The heroes of finance and Powell’s put

At the weekend G20 meeting of finance ministers and central bankers in Japan, the world’s finance leaders tried to put a brave face on the situation.  Tension over the intensifying trade war between China and the US was the biggest talking point at the meetings. Officials also wrangled over wording for a final communique on how to describe their concerns for world growth. While they flagged that it appears to be ‘stabilizing’, they also warned that the risks were tilted to the downside. “Most importantly, trade and geopolitical tensions have intensified. We will continue to address these risks, and stand ready to take further action”, the communiqué said.

But where is this action to avoid a new global recession going to come from? The world’s central banks, it seems. “Central banks are heroes,” OECD Secretary General Angel Gurria told Bloomberg Television in an interview during the meetings. “The question is: how much armoury do they still have, how many bullets, particularly silver bullets?”

In other words, what monetary policy weapons do the major central banks have left after ten years of keeping policy interest rates near or even below zero, and after massive injections of money through ‘quantitative easing’, buying up all the debt of governments and corporations from banks in order to encourage them to lend for investment?

Well, we are about to find out in the US.  The Federal Reserve led by Jay Powell, having gradually raised its policy rate for the last four years, is now indicating that it will reverse this policy and take its rate down again in order to boost the American and world economy. Powell told markets and the G20 ministers that the Fed stood ready to cut interest rates, saying it would “act as appropriate to sustain the expansion”.

A put is financial jargon for betting on a rise in financial assets in futures markets.  In the mid-1990s the then Fed chair Alan Greenspan reduced interest rates to boost the stock and property markets.  The Greenspan ‘put’ ‘took the stock market to a new peak in 2000, (but it was followed by the huge ‘dot.com’ bust).  We are about to have the Powell put to do the same.  Financial markets are now betting that the Fed will cut rates and keep the cost of borrowing really low in order to speculate further in financial markets. Jay Powell is set to be the new hero.

Thus the fantasy world of financial markets may be extended.  But will cutting interest rates avoid a recession in the ‘real’ economy?  Everywhere the ‘hard data’ are showing a sharp slowdown in economic growth, a collapse of the world car industry, and outright slumps in many large so-called emerging economies.  Above all, there is a significant a contraction in world trade as the trade and technology war instigated by the US against China hots up.

US economic growth had accelerated (from 2% to 3% a year) in 2018 after the Trump corporate tax cuts boosted profits – and unemployment dropped to post-war lows.  But last Friday’s May employment growth figures were the lowest in years and wage growth that had been accelerating also dropped off.  So there are signs that Trumponomics has been exhausted.  Now Jay Powell must step up to the proverbial baseball plate (after being ‘encouraged’ by Trump).

Elsewhere in the world, two key G7 economies continue to show a significant slowdown in economic growth. German industrial production plunged 1.9% from a month earlier in April.  That was the biggest drop in output since August 2015.  Year-on-year, industrial production dropped 1.8% over April 2018, following a 0.9% fall in March. Manufacturing output dropped 3.4% over the year!. Both German exports and imports fell.  German growth is now the slowest in five years. As a result, the German Bundesbank central bank cuts its GDP growth forecast for this year to just 0.6%, down from 1.6% at the beginning of 2019.

At the same time,the G20’s host, Japan announced that wages had fallen for the fourth consecutive month and overall household spending slowed sharply. Unemployment, currently at record lows, was now set to rise.  And most important, China’s economic growth rate is at its lowest level in over a decade – even if the rate of 6%-plus is around three times the average in the rest of the G20 economies.

In its semi-annual report on Global Economic Prospects, the World Bank cuts it forecast for global economic growth (that’s all countries including China and India) for this year by 0.3% percentage points to 2.6%. “There’s been a tumble in business confidence, a deepening slowdown in global trade and sluggish investment in emerging and developing economies,” said new (Trump-appointed) World Bank President David Malpass, “Momentum remains fragile.”

World trade growth is expected to fall to its lowest level since the global financial crash of 2008. The bank also warned that risks are skewed “firmly” to the downside, citing reignited trade tensions between the U.S. and China, financial turbulence in emerging markets and sharper-than-expected weakness in advanced nations, particularly Europe. Hidden in the back of its report, World Bank economists reckon that “A sharper-than expected deceleration of activity in systemically large economies—such as China, the Euro Area, and the United States—could also have broad ranging repercussions. The probability of growth in 2020 being at least 1 percentage-point below current projections is estimated at close to 20 percent. Such slowdown would be comparable to the 2001 global downturn.”

Another sign that the world capitalist economy is turning sour is what’s happening in the smaller G20 economies.  Growth in the Australian economy fell to its weakest rate in almost a decade in the first three months of this year. The economy grew by just 1.8 per cent year on year in the first quarter, and down from 2.3 per cent year on year in the preceding fourth quarter. This is Australia’s worst quarterly growth showing since the end of 2009.

Among the so-called BRICS (Brazil, China, India, Russia and South Africa), it is looking even worse. The South African economy is now suffering its worst slump in a decade. Output in Africa’s most industrialised nation dropped by an annualised 3.2 per cent in the first quarter, its largest quarterly fall since 2009. Power-intensive industries such as manufacturing and mining recorded the biggest drops in activity in the quarter. Mining activity fell by more than 10 per cent while manufacturing dropped 8.8 per cent.

Turkey went into a recession earlier this year under Turkey’s Trump, President Erdogan.  Argentina was already in a slump in 2018 under the governance of the right-wing administration of President Macri.  The country is now experiencing vicious austerity measures at the behest of the IMF which is bailing out the Macro government with the biggest loans in its history.

But the likely trigger of a new recession is the ongoing and intensifying trade and technology war between the US and China.  Neither side appears to be ready to back down and, as a result, world trade growth is diving while there is the prospect of increased tariffs and protectionist measures that will hit world growth.  Bloomberg economists reckon that if tariffs expand to cover all US-China trade in the next few months, then global GDP will take a $600bn hit in 2021. With 25% tariffs on all bilateral trade, GDP would be down 0.8% for China: 0.5% for the US and 0.5% for the world economy compared to no trade war.  That spells global recession.

And Trump seems bent on widening the trade war to other economies.  He has just temporarily delayed introducing a range of tariffs on Mexican imports, including imports of car and car parts that American companies make inside the Mexican border with the US.  The world car industry is already in major crisis driven by the end of diesel and slowing demand in China, Europe and Japan.  Now American car companies face new problems with Trump’s plans.

Thus while financial markets may be set to boom with the Powell put, that’s likely to have little effect on the struggling world economy.  The recovery since the Great Recession ended in mid-2009 has reached its tenth year, making it the longest from a slump in 75 years.  But it is also the weakest recovery since 1945.  Trend real GDP growth and business investment remains well down from the rate before 2007.

The trade and technology war is settling in for the long haul.  What makes it likely that the trade war will not be resolved amicably to avoid a global recession is that the battle between the US and China is not just over ‘unfair trade’, it is much more an attempt by the US to maintain its global technological superiority in the face of China’s fast rise to compete. The attack on Huawei, globally organised by the US, is just the start.

US investment bank Goldman Sachs has noted that, since 2010, the only place where corporate earnings have expanded is in the US.  And this, according to Goldmans, is entirely down to the super-tech companies.  Global profits ex technology are only moderately higher than they were prior to the financial crisis, while technology profits have moved sharply upwards (mainly reflecting the impact of large US technology companies).  And now it is just this sector that will suffer from the technology war.

The risk of a new recession, as measured by various methods, continues to rise.  Here is the New York Fed’s index of the probability of a recession based on analysing financial market and economic data.

Then there is the supposedly reliable indicator of the inverted yield curve in bond markets.  Normally, the interest rate of long-term bonds (ie 10 years or more) is much higher than the short-term interest (less than one year). So the ‘curve’ of interest rates from 3m to 10 years is up (or steep).  But when the 10-year rate drops below the three-month rate, this has invariably heralded a new recession within a year.  Why?  Because it implies that investors are so worried about the future that they want to hold ‘safe’ assets like government bonds rather than invest, to the point that long-term interest rate on these bonds falls below even the rate set by the Federal Reserve for short-term loans.

The yield on benchmark U.S. government bonds hit new 2019 lows near 2% before the G20 meeting.  Yields on 10-year bonds in both Germany and Japan were below zero!  About $11 trillion of bonds around the world, concentrated in Europe and Japan, carry negative yields, now account for about 20% of all debt world-wide.

And US yield curve has now inverted. The inversion has only just happened and it needs to continue for a few months to justify its reliability as a recession indicator. So watch this space. Maybe the central bank heroes can save the day.

 

22 Responses to “The heroes of finance and Powell’s put”

  1. ucanbpolitical Says:

    Well put, Powell’s Put. What distinguishes 2008 from today is this Put, this almost messianic belief built into the algorithms that the FED will be able to perpetually elevate the stock markets. Well you know the story of the second coming. You are also correct to focus on second tier economies. But you need to go beyond the BRICS. Switzerland, Singapore, Indonesia, South Korea, etc, are being hammered by the trade war and the stresses now found in global supply chains.

  2. vk Says:

    About the “technological war”, here’s an important news that came out today:

    “US accused of undermining trade talks by demanding ‘hundreds’ of changes to Chinese law”

    https://www.scmp.com/news/china/diplomacy/article/3014057/us-accused-undermining-trade-talks-demanding-hundreds-changes

    EXCERPT: “In essence, the trade war is not about the trade surplus. It’s a US effort to change how the Communist Party runs the nation’s economic activities at home and abroad,” Shi said.

    In sum, this is not a trade war or a technological war: it is a counter-revolutionary war, a war between capitalism and socialism. Bannon himself once said: “I’m against the Communist Party, not the Chinese people”.

    Only the very dense Trotskyists and Eurocommunists can’t see China is a socialist country.

    • sartesian Says:

      Well, it’s all sorted then. Bannon says its communist, it’s communist. Bannon’s also against the European Union, not the European people. Clearly that makes the EU socialist. Only the very dense third-worldists can’t see…….anything, actually, especially the close-up stuff.

      Raise high the banner of Marx-Engels-Lenin-Stalin-Mao-Deng-Xi-and Bannon. Sounds like a law firm.

      • vk Says:

        Your argument would be correct — if it wasn’t for the fact that this isn’t some backyard discussion between some random academics or politics enthusiasts.

        These are forefront actors of World History; there’s literally a war going on based on an entire doctrine (Shock of Civilizations) that embraces much of the elite of the most powerful empire in the world right now.

        We must separate rhetoric from actions, organic debates from aritificial debates. And these tell me the USA is not at war with the EU, but is with China, and that all sanctions against Russia point to the direction to ultimately destroy China. It is China, not the other countries, which is the ultimate American target.

      • Anti-Capital Says:

        Calling China “socialist” based on Bannon’s antipathy is the apotheosis of “rhetoric,” substituting ideology, or “reflexology” for critical analysis of the social relations of production.

        The US at war? The US is at war all over the globe. Doesn’t make Iran socialist, does it? Doesn’t make Venezuela socialist does it? Doesn’t make ISIS or the Taliban socialist, does it?

        The conflict between the US and China is the product of capitalist overproduction in which China has participated wholeheartedly. The solution isn’t in supporting this or that “player.” It’s in abolishing the whole game, or more precisely, the whole racket.

    • Wal Buchenberg Says:

      VK,
      you are referring to Marx. You should know that competition is a fundamental element of capitalism. The competition occurs between companies, between industries and between economies. All competitions are supported by the respective governments. That one government declares another an enemy is a consequence of capitalism. That the US-governmant views China as an enemy is a consequence of capitalism and has nothing to do with whether China is socialist or not.
      It is a mortal sin for the working-class movement to take sides in this capitalist competition and speak out for one company or one government and against the other.
      Wal Buchenberg, Hannover

      • vk Says:

        But you’re wrong to presuppose competition only happens in capitalism. It is the same fallacy to consider trade can only happen in capitalism.

        Besides, when History is in flux, things get mixed up. This happened, e.g., in the transition from Ancient Slavery to Manorialism (“feudalism”), where many aspects of both systems coexisted for 500 years in Europe.

        Trump clearly wants to destroy China, not “win”.

    • jlowrie Says:

      ”Only the very dense Trotskyists and Eurocommunists can’t see China is a socialist country.”

      Not to mention the Stalinists, Marxist humanists, anti-Bolshevik communists, libertarian Marxists, anarcho-communists, and not forgetting the Maoists, speaking of whom did not the Chairman himself deny that China was socialist, arguing contra the likes of you, that the expropriation of the capitalist class did not constitute socialism as it was a purely legal enactment, which he illustrated, if I recall correctly, by an analogy: in China women have been granted by law equality with men. So what? Nothing has changed.Socialist woman has yet to emerge in China. Everything else needs to be done; and as with women in China so with society in general: everything else remains to be done before socialist society can emerge.

      Take Stalin’s ”Economic Problems of Socialism” of 1952. Stalin in discussing the transition from socialism to communism in the countryside raises the idea that the conversion of collective farms to state farms might be a step in that direction. Why? Such a measure is merely a juridical change and might in fact be a step away from communism. The Chinese Marxist, Kang Sheng, who enjoys the honour of having been posthumously expelled from the party by Mr Deng as a Trotskyist or some other such nonsense, on a return from Russia in the early 1950’s remarked that the landlords had returned to the countryside in the guise of the Machine Tractor Stations! Can you not comprehend that these were not in the possession of the peasants and therefore they were alienated from them. Marx in discussing pre-capitalist society at times employs the distinction from Roman law between the concepts of property and possessio, i.e. who actually controls a good as to who juridically supposedly owns it. I suggest the same distinction is of use in analysing the transition between capitalism and socialism. If production is to be organised by the associated producers, then it is by no means clear that its control by the state might not in fact be a retrograde step, which I believe would have been the case in converting ALL collective farms into state property, a change in juridical status that might have opened the way for negative changes in the real economic relationships through the interference of state actors.

      In China in the past when Deng was tyrant the airlines were state property but Mr Deng used them privately to ferry his bridge cronies into Peking for a few rounds: you see, he enjoined ‘possessio’ of this state property, which is why his family like that of President Xi enjoy the ‘grandeur’ of billionaires!

  3. Tyrgfrfgrrrrg Says:

    “Turkey went into a recession earlier this year under Turkey’s Trump, President Erdogan”

    I still remember when Erdogan was Obama’s Moderate Muslim ‘model’. And even the Bushs before that.

  4. fyi Says:

    A put is betting for a fall in an underlying price in the options market, not a rise in the futures market, although there are futures options as well. It’s called the Greenspan put because central bank intervention was like insurance against the decrease in equities prices, which is like what people use put options for.

  5. João fores. Says:

    Precisamos de uma análise sobre a situação do Brasil.

    • michael roberts Says:

      https://thenextrecession.wordpress.com/2018/10/29/brazils-tropical-trump/

    • antonio Says:

      Here is one more analysis on the situation today in Brazil.
      Put another way: in 2.021 Brazil will return ‘in full right’ ‘to the 19th century. 0.5 annual growth and GI Index through the clouds (these are the real economic data relevatnes of ‘pure’ capitalism in the nineteenth century. Angus Maddison).That the ultimate goal, desired and nuclear (the rest are smokescreens) by the neoliberals and the extreme right (Bolsonaro, Trump, Bacon, Lepen, Macron, Vox, etc ..: THE PRIVATIZATION OF ALL.) Large private companies seize social property built in the twentieth century.The socialist mode of production recedes, takes a step back.The State as a new agent-economic subject is contracted, reduced to … zero, if allowed.It is sold.It is the revolutionary impulse ( 1,917, 1959- Rosa Luxemburg, Ragnar Frisch, Walter Sheidel …) in its receding phase, also in Europe, of course, and in China, Cuba, Venezuela, North Korea, etc … …
      https://www.eldiario.es/internacional/Privatizar-Brasil-completo-objetivo-Bolsonaro_0_908509528.html

      • antonio Says:

        About the privatization of Brazil (and the rest of the System-World) and about the socialist social property. Can you avoid its privatization? In the same media and on the same day the news appears with the solution: the Norwegian Sovereign Fund. That is to say, the step that socialism lacks (mode of production), the step that its social property lacks, to prevent it from falling back, to be privatized and sold, is to convert it into LIVING social property. It can not be social property only an object property, an inert and abstract matter, must be a subject property, living and concrete matter. It must integrate and include in it the individual properties of living subjects that do have the capacity of decision and action for the moment in which social property is attacked. And so, in the Norwegian Sovereign Fund – social property – it is not the Government and the parties (corrupt or not) that decide whether the Fund is privatized or not, whether it is invested or not. It is the individual citizen owners, holders of sovereign titles of the Norwegian Sovereign Fund who make such a decision. Via the Norwegian Parliament, in this case, but could be, more democratic, via referendum. Result of the solution: the Sovereign Fund (1 billion euros) Norwegian NOT PRIVATIZED

        https://www.eldiario.es/ballenablanca/transicion_energetica/soberano-Noruega-ratifica-desinversion-petroleo_0_909209907.html

    • antonio Says:

      One more about the privatization of Brazil (and the rest of the System-World) and about socialist social property. Can you avoid its privatization? In the same media and on the same day the news (below) appears with the solution: the Norwegian Sovereign Fund. That is to say, the step that socialism lacks, the step that its social property lacks, to prevent it from going back, to prevent it from being privatized and sold, is to become LIVING social property. The social property can not and should not be only an object-property, an inert and abstract material property, it must be a property-subject, living and concrete matter. To achieve that goal, you must integrate and include in it individual subject-properties. Individual property-subjects that do have the capacity of decision and action for their defense at the moment in which social property is attacked. And so, in the Norwegian Sovereign Fund – social property – it is not the Government and the parties, who decide whether the Sovereign Fund is privatized or not, whether it is invested or not. They are the individual owners-subjects, the citizens, holders of the titles of the Sovereign Fund, who make that decision. They do it via the Norwegian Parliament in this case, but it could be, with more democracy, via referendum. It is the individual properties that direct and defend social property. Yes, exactly the same as in a capitalist society. Yes, exactly like many other capitalist solutions applied in socialism. Why?. Because capital is not the problem, the problem is only who owns it. Only a few (capitalism) or a social majority (socialism). Result today of the solution: the Norwegian Sovereign Fund (1 trillion euros of capital) IS NOT PRIVATIZED and all other social properties, since the 80s (Urss, Eastern countries included), if they were privatized and will continue to do so …
      https://www.eldiario.es/ballenablanca/transicion_energetica/soberano-Noruega-ratifica-desinversion-petroleo_0_909209907.html

  6. Wal Buchenberg Says:

    Hi Michael,
    I think it is time for you to make a recent economic analysis of what is now Britain. After Brexit the year 2018 will become the base year for comparisons with the following decade and longer.

    Wal Buchenberg, Hannover

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