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Posted by Monitor on June 16, 2009, 4:52 am
Global Economics: Now What? The W-Shaped scenario
June 16, 2009
Is this really the end of the recession?
The new framework for modelling the world economy in a post transition-
phase state is still missing. The models we use still have major
systemic errors in them, we obviously still have the same valuation
problems and mis-specification of the policy mix. Despite some calling
for the New Thinking, there is little new that has been put forward in
reality.
Much of the problem in valuations is still here. Others argue that
while the visible part of the sub-prime mess is mostly cleaned up, a
lot of the less visible, but rather sizeable side-effects of it are
still on the books, without =91proper=92 valuation. I would add my own
observation, that the way the markets approached emerging markets has
not really changed much, differentiation is still not really the name
of the game. If the capital markets asked for the a realistic risk
premium, some emerging market treasuries would have gone into default,
whatever the urgent ambulance package was. In any case, we would see a
much wider performance range from emerging markets than was the case
the past months.
Plus, the policy response has been mostly inadequate. The global
economy has gone through a transition phase the past ten years, making
national level policy responses unlikely to do the job. The problem is
that to tackle the kind of global crisis that is at hand, one would
need to have enforceable monetary and fiscal policy in place, on a
global level, and that is clearly not there. What has been there
instead, after an initial bout of panic, is a set of protectionist
measures, and a happen-to-be-at-more-or-less-the-same-time fiscal
stimuli around the world that kind of works as harmonised global
stimulus.
Yet, the current stimuli take most governments way-way beyond known
territories: deficits are up to levels unimaginable before, and debt
as well as debt projections are through the roof. For the majority of
the governments the current stimulus it is a one-off action. This one
really needs to work.
Which takes us to the really bad news: most of the =91green shoots=92 seem
to be directly dependent on the fiscal stimuli. There is hardly
anything else. Scratch any bit of =91end of recession=92 data around,
independent whether the US, China, Germany, or Australia. Although
there is some actual money in the pockets, it is not that much. The
biggest across the board factor is the change of confidence. In other
words, the governments are inducing a new bubble, and we lay all our
hopes on it.
This might work. Yet, there is a significant momentum towards further
slowing in the global economy. The multiplying effect of the initial
hit is just taking shape. The main survival strategy in sectors hit
only indirectly by the crisis has been to cut back spending as much as
possible, and try to bridge over the shortage of revenues from
reserves and bank loans. Banks are still hesitant to lend (even if
they are ordered to by their respective governments, as we have seen
many examples around the world), which means that the bridging
exercise is mostly from own reserves. And there signs that reserves
are running out.
If the global confidence boom will not be sustained, and there is
plenty of reason why it should not be, then the coming fall might turn
out to be even bigger than the one allegedly bottoming. The W-shape
scenario might see a deeper, and longer, second trough.
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