The Telegraph finance pages lead with the story that 'Wall Street Tumbles' in what they describe as 'shock' data on joblessness and a contraction in factory activity. The most interesting part of this is that anyone might be shocked by the ongoing travails of the US economy. Whilst there may be bounces, there is no way that the US economy might recover until such time as the problems of the credit bubble are finally removed. Whilst government and the Federal Reserve have sought to bury the problems with loose money and fiscal stimulus, there is no getting away from the fact that large sectors of the economy are still unbalanced as a result of the credit bubble. In a simplistic example that I often use, the shiny new shopping malls no longer have the customer base that they once had.
The second headline in the Telegraph that I noted was that Western companies are starting to feel the pressure of rising wages in China. However, the more interesting point is how China is continuing with its policy of currency manipulation in order to maintain exports:
Indeed, it is difficult to see the motives of China. The problem is that, as Mervyn King recently observed, everyone sees expansion of exports as the way out of economic troubles. Not everyone can, of course, achieve this as somebody must be importing in order for another country to export. With this in mind, China's game will become increasingly contentious. And then there is the Chinese property bubble, with the Telegraph article saying the following:
The changing landscape has major implications for Chinese exporters, with an average profit margin of just 3pc. High-tech companies in wind power, solar, and transmission equipment that have recently broken into world markets will face stiffer headwinds. The Shanghai Composite Index of Chinese equities has been lagging all year on fears of a profit squeeze. The bourse is down 20pc since last November.
The erosion of export margins may explain why Beijing is still dragging its feet on a revaluation of the yuan, despite ever louder calls for retaliatory sanctions in Washington. China's currency has fallen slightly on a trade weighted-basis since the dollar-peg was replaced in May by a crawling band, a clear sign that the authorities are worried that the economy is cooling too fast. Beijing has tried cool the property boom with credit curbs but it is hard to use such tools in a surgical fashion without collateral damage. The growth of factory output ground to a halt in July, on a month-on-month basis.
China's foreign investment body SAFE has bought record amounts of bonds from Japan, Korea and other Asian countries over the last three months. While this is part of a normal shift away from the US and Europe, it is also a way for Beijing to hold down its currency against these competitors. It is difficult to separate motives in such a policy.
Meanwhile, China Daily reports that 70pc of all flats in Hainan, 66pc in Beijing, and 51pc in Shanghai are empty, based on a survey of electricity use. They are presumably owned by investors and speculators.It was something I observed first hand whilst living in China and reported in this blog a couple of years ago. The reason why the apartments are left empty is that Chinese people will pay a premium for an apartment that has had no occupants. This is the reason why they lie empty, rather than being rented out. Of course, had they been rented, then the investment bubble would have popped, as declining rents through excess supply would have (at least eventually) offered a market signal. Thus a peculiarity of the Chinese market has translated into a massive bubble.
The Telegraph, being a UK newspaper, inevitably reports on the UK economy. In one report, the Bank of England is suggesting that the UK economy is extremely fragile, which I thought was stating the obvious. Meanwhile, the government deficit continues to grow, though the article frames the story in terms of not as fast as before. Regardless of the framing, the UK continues to sink ever further into debt. Perhaps, in an odd way, the most interesting story is that the retail chain Poundland is doing well. For readers who are not from the UK, this is a store that stocks very, very cheap goods and they are reporting that all income groups are now using their stores. It is a sign of the times - the new frugality. However, assuming that the shop has not changed greatly since I last visited one, the shop's cheap goods seem to be disproportionately originating in China. In other words, the new frugality plays to the strengths of the emerging economies - low cost.
It is also perhaps symbolic of something that I long ago discussed, the meeting in the middle of the rising middle classes of the emerging economies and the sinking middle classes of the developed world. This point leads me to an article picked up on Reddit, which is a Spiegel Online article:
While America's super-rich congratulate themselves on donating billions to charity, the rest of the country is worse off than ever. Long-term unemployment is rising and millions of Americans are struggling to survive. The gap between rich and poor is wider than ever and the middle class is disappearing.The article paints a grim picture for the middle classes, of stagnating wages, and growing unemployment. However, the extent of the problem is so broad that:
I suggest reading the article in full. However, in the same list of headlines, I also found a very similar story in the Guardian:
But even though Federal Reserve Chairman Ben Bernanke continues to pump money into the market, and even though the government deficit has now reached the dizzying level of $1.4 trillion, such efforts have remained unsuccessful.
"The lights are going out all over America," Nobel economics laureate Paul Krugman wrote last week, and described communities that couldn't even afford to maintain their streets anymore.
The problem is that many Americans can no longer spend money on consumer products, because they have no savings. In some cases, their houses have lost half of their value. They no longer qualify for low-interest loans. They are making less money than before or they're unemployed. This in turn reduces or eliminates their ability to pay taxes.
America appears to be a society splitting down the centre, shattering the middle class that long formed the cultural bedrock of the country and dividing it into a country of haves and have-nots. "A once unthinkable level of economic distress is in the process of becoming the new normal," warned Nobel-prize winning economist Paul Krugman in a recent New York Times column. Or, as Steven Green, an economics lecturer at Baylor University, put it to the Observer: "We are really in a tough spot right now."These articles paint an ugly picture, and it is only getting worse. It is worth remembering that it was not that long ago that people were painting a picture in which the actions of the US government to 'save the economy' were working, that the bailout of the financial system saved the world economy.
So how is the world economy? I will return to the Telegraph, this time to the economics section, for a snapshot of the news. There is the unsurprising headline that the Greek crisis refuses to go away, with reports of capital flight out of Greece, and growing doubts about whether the EU bailout might work. Furthermore, it is not just Greece as an exception, according to an article about Moody's assessment of the situation:
"Genuinely adverse debt dynamics were only expected to materialise in 15 to 20 years. The crisis has 'fast-forwarded' history, eroding all the time available to adjust, " said the group's quarterly Sovereign Monitor.
Moody's fears that the US will crash through its safety buffer by 2013 if growth falters (adverse scenario), with interest payments topping 14pc of tax revenues. The debt-to-revenue ratio has already doubled in three years to 430pc.
The US, UK, Germany, France, and Spain are all at risk of an "interest rate shock", either because they must roll over a cluster of short-term debt (US, France, Spain) or because deficits are so large.
Countries that "fail to demonstrate the level of social cohesion required to stabilise debt" will lose their AAA rating. "Intra-generational" conflict between young and old requires careful handling. States that delay pension reform risk spiralling downwards.
Moody's said the world had changed since Europe's debt crisis. None of the large sovereign states can still assume it is credit-worthy. "The burden of proof now falls on governments," it added.
Autocrats in Beijing are contemptuous of India for its messy, indecisive democracy. But they must see it as a serious long-term rival—especially if it continues to tilt towards America. As recently as the early 1990s, India was as rich, in terms of national income per head. China then hurtled so far ahead that it seemed India could never catch up. But India’s long-term prospects now look stronger. While China is about to see its working-age population shrink (see article), India is enjoying the sort of bulge in manpower which brought sustained booms elsewhere in Asia. It is no longer inconceivable that its growth could outpace China’s for a considerable time. It has the advantage of democracy—at least as a pressure valve for discontent. And India’s army is, in numbers, second only to China’s and America’s: it has 100,000 soldiers in disputed Arunachal Pradesh (twice as many as America will soon have in Iraq). And because India does not threaten the West, it has powerful friends both on its own merits and as a counterweight to China.So what can we make of these headlines? Was the world economy saved when money was poured into the financial system, when government debt exploded to support flailing economies, when the policymakers tugged on their levers to save the world economy?
The headlines I have chosen are selective, but they are not unusual. What we see is instability, and ongoing shifts in the shape of the world economy. The emerging economies are getting richer, but are also unstable. The developed world economies teeter on the brink, and none of the policy levers seem to actually work. Tensions between the emerging economies, and between emerging economies and developed economies are rising. Alongside the economic rebalancing, there is a rebalancing of power.
If we jump back in time again, none of this should be happening. The masters of the universe were supposed to have known what they were doing. Have they really saved the world economy, or have they simply created ever more chaos. Take a look at the stories above, and I think you may be able to answer the question yourselves.