Recent Updates

  • US: Advance Durable Goods (Aug)
  • Italy: Business & Consumer Surveys (Sep), Contractual Wages (Aug), Large Firms Employment, Earnings & Hours Worked (Jul)
  • Luxembourg: International Trade (Jul)
  • Poland: Inflation Target (2021)
  • more updates...

Economy in Brief

European Inflation Makes a False Start Higher As Deflation Returns; G20 Meets Amid False Hopes and Delivers
by Robert Brusca  February 29, 2016

The overall price level in the EMU fell again in February after dropping in January. Year-over-year inflation once again is falling for the first time in five months. Core inflation is positive but with its lowest year-on-year gain since April 2015. And the ECB is still waiting.planning.and the world is anticipating. more action from the ECB to stimulate inflation and yet there is waiting at a time that waiting MAKES NO SENSE.

What I did at my winter vacation or the G20 meeting

The G20 meeting this past weekend broke up only after delegates locked arms and sang several rounds of Kumbaya together in an impressive show of unity.Not! The G20, in reality, broke up with no agreement to do anything concrete. Everyone went into the meeting on edge about China and the magical ever-dropping renminbi exchange rate and with China's official reserves dropping into a black hole and disappearing. What the summit attendees got to take away in their G20 `Swag Bag' was nothing - an odd Buddhist gift from the Chinese, but there it is. China only asserted that the exchange rate weakness was not planned nor part of policy and expressed some incredulity that it could be so weak and disbelief that it could continue. Today China cut reserve requirements on bank deposits. But at the G20 it pledged nothing. Just as G20 members pledged nothing but claimed they would seek all avenues for stimulus. Fat in Roman times. All roads lead to nothing.

With the EMU Maastricht fiscal rule in force and binding or beyond binding for most EMU members, there will be no fiscal stimulus there. Germany could but its sum total of excess spending is on the care of migrants and even that is under attack for its miserliness. Japan's debt is already so large that new spending will not launch there; rather Japan might delay its long-sought fiscal consolidation a bit longer. The U.S. still has its budget loggerheads in place and it's an election year. So the burden for stimulus to reignite inflation falls again to the folks behind door number two, the central bankers. And they are over taxed and have been pulling rabbits out of their hats for so long they have nothing left in there but rabbit droppings. A German spokesman this week noted that monetary policy has little more to give. And so there we are again at impasse. The days of the GX meeting (Where X=some number, n, historically 3, 7, 8 or 20) producing a policy response are OVER.

Sad day evermore at the G20

The GX meeting has become a photo-op and participants come to say things for public consumption that might sound nice back home. It is not a place where work gets done. The greatest task for the GX is deciding who stands where for the photo-op (but then there is always photo-shop).

Sad day for the U.S. at the G20

In the U.S., Jack Lew, about as low-profile a Treasury Secretary as we ever have had, gave a terse statement and walked off claiming it was time for the world to stop depending to be propped up by the U.S. consumers. So Jack said that and.left? Is there a new policy there? A threat of a new policy there? A plan for a new policy there? Or was this in the spirit of more empty words from the out of gas G20?

Some perspective on the ECB inflation undershoot

So we find inflation in the EMU again in the dumpster with no plan afoot to deal with. The Germans again are foot-dragging impeding any possible action. James Bullard, St. Louis Fed President and CEO, in a speech last week, blasted both the Fed and ECB policies for losing credibility over their respective inflation targets. In the EMU, the inflation mandate is for a pace just below 2%. To Germany, this seems to mean readings no higher than 2% and anything lower is fine. To the rest of Europe it reads, no, something close to 2%, dammit. With inflation negative and more than 2% off target, imagine how outright distressed the Germans would be if inflation had been running at 4% and began to accelerate and had been like that for some time and little effective action was being taken? Sometimes it is good to put the shoe on the other foot even though it doesn't fit.

The migrants and the Pope

Migrants are rattling their cage literally, as they broke down the not-so-great wall of Montenegro to try to storm the pathways to other EMU nations and seek sanctuary outside of an overburdened Greece. If the Pope really wants to weigh in on wall-building, this would be a good time, since Donald Trump's comments were about a hypothetical wall and this is a real one and it is bottling up real people in a country (Greece) with a real inability to deal with it.

Monetary policy and the FDA

It should be clear that there is something drastically broken in the global economy. Extreme and by now what is clearly excessive monetary medicine is refusing to revive it. If you were a doctor and this was your patient, would you not (soon?) seek another course of treatment instead of just upping the dosage on the same old medication? We know that drugs have side effects because we make drug companies test them. If monetary policy were a drug, IT WOULD NOT BE ABLE TO BE USED RIGHT NOW because it is being offered in a dosage that is untested and delivered with other aspects that have not been fully vetted. The U.S. Food and Drug Administration (FDA) would not approve it.

Yet, there is an obsessed opposition to fiscal policy and no sense at all of trying to diagnose anything but a symptom. In Europe, Podemos is stronger. The U.K. is seriously pondering Brexit. Greece may yet be blown out of the EMU by the weight of migrants being made to clog its economic veins.

The problem is CLEAR

So what is the problem? Let me state it simply and clearly while other economists gnash their teeth and disagree. IT IS CLEAR. There have been no exchange rate police or agreements and various Asian countries, now personified by China, have developed on the back of export-led growth using cheap labor, an undervalued exchange rate and massive U.S. treasury security (and other asset) purchases to implement this strategy. The Senate in the U.S. has fooled around for years and flailed to name anyone as an unfair trader yet the U.S. ran its last current account surplus in the early 1980s. Exchange rates are not moving to equilibrate payments imbalances as economists' envisaged. Arguably the period of fluctuating exchange rates has been little more than open season on the U.S. consumers. Cheap goods flooded into the U.S. and Europe; the dollar was kept strong by exchange-rate-targeting countries buying massive amounts of investments in the U.S. This, of course, made the U.S. uncompetitive and is the reason that nearly all the best investment of the last 30 years has gone into Asia. And the shift of output/income creation to Asia has another drawback due to the `paradox of thrift.' Asia saves. China's ratio of consumer spending to GDP is low so the spending multiplier for global growth shifted down. A dollar earned in the U.S. is far more like to be spent that one paid to a worker in China. Income growth multiplies spending more in the West. So that shift in the source of `income creation' has exacerbated the global supply/demand imbalance by reducing demand- not just shifting it to Asia. Moreover, in the wake of the financial crisis, Western countries are now also working off huge debt loads. Bad, worsening and persistent exchange misalignments have perpetuated the Asian miracle as well as poor wage and productivity slump in the West. There is no plan to fix it.

large image