Global Agenda: That September feeling

If floor's beginning to crumble under developing countries, how much hope can there be that collapse can be avoided in Europe and Japan.

September 1, 2011 23:44
4 minute read.
Ben Bernanke

Ben Bernanke 311. (photo credit: REUTERS)


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The much-awaited speech from Fed Chairman Ben Bernanke last Friday at the Jackson Hole confab proved to be a damp squib. However, although Bernanke didn’t explicitly award the financial sector what it is increasingly explicitly demanding – namely another round of Fed intervention in the bond markets, and the bigger the better please – he once again laid out both his favorable attitude regarding such additional intervention and the specific methods by which this general goal could be pursued.

For the global equity markets this was enough to start celebrating, especially when the promise that the cavalry was being readied for action was further bolstered by the publication of the minutes from the previous policy discussion at the Fed’s Open Market Committee, which showed strong support on the part of most members for further intervention. The result has been a strong week in US equity markets and, to a greater or lesser extent, in markets around the world.

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True, this rally took place on low trading volume and was therefore dismissed by technical analysts as a correction – but it was still a welcome way of ending a month that had begun with a continuation of the most brutal sell-off the markets had staged since the end of the slump in March 2009.

The problem – for everyone other than the shrinking group of people that trade the markets and hence care much about their gyrations – is that the real world did not display any meaningful signs of improvement over the course of August. On the contrary, the general tone of the economic data being published around the world was decidedly gloomy.

It is becoming steadily clearer that the weakness in the global economy is not behaving the way the top politicians and policy makers said it would. That is to say, it is not “transitory,” and it shows no signs of fading away in the summer heat, as had been widely suggested in the spring. Nor does it seem likely to fall by the wayside in the fall. Quite the contrary. To make matters worse, it is not in any way “localized” to a specific country, region or sector.

These ideas, which have now been proven baseless as the more realistic analysts predicted would be the case, were very popular in the spring, when the emerging problems in the global economy could all be blamed on the earthquake/tsunami nuclear disaster in Japan and the disruption these caused to supply chains, especially in the auto industry. Now, even as the auto industry is bouncing back from that specific problem, the more general slowdown that is encompassing almost everything, almost everywhere, is undeniable.

Perhaps most shocking of all, to the optimistic school and the politicians who cheer-lead it, is that the developing economies are not only part of the new slowdown, but are actually leading it in some respects. This has been apparent for some time in China. But the cover story to explain the relative slowdown in that country’s breakneck expansion has been its need to tighten monetary policy to fight rising inflation.

However, on Wednesday night, Brazil’s central bank stunned the financial community in that country and around the world by cutting Brazilian interest rates by half a percentage point – a move not merely totally unexpected, but also entirely without precedent. The rationale provided was the rapid and significant weakening of economic activity in what had been, until very recently, the country that served as the poster boy for rapid and healthy growth.

If the floor is beginning to crumble under the developing countries, then how much hope can there be that a collapse can be avoided in Europe and, eventually, in Japan (where the country’s sixth hapless premier in five bad years took office this week)?

Certainly, anyone following the flow of news out of Europe’s increasingly fissiparous and argumentative Union could be forgiven for feeling despondent. The German people and its political representatives are deeply divided as to whether to continue bearing the brunt of bailing out the weaker members of the EU, to the point where the parliamentary debate on the bailout plan has been deferred from September 23 to 29.

Meanwhile, as if to encourage the German opposition to stick it to the rest of Europe, Italian Prime Minister Silvio Berlusconi and his finance minister have eliminated several key proposals from the package of austerity measures the Italians had cobbled together. The Greek parliament has reported that its own government is way off in its efforts to meet the budgetary targets it promised the EU and International Monetary Fund that it would reach… and so on, across the continent.

Underlying it all is the fundamental problem that keeps getting bigger as time passes and no real progress is made in solving anything: the general public’s confidence in, and patience with, a system that has been so corrupted and used to its detriment, is eroding rapidly. The financial markets are merely the thermometer that measures the severity of the underlying illness, which is raging in the sociopolitical systems of the developed world.

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