Follow Dr. Andreas Höfert
The IMF’s Jacques Polak Annual Research Conference is usually of very high caliber. Highly ranked academic economists debate new advances in economic theory and empirical evidence with IMF staff and central bankers. This year’s conference – the 14th – dealt with “Crises: Yesterday and Today” and was the last in which Ben Bernanke participated as chairman of the Federal Reserve. It thus had an undertone of appraisal and critique of the policies Bernanke implemented in his eight-year chairmanship, especially in the last five years since Lehman went bust.
Every six months, the US Department of Treasury publishes its semiannual Report to Congress on International Economic and Exchange Rate Policies. In this 30-page document, it gives praise to and lays the blame on the rest of the world for its trade practices. One of its running stories over the last couple of years has been the question whether China will finally be given the infamous label of “currency manipulator.” In this sense, the latest report was somewhat of a first, as this time, the bulk of the blame was not heaped upon the usual suspects China and Japan, but on Germany and, to a lesser extent, the Netherlands.
There are more and more signs that the Eurozone might follow in Japan’s footsteps. Remember, after the consecutive bursts of its real estate and stock market bubbles in the late 1980s and early 1990s, the Japanese economy stalled for the next 20 years in the face of flat to declining prices.
Over the last few months, I have held several fierce debates with my esteemed colleague, Jürg de Spindler, who works as the political analyst in our CIO team. His job is to dissect and interpret what is happening in the political spheres of the countries we cover from an investment and economic perspective. Needless to say, he has not been short of work lately. The German elections, the Italian government crisis, the shutdown/showdown in Washington – these are just some of the crises he has or had to cover.
The scenario that the Eurozone is reaching recession escape velocity has gained some thrust in the last couple of weeks. We already knew that Germany and – with weaker momentum – France left recession in the second quarter of 2013. Since the two largest Eurozone economies account for almost half its GDP, the whole region was lifted out of the double-dip recession after six straight quarters of shrinkage. Doubts remained though about whether this recovery might only be a German story rather than one for the Eurozone as a whole.
Grand coalitions, i.e. when the two largest political parties of opposing ideologies form a national government together because neither of them can achieve a majority for itself, are usually welcomed by market participants. They have a broadly based legitimacy within the electorate and hence they can implement tough and painful reforms more easily. While this might be true in the short run, such grand coalitions can nonetheless have major drawbacks in the longer run, which ultimately could undermine the foundations and stability of governments and in extreme cases even the democratic process of a country.
I am sometimes baffled by the post hoc ergo propter hoc market commentaries issued by TV talking heads and newswire writers. For example, equity markets worldwide rallied nicely on 16 September. The reason? Larry Summers announced he was withdrawing as a candidate to succeed Ben Bernanke as chairman of the US Federal Reserve.
Roughly two years ago I wrote about the difficulty investors (and the broader public) face trying to hide from governments in need. Back then, I concluded that “…in the next couple of months and years…the risk that governments will adopt Procrustean measures to cut their funding needs to size will dramatically increase. Hence we could see more financial repression, capital controls, tariffs and trade barriers and ultimately the decline of globalization.” Since then, unfortunately, financial repression has indeed increased.
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