Global Agenda: Now what?

The world has survived this week without suffering a major financial disaster, but no one knows what will happen next.

June 24, 2011 04:51
4 minute read.
Pinchas Landau

Pinchas Landau blog photo. (photo credit: Courtesy)

The world has survived this week without suffering a major financial disaster. Many people – especially in Israel, where the focus of public attention remains firmly on cottage cheese, for reasons discussed here last week – will not have been aware that there was considerable drama in the financial markets during at least the first half of the week, with the entire edifice of the European Monetary Union teetering on the verge of collapse.

That’s the great advantage of blissful ignorance: If there is a dire threat of which you are unaware, but that threat dissipates, you are much better off not having known about it at all.

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In the US, too, nothing happened. True, that was expected, but there was a fair chance of an alternative – and much more dramatic – outcome. The Federal Reserve conducted a monetary policy discussion on Tuesday and Wednesday, which concluded with an announcement and a press conference, in which Fed Chairman Ben Bernanke said the Fed had nothing new to say. That meant: a) short-term interest rates stay at near-zero; and b) the current program of purchases of US Treasuries by the Fed (known as QE2) will end on June 30, as scheduled, with no indication that the Fed intends to initiate another such program (the much-speculated- about QE3).

However, the Fed did publish updated forecasts for GDP growth in 2011 and 2012, which showed that it has again reduced its expectations for both years, the second successive downward adjustment. It also adjusted its forecasts for both inflation and unemployment for this year and next – in both cases upward; i.e., more inflation and higher unemployment.

This forecast for lower growth and higher unemployment is tantamount to proclaiming that QE2 failed, since its primary declared goal was to stimulate the economy. Granted, it seems to have achieved is second goal, of preventing deflation and pushing up the rate of inflation. However, considerable disagreement exists as to whether the current trend of rising inflation in the US and around the world is traceable, at least in part, to QE2.

But what was much worse than this implicit admission of failure was Bernanke’s admission that he and his colleagues are unsure whether the recent spate of poor economic data is a transitory phenomenon. He believes it is, and he obviously hopes so, allowing him to assert that growth will pick up from its current low level and the inflation rate will decline. But he effectively asked the American people and the global financial markets to take this assessment on trust.

The problem with that is not that Bernanke doesn’t know what will happen down the road; obviously, no one does.

It’s that he doesn’t “know” what is happening right now, which is to say he is unable to explain the slowdown that is increasingly apparent in the US and across the world.

If his major policy initiative (QE2) has plainly failed to deliver the results he expected from it and “sold” to Congress and the public, and if he is nonplussed by current developments, he cannot complain if a growing number of analysts – and, one suspects, most of the general public – will not take him on trust and share his confidence about the future.

This week’s minor drama in the US will gave way to a greater one during July, as the early August deadline nears for Congress to raise the ceiling for the national debt. Failure to do so would result in the unthinkable: a default by Uncle Sam. Even those analysts convinced that the US will eventually go bust don’t believe this is an immediate threat. There will certainly be a deal between the Democrats (led by the Obama administration) and the Republicans, but the party-political brinkmanship will continue up to the last minute.

Likewise, there was little doubt that the Greek government would survive a no-confidence motion on Tuesday night. But given the fluid state of Greek politics and the intense popular pressure on many members of the Greek parliament to reject European Union dictates to Greece, one couldn’t be sure. The motion was duly defeated, but doubt remains, albeit not a lot, whether the Greek parliament will pass the government’s latest package of severe austerity measures.

That vote will make next week another nail-biter for the markets and for European politics. But the drama is phony in the sense that all these maneuverings and measures cannot prevent Greece from defaulting in the end, because they are only delaying tactics, not real solutions. Worse, the situation of Spain and, especially, Italy continues to deteriorate rapidly, so that the overall Europe picture is grimmer than ever.

The severity of European woes was amply demonstrated Thursday, when the euro slumped against the US dollar and plunged to new historic lows versus the Swiss franc, while European stock exchanges suffered heavy losses.

Thus, while Bernanke scratches his head and considers his next moves, the spotlight has returned to Europe – where even doing nothing is no longer an option. But with end of the road clearly in sight, the tactic of “kicking the can down the road” will no longer work.

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