If synchronized budget austerity is the order of the day across the developed world, major central banks will be forced to shoulder the burden of economic support for far longer than many had bargained on.
Back in January, financial commentators talked at length about this year being the year of the exit strategy — when massive economic stimuli from governments worldwide would have been removed as resulting global recovery gained traction.
In truth, most focused on the likelihood of monetary exits — if not interest rate rises in the US and Europe, then at least the wind-down of extraordinary “quantitative easing” or effective money-printing. The politics of budget retrenchment, it was thought, might take a good bit longer.
Yet, panicked by financial market convulsions over the sustainability of debts in Greece and other euro zone countries, governments are heading for the other exit first and en masse.
If they’re not careful, the world economy could get caught in the crush.
“The fact that all major economies face the need for fiscal retrenchment at the same time means that the global cyclical recovery that has been in place for the past year is vulnerable to tightening fiscal policies in several economies at once,” HSBC economists warned last week.
Others take a stronger line.
In a typically provocative research report, Lombard Street economist Charles Dumas last week talked of the “Anglo-German Stupidity Shoot-Out” and warned Europe risked turning recession to depression with lock-step draconian budget cuts.
What’s for sure is the collective scale of the retrenchment planned in Germany, France, Britain, Italy and Spain alone — five of the world’s top 10 economies which account for more than 20 percent of global output — means interest rates are not going up any time soon. And, egged on by the G20 leading economies, budget surgery will not be confined to Europe, even if the prospect of staggered cuts elsewhere is of some relief.
The world’s two biggest economies, the US and Japan, look slower in laying down plans to rein in their bloated debts and deficits — partly for electoral reasons — but the size of their tasks from next year is no less daunting.
“Those countries with serious fiscal challenges need to accelerate the pace of consolidation,” G20 finance chiefs wrote in a communique after meeting in South Korea this month.
And so, the monetary taps stay on.
At the start of this year, economists polled by Reuters had expected the US Federal Reserve, European Central Bank (ECB) and Bank of England to be lifting interest rates by the end of this year.
Less than six months later, interest rate futures show little chance of a Fed move this year; no Bank of England move before next March at least; and ECB rates on hold until 2012.
Economists at JPMorgan have crunched the numbers to show developed economies’ budget deficits as a share of their GDP deteriorated by more than 6 percentage points between 2007 and last year to a post-World War II record shortfall of 8 percent of GDP. Total net debt levels skyrocketed by more than 20 percentage points to 62 percent of GDP.
Joseph Lupton and David Hensley reckon that as long as the recovery holds up, deficit levels could be halved as soon as 2013 in what would be the biggest fiscal consolidation in 40 years.
However, even that would still fall short of “debt sustainability,” they said.
One obvious conclusion for central banks is this squeeze will at least slow the world economy substantially if not smother it completely, as Lombard Street suggests of Europe.
Also, there will be the ongoing pressure to avoid triggering a fiscal heart attack by raising official interest rates and aggravating capital market borrowing rates — currently at historically low levels.
Facilitating the huge buildup of debt in the first place, average interest rates paid on developed market government debt plunged more than 5 percentage points to 3.3 percent since 1982. The pressure from here is likely more up than down.
And putting all the pressure on Western interest rates has its consequences around the globe, not least for those who fret about so-called global imbalances in national accounts and capital flows. With developing economies seeing much faster growth and inflation rates and without the same fiscal overhang, interest rates there have already started to rise.
Brazil, India and Israel have all hiked rates in the first half of this year. Tension and volatility surrounding Europe’s debt crisis has kept frightened Western capital at home for now and lifted the dollar in the process, but the widening interest rate gap between developed and emerging markets may reopen floodgates.
Fresh capital surges to developing markets risk refueling imbalances, bubbles and reserve recycling that were arguably at the root of three years of financial turmoil in the first place.
As South Korea showed last week, capital and currency controls are only a short step from that. G20 needs to be wary.
The saga of Sarah Dzafce, the disgraced former Miss Finland, is far more significant than a mere beauty pageant controversy. It serves as a potent and painful contemporary lesson in global cultural ethics and the absolute necessity of racial respect. Her public career was instantly pulverized not by a lapse in judgement, but by a deliberate act of racial hostility, the flames of which swiftly encircled the globe. The offensive action was simple, yet profoundly provocative: a 15-second video in which Dzafce performed the infamous “slanted eyes” gesture — a crude, historically loaded caricature of East Asian features used in Western
Is a new foreign partner for Taiwan emerging in the Middle East? Last week, Taiwanese media reported that Deputy Minister of Foreign Affairs Francois Wu (吳志中) secretly visited Israel, a country with whom Taiwan has long shared unofficial relations but which has approached those relations cautiously. In the wake of China’s implicit but clear support for Hamas and Iran in the wake of the October 2023 assault on Israel, Jerusalem’s calculus may be changing. Both small countries facing literal existential threats, Israel and Taiwan have much to gain from closer ties. In his recent op-ed for the Washington Post, President William
A stabbing attack inside and near two busy Taipei MRT stations on Friday evening shocked the nation and made headlines in many foreign and local news media, as such indiscriminate attacks are rare in Taiwan. Four people died, including the 27-year-old suspect, and 11 people sustained injuries. At Taipei Main Station, the suspect threw smoke grenades near two exits and fatally stabbed one person who tried to stop him. He later made his way to Eslite Spectrum Nanxi department store near Zhongshan MRT Station, where he threw more smoke grenades and fatally stabbed a person on a scooter by the roadside.
Taiwan-India relations appear to have been put on the back burner this year, including on Taiwan’s side. Geopolitical pressures have compelled both countries to recalibrate their priorities, even as their core security challenges remain unchanged. However, what is striking is the visible decline in the attention India once received from Taiwan. The absence of the annual Diwali celebrations for the Indian community and the lack of a commemoration marking the 30-year anniversary of the representative offices, the India Taipei Association and the Taipei Economic and Cultural Center, speak volumes and raise serious questions about whether Taiwan still has a coherent India
RSS