what it is really doing. In Europe, the ECB has a strong historical dislike of monetising government deficits, and fears that quantitative easing might be declared contrary to their legal obligations. Therefore they draw very fine distinctions between their actions and US-style QE. In the long run I think that both central banks would be better advised to tell it exactly as it is.

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Posted in Eurozone, Macroeconomics, US |

The US economy hovers around escape velocity

December 6, 2010 10:27 am by Gavyn Davies

Most forecasts for growth in the US economy have been revised upwards in recent weeks, and the financial markets have eliminated fears of a double dip recession, at least in the imminent future. A string of encouraging economic data have underpinned this rise in optimism. But the anaemic employment data for November have raised serious question marks about the pace and durability of the recovery. Although the economy seems to be headed in the right direction, and is close to achieving self-sustaining growth, it is not quite there yet.

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Posted in Macroeconomics, US |

Jean-Claude Trichet fights to save his legacy

December 1, 2010 10:47 pm by Gavyn Davies

Update: See Gavyn’s comments on the ECB’s statement

Jean-Claude Trichet, ECB president, has been here before. Early in his life as governor of the Bank of France in 1993, Mr Trichet faced down a tidal wave of market pressure and prevented the franc from being devalued. I can vouch for the fact that not all of his tactics were those of a choir boy, and at one point he was forced to widen the ERM trading band within which the franc was allowed to fluctuate, but he eventually emerged without having to admit defeat. The rest, and the creation of the euro, is history. Now, at the very end of his career, Mr Trichet is fighting to save his legacy.

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Posted in Macroeconomics |

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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