A High-Stakes Gamble, In China and the U.S.

A long post on China Financial Markets brings a timely reminder not to get too euphoric about the recent turbo-charged economic numbers - everything from bank lending to car sales took a big jump in the first quarter - regardless of the official cheerleading. Key to whether China's economy is really recovering is whether all that money is creating jobs. Hard to know - but as the blog points out, even among officials there is the realization that the stimulus plan's impact could be temporary and a second round could still be necessary.
Meanwhile, in the U.S., talk of a second stimulus package - mooted as recently as in February - has all but withered away as the economy appears to have stopped falling in a straight line. That's no grounds for complacency, though - while China might see a W-shaped recovery, the risk in the U.S. is an L-shaped one (though U remains the favored forecast, for now).
China needs, as CFM notes, to see more private than public sector growth - but that doesn't seem to be happening, if the numbers quoted are correct. It still needs a prospering export industry, even as it seeks to reduce its dependency on foreign demand and become more reliant on domestic consumption. All the while, there's the issue of its massive foreign exchange reserves and how to manage them.
The U.S. problems are just as daunting: it has to do the reverse of the Chinese - reduce consumer demand and become more competitive in the global market place; it also has to reduce the share of its financial industry (which even last year accounted for 28% or so of domestic corporate profits) in the overall economy and find something to replace the lost business with. As consumer demand shrinks, Americans' reliance on debt should also diminish - doing away with the need for the securitization markets which lie at the heart of the financial crisis and which the authorities seem hellbent on restoring - even though if we've learnt one thing, it's the fallacy of the grandiose notion of democratizing credit.
The point is this: the Leviathans of the global economy - China and the U.S. - are both facing wrenching structural changes. Both governments are working on making the changes bearable and limiting the pain to their populations, but let's be realistic: it's a high-stakes gamble - there are no blue prints; plus the sobering thought that the last time we got out of a similar economic desaster, the world was engulfed in warfare.

Spring Blandishments

Spring's here and with it comes talk of "green shoots" and "small signs of hopes" when it comes to the economic data - February brought the second month in a row of rising retail sales and personal spending, durable goods orders were up as were existing and new home sales. And bank chiefs talked about a good start to the year for the first two months.

But it pays to remember that the on-month gains came after the economy well and truly tanked in the fourth quarter - it fell so steeply, there had to be some kind of leveling off in the pace of decline. That's no doubt a good sign; a continuation of the fourth quarter's precipitous drop across all sectors of the economy would have been highly alarming. But when things stabilize, there's still a possibility they could resume their decline - it's in no way a given that the only path from here is upward. And in a worrying sign, some bank chiefs, including JPMorgan's Jamie Dimon, are warning that March was a tough month.

The coming week brings the first inklings of this month's data in the form of the ISM's national reports on the manufacturing and non-manufacturing sectors. The headline numbers will show more stability, but it's the components such as inventories, shipments and orders - particularly export orders - that will be the most insightful. Global demand outside the U.S. has collapsed - the major export nations, from Japan to Germany to China, have all reported dire export numbers. Chinese officials believe they have averted crisis with their stimulus package and that the vital signs of their economy - such as bank lending - have improved. Germany says it has done enough to stimulate its economy and that given its high debt levels - left over from the country's reunification in the 1990s - it doesn't have the fiscal flexibility to spend more.

But demand will have to come from somewhere for the U.S. economy to start growing and not just bump along the bottom of the trough for an extended period. The domestic stimulus package is one source - but that won't come into full force until 2010. Foreign demand will take even longer to surface - China's recovery will to some degree depend on a recovery in the U.S. as one of its largest trading partners; Germany needs the rest of the world to recover so it can start exporting again, and Japan's economy remains in a blue funk. A hopefully more immediate source of demand will come from the funds that the Fed is creating and throwing by the armload at financial markets to revive gun-shy capitalist spirits and the broader economy.

Spring crocuses notwithstanding, the economic outlook continues to hang in the balance. It will take longer than one season for the rescue efforts to work their way through the economy.

Business As Usual Is Not An Option

Ben Bernanke, our unruffled Federal Reserve chairman, was asked today whether spending trillions of dollars is the right answer given that it was overspending that got us into trouble in the first place. And his answer was clear - but also goes to the heart of the widespread unease that many feel right now: We cannot afford not to spend. Without aggressive measures, the downturn will become much worse. We need to get through this crisis, then only can we start talking about being fiscally responsible. For sure, there has to be a plan to address the ballooning budget deficit; but now is not the time to be prudent - and he cited St. Augustine's famous "God let me be moral - only not just right now."


The rub with this though is that St. Augustine knew what he had to achieve, and more importantly, what he had to do to fulfill God's demands. It was more or less in his own hands. But it's far from obvious that any of the world's governments have any coherent notion of how to get to the blessed state of sustainable deficits, both external and internal. We need to rethink the premise of a global economy that is driven chiefly by consumer spending in the largest economy, the U.S. Rebalancing the global economy will require the U.S. to curb consumption and invest more in education, transportation, clean technology and many other areas that have been neglected in the past decades. Japan, China and Germany (numbers 2-4 of the global economy) must wean themselves off the exporting fix - these economies must find a way to stimulate private consumption. None of this will be achieved overnight; the scale of the challenge we are facing is daunting.

Conventional wisdom says that the housing market in the U.S. lies at the root of the current crisis - that is partly true. But a different statement would also be correct: it was the massive global imbalances that created the havoc we are now struggling to contain. The G7's conciliatory tone toward China - rather than the usual yuan bashing - was a first step; but the forum that will prove decisive in outlining the post-crisis economic order should ideally be the G20 - where emerging and developed nations come together - which next gathers in London in early April. It has been mostly a talking shop, a handy place for national grandstanding. But under the new U.S. leadership, it has to be hoped that this will change, because we cannot emerge on the other side of the crisis with the same or similar imbalances in the world economy. We cannot afford business as usual.