Japanese economic growth improves whilst Europe’s banks look to raise funds

After a slightly confusing day for economic statistics the Dow Jones Industrial Average closed just 28 points higher at 10415. The confusion was caused by some obfuscation at the Bureau of Labor statistics. There was no such obfuscation with Japanese economic statistics and the Nikkei 225 rallied by 140 points to 9239 getting it out of bear market territory for now anyway. It also meant that the current wide gap between the two indices narrowed to 1176 points but it is still some 12.7% of the Nikkei’s value.

Germany’s banking sector and euro zone stress tests

Adding to my recent theme of weakness at European and more particularly German banks we saw this statement in the Financial Times Deutschland edition by Juergen Stark who is the chief economist at the European Central Bank.

 Juergen Stark, considers the German banks to be undercapitalized. Stark made this statement on Wednesday at a meeting with the head of Unions Parliamentary Group in Berlin, according to participants. He was referring largely to savings banks and regional banks (Sparkassen und Landesbanken). Accordingly, [Stark] called for privatization of the German savings banks, based on the successful Spanish model.

It is not entirely clear to me that the Spanish model is as successful as he claims but already his comments have produced a revealing result. Deutsche Bank is going to raise some 8 to 9 billion Euros of capital and far from all of it is required to help in its acquisition of Postbank. It reminds me of the aphorism that in financial markets there are “the quick and the dead”. Other equally undercapitalised German banks may rue the fact the Deutsche has shot to the front of the queue as depending on what the new Basel banking regulations settle on German banks look like they will need around 100 billion Euros of new capital. Those who analyse Mr.Stark’s contribution should consider two other matters.Firstly we have a pretty immediate response from a bank which is not in the categories he singled out for criticism but apparently still needs capital which implies a rather poor position at those other institutions his remarks directly addressed. Also it would appear that Mr.Stark does not appear to be much of a fan of the euro zone banking stress tests that CEBS enacted back in July. I wrote on this subject back on the 23rd and 26th July and it would be fair to say that I had several criticisms of them too. CEBS itself has had to issue a rather curious reply to criticism from the Wall Street Journal this week from which I quote this section.

CEBS notes that comparison with other sources should be treated with caution as a result of different reporting dates and reporting methodologies. For instance, data provided by the Bank for International Settlements (BIS), is aggregated in a way which makes comparison with the data disclosed by banks during the CEBS exercise impossible.

Thanks to them for making the situation clear,or not as the case may be! One objective of this sort of official intervention should be transparency and it is plain that this was not provided. Even supporters of CEBS may be wondering why National Bank of Greece and Deutsche Bank are raising funds when they were apparently in such good shape just over a month ago….

The Japanese economy: economic growth is revised higher but disinflation persists

 The Japanese Cabinet Office reported today that her Gross domestic product grew at an annualized 1.5 % in the three months ended June 30, faster than the 0.4 % reported last month. So the second estimate if we convert it to the UK style is at just under 0.4% rather than 0.1%. This does not sound quite so good but is a clear improvement which was caused by capital investment which rose by a revised 1.5 % from the previous quarter, rather than the 0.5 % initially reported.

However the numbers do also give us something of an old friend as the GDP implied deflator, which is probably the best measure of price trends we get as it covers the whole economy, fell 1.7 % from a year earlier.That is five quarters of drops in a row and leads to a curious anomaly where on the quarter on an annualised basis nominal GDP fell by 2.5%. This leads to an interesting conundrum if you compare it with national debt levels does it not? I will leave that subject there for now but if anyone does not understand what I am saying please ask in the comments section as I am deliberately leaving this a little opaque as to understand Japan’s position I feel that one does have to cogitate on such issues as they are very different to elsewhere.

One caveat on these figures is that Japan had not so long ago to reform them as one particular revision was so large it led to considerable embarrassment so on the new basis we lack much of a track record. Rather un-Japanese I thought at the time although of course in some ways Toyota has followed this trend since so it is perhaps not quite as un-Japanese as i had thought.

After the figures we saw a slightly contradictory move of a weakening of the Yen exchange rate and as I type it is at 83.79 versus the US $ and 106.70 versus the Euro.On this subject there has been some concern expressed in Tokyo about recent purchases of Japanese Government Bonds by China. Now most countries would be pleased to see the Chinese buy their bonds! This hits on a difference between Japan and say the US and UK. She has a high domestic savings rate and so in spite of her large stock of national debt she can finance it domestically whereas we cannot. Last time I looked at the figures only some 5% of the JGB’s in issue were owned by foreigners whereas the UK figures are more like 30%. These purchases are in some places being blamed for the rise in the Yen which I think is to overstate their importance and I think it would be more truthful to say that Japan is an insular nation which does not like depending on gaijin or to use a literal translation alien (rather than foreigner) and how can I put this delicately particularly not China.

There is something of an irony for Nakoto Kan’s stimulus package being announced on a day that had improved growth figures and in an economy of Japan’s size I wonder what he expects a stimulus of 920 billion Yen or 11 billion US dollars will achieve. Going forwards the real issue is whether the rise in the Yen will return Japan to recession or whether she can continue to grow. A further problem from the Yen’s rise is that it adds to Japan’s dis inflation problem by reducing import prices.Much in Japan is not as elsewhere.

America’s economic statistics

As I said at the beginning of this week we would get information from the US trade figures but that they were very unreliable, however the unexpected twist was that the initial (jobless) claims figures from the Bureau of Labor Statistics would turn out to be unreliable too, as according to Bloomberg.

For the latest reporting week, nine states didn’t file claims data to the Labor Department in Washington because of the federal holiday earlier this week, a Labor Department official told reporters. As a result, California and Virginia estimated their figures and the U.S. government estimated the other seven.

A much simpler answer would have been to delay the numbers for a day to allow everyone to catch- up and it is for this reason that I cannot report on these weeks figures. The one piece of information we did get was that last week’s figures were revised up by 8000 to 478,000 continuing a trend that usually sees upwards revisions over time.

The trade figures showed a narrowing from June’s concerning $49 billion deficit to $42.8 billion with exports rising and imports falling to complete a much happier picture.However if one steps back and looks at trends rather just monthly figures the three-month average actually rose to $44.4 billion from $43.9 billion reminding us that we need to look at more than one months figures and the chart the BEA shows on its press release which goes back to July 2008 shows persistent problems in my view.

I think we are still left with a picture of a slowing economy but we are not much the wiser as to whether it is a severe or a minor one.

Fiscal Policy and a possible stimulus

A comment on this blog was posted yesterday on the subject of fiscal policy and suggested that a fiscal stimulus would be a good idea. I would be interested in readers views on this and I would like to narrow the debate to whether this is the right time for one as I feel this is the crucial issue. Changes in fiscal policy take a considerable time to be enacted usually and to start the debate my concern is we are not yet absolutely clear that it is required and so it would be running a large risk. Indeed we have a lot of stimulation both monetary and fiscal in world economies right now which sometimes gets forgotten. So now I have posed two questions! Sorry.One is about timing and the other is about total stimulus size.


19 thoughts on “Japanese economic growth improves whilst Europe’s banks look to raise funds

  1. The root cause of this crisis is probably the same as all the others that went before it – productivity has increased faster than wages and demand could keep up. Western consumers (in the USA particularly) supplemented their income by borrowing, and now asset prices (i.e. housing) have reached a level where debt servicing costs are causing demand stagnation.

    There are two ways out of this: 1) asset prices are allowed to deflate and many creditors take a haircut (meaning the financial system will be bankrupted again), 2) the currency is debased and wages inflate. In the end I expect a combination of the two will occur. However, I worry that option 2) is not feasible while world trade and a vast potential labour pool in the developing world are putting downward pressure on wages. I doubt that a ‘third way’ of stagnation and slowly working off the debt will prove to be a stable situation, which brings into question the point of further stimulus.

    Assuming further stimulus was deemed desirable however, I believe it would have to address two issues: firstly, lack of disposable income required to generate demand and secondly, high borrowing costs for SMEs. The former could be given a temporary boost by cutting taxes for lower to middle income households. The latter could be tackled either by direct government lending (from a new GSE, perish the thought) or some form of guarantees or tax breaks to private lenders in this area. Both policies could be funded by government borrowing and treasury purchases by the Fed.

  2. If an economic system has developed a structural problem (such as an unsustainable dependence on borrowing) I still fail to understand why you would want to stimulate activity that will only further exacerbate the structural weakness.

    When did it become a sin to allow markets to self correct? Is it not the role of government to ameliorate the painful personal consequences of a market failure and take action to prevent a reoccurence , rather than simply do anything possible to maintain the flawed status quo.

  3. “Both policies could be funded by government borrowing and treasury purchases by the Fed.” Surely the problem with that concept Graeme is that all Western governments already have borrowings (including tricks like PFI etc.) which are much too high, and such policies as you suggest are Socialistic and in the long-term economically destructive. As with all modern economics ultimately it comes back to politics. Not everyone wants extreme Socialism.

    I do not agree with your analysis about how we got to where we now are. Real productivity will always increase with demand. If demand falls then the level of production will fall. That is a function of the natural law of supply and demand. Politically the problem then is the accompanying economic downturn and rising unemployment, so-called “full employment” being the Socialist political zenith goal. However, it seems that we collectively have to learn the same lesson over and over again that we must live within our means – both individually and collectively. The root of all of our problems I believe is our failure to accept this any longer; to believe the Socialist dream that everyone can have and enjoy what they want rather than what they can actually in real terms afford earned by what they contribute. Politicians of all parties, who want to be elected, keep up the pretence, and ever since WWII have funded this delusion by using inflation to meet their shortfall between revenue raised and Public expenditure. In the UK this has been made worse by the playing of “remnants of Empire” games which we can no longer afford, and backing the Yanks in expensive wars abroad.

    The genus of the present economic difficulties was in the transition from real wealth generation to generating artificial wealth by parasitic manipulation. Once easy money was to be made by such delusional exploitation all focus on real wealth generation became blurred and predatory pursuits became the most lucrative.

    So with the present excessive level of total public debts, and additional commitments like Public Sector pensions, I feel that further stimulus will set in place yet further long term high inflation and economic destruction, which will not be able to be repaired, any more than that done since WWII has been able to be repaired. Further stimulus will not even be real Keynesianism, since the total stimulus will never be repaid by the Exchequer in the required Keynesian manner when there is any upturn, and the currency will be even further debauched, leading to serious problems.

    The only rational solution is thus now to take our medicine, so as to get better. A natural economic correction is now necessary, so that we get back to living the lives which our economy can afford. It will ultimately occur whether there is further stimulus or not. The only real effect of further stimulus will be to delay taking the medicine, but to make the suffering greater afterwards.
    There are many historical examples of similar cycles; many previous advanced civilizations have collapsed for similar reasons. To continuously believe that the same actions which have caused previous disaster will function differently this time is the height of delusion and idiocy! We can only ultimately enjoy the real wealth which we generate.

    • Reading between the lines, you seem to agree with much of my analysis, but dislike how I have couched it. I would like to point out that I am not ‘a socialist’ but rather ‘a centrist’. I do, however, believe that Adam Smith taught us why greed is good and Karl Marx why too much greed is bad. Ultimately the problem is not that we cannot generate enough wealth but rather, that we can never generate enough profit 😉 As you point out, there have been many of these cycles over the centuries and more stimulus is only going to delay the inevitable. Enjoy!

      • Hi Graham,

        I am afraid that your assumption that I agreed with much of your analysis is unfounded and thus erroneous. If I had agreed with the fundamental substance of your comment I would not have posted my comment at all. It is precisely because I do not agree that I posted my comment.

        I do not agree with any further economic stimulus being applied. It would do well to consider what the real objective of any further stimulus is and would be in the circumstances which now exist. As Shaun has previously implied, I believe, since QE and artificially low base rates have not worked as intended, where is the evidence that any more of the same would work? My belief is that they will not, principally because they would be an attempt to address the existing problem with more of the same increased fundamental collective profligacy. The objective of trying further stimulus is essentially a Socialist gambit, principally to try to avoid over-indebted electors suffering the consequences of their own profligacy.

        You claim that you are a “Centrist”. I would put to you that Centrism is essentially watered-down Socialism. It has nothing to do with Adam Smith and his pronouncements, but does follow the leaning of those like Galbraith. I believe unlike you that the essential problem is that we are NOT producing sufficient real wealth to sustain the lifestyle that the average Western citizen has enjoyed over the last decade. Profit is not wealth.

        I agree with you on the issue that any further stimulus is only going to delay the inevitable; but I do not agree that is “only” or all that it will do. As Keynes explained, inflation destroys economies and destroys society. That is why Lenin was right. Look at the Wiemar Republic and Zimbabwe as examples of this. “Stimulus” means future inflation, because this stimulus is never redeemed by politicians. To repay the value used to stimulate costs votes which is suicidal for politicians, so they never do it! Thus stimulus always generates large amounts of inflation ultimately with fiat currency situations; there is no restraint. The suffering which follows is never anything to enjoy, so I do not understand your point “enjoy” as being anything other than flippant.

        In your second comment post your are just reiterating my points. The suffering you refer to was solved in the past by benevolence rather than by Socialism. If Socialism actually worked we would no longer need benevolence and charity; the fact that we continue to need benevolence and charity shows that Socialism does not work.

        When you claim that any economic correction will result in “savers” losing money I do not understand your point at all! Why should you pick out savers as your target for comment? Do you mean that any economic correction will result in those with capital losing part of their capital? I would not agree with that necessarily being true. Those with capital will certainly lose if there is further stimulus, unless they have moved into gold or a similar real commodity, since the resultant inflation will further debauch the currency. However, in a natural economic correction that would not be so. Look at the Great Depression as an example. Those with capital did not suffer significantly.

        The transition from real wealth generation to artificial wealth substitution was not only a consequence of loose monetary policy as you claim; it was mainly a result of idiotic successive political policies, and particularly Socialistic political policies (whether by an overtly Socialist party or not). It in essence originally had nothing to do with “a globalized labour market driving down wages”. It was more due to irresponsible government policies forcing up the tax overhead and resultant unskilled labour costs, due to Socialism and a welfare state, so that the West was unable to continue to compete in generating real wealth.

        However, I do agree with you, that it is a bit like watching a natural disaster documentary in slow motion, and we know what the inevitable outcome will be. Due to the modern generation of slimy politicians who have no honour, but are only interested in trying to be re-elected whatever, we know that they will continue to attempt to re-stimulate Western economies until they have driven them down into fiscal disaster. That is the inevitable weakness with fiat currencies – that they can be debauched with excess and supposed economic stimulus. This is ultimately the process of all advanced civilizations. They rise for a period and ultimately destroy themselves. As Ariel Durant is reputed to have said or written, “A great civilization is not conquered from without until it has destroyed itself from within”.

      • Drf, I am sorry for my flippancy, and I made the second post because I realized on a second reading that you appeared to agree with little of what I said.

        I do not think further stimulus is a good idea either – never said it was – I was merely pointing out the form it would need to take to be effective. However, I think you are being naive if you think savers would not suffer in a deflationary environment where many banks went bust. If the state paid for a bailout this would come out of the tax take as well. Debtors will not pay back what they owe because they can’t (except in inflated currency).

        That real wealth and profit are not the same thing is also a point I was trying to make. We will have to agree to disagree on the causes of this credit bubble though. You say it is down to ‘the socialists’, I say it is the fact that profits were lent back to us to make more profit. Ask yourself this though – is there too little productive capacity in the world to e.g. supply enough cars or houses to meet everybody’s needs? What does that tell you?

        I agree that small government and charity are desirable as well, but we are where we are, and I can’t see a majority of the current generation coping in the kind of world you advocate. The extended family is no longer there for most people, and many fear prosecution for trying to do the right thing. I think we both agree that this is bad, but it is not something that can be fixed overnight.

        PS. I am really not a socialist – I think this is a bit of a ‘dog whistle’ word for you though. I voted for the Tories at the last election and would prefer deflation to inflation personally.

      • Hi Graeme,

        (Sorry that did not spell your name correctly previously.) I have used the term “Socialist” and its derivatives to refer to what are essentially the left-wing policies now practiced by all Lib/Lab/Con political parties and the EU, and those equivalent parties in other Western countries. I was not referring to those parties which declare themselves overtly to be Socialist.

        “…you are being naive if you think savers would not suffer in a deflationary environment where many banks went bust.” I did not suggest that imprudent savers might not suffer if many banks failed. However, provided that any saver abides by the protection rules, deposits are protected by the FSCS, not the government. So if any registered deposit-taking financial services provider goes bust a prudent saver will not lose their deposit. This is paid for by a levy on all other deposit-taking institutions – not by the government. Nevertheless it is savers who will lose the most from debauchment of the currency by governments in inflation. However, again I do not understand why you are concentrating your attention only on savers? If banks fail then my belief is that they should be allowed to fail like any other business in a Capitalist system. Bailing them out was a grave error of judgment, and is beginning to be more widely seen as such. It became more than anything else a gambit to preserve the large bonuses of highly-paid casino bankers, rather than the economy as a whole.

        “We will have to agree to disagree on the causes of this credit bubble though. You say it is down to ‘the socialists’, I say it is the fact that profits were lent back to us to make more profit.” I did not imply nor mean that Socialists were the cause of the credit bubble. That would be an absurd and naive assumption. I put forward the concept that the gradual creep of Socialism, as a inherent political ideology, and the accompanying creeping Welfare state, ever since WWII has gradually built up the problems which led to the last serious economic difficulties and sea change; these gradually destroyed our real wealth generating capacity; these were then gradually replaced by predatory parasitic activities, which included increasing excess lending to those who were clearly not likely to be able to continue to service that debt. So in a sense here we actually agree, except that you term the funds used for these reckless loans “profits”, whereas I do not see those funds as resulting from true profits. So overall we essentially see the end symptoms as similar, but I see this as a long term and gradual cause since WWII, whereas you see only the final phase as the ultimate cause.

        We seem to agree in part, although having different analyses, but in any case we seem to agree on what the most likely outcome now is going to be. Sense will not prevail, but politics and vote buying will prevail. As I
        had commented previously:

        “Due to the modern generation of slimy politicians who have no honour, but are only interested in trying to be re-elected whatever, we know that they will continue to attempt to re-stimulate Western economies until they have driven them down into fiscal disaster. That is the inevitable weakness with fiat currencies – that they can be debauched with excess and supposed economic “stimulus”.

    • To clarify a few things (can’t see how to edit posts here) –

      – I think we both agree that productivity expands or contracts to satisfy demand – the problem is that rapid contraction of production leads to rapid contraction of jobs, which means you don’t get many votes at election time. Democracy has a nasty habit of bankrupting itself as you say.

      – I do not believe in full employment. I accept that some people deserve higher wages than others, and that some people are basically unemployable. It is only fair that the latter do not live the life of Riley paid for by the state, but then again I’m not comfortable with their children dying in the gutter either. How you solve this tricky conundrum is not something people are given to discussing rationally.

      – I agree that there should be a correction – but you do realize that this will involve creditors (savers) losing some money however it happens?

      – When you say ‘the transition from real wealth generation to generating artificial wealth by parasitic manipulation’ you are talking about the credit bubble, which was a consequence of loose monetary policy, which was a consequence of falling demand, which was a consequence of a globalized labour market driving down wages.

      – A lot of the capital has gone to sovereign wealth funds rather than ‘rich people’, but the results are the same.

      – I have no strong feelings about how this mess should be sorted out – but I find it kind of fascinating – it’s a bit like watching a natural disaster documentary in slow motion.

  4. I think Graeme has a point which hasn’t really been made before in anything I’ve read about our current economic problems. In some instances we are suffering from over-production. We are the victims of our success and because we are efficient in what we produce there is often overproduction which uses up valuable resources. You only have to look at the rows of unsold new cars often in dis-used airfields and the like to see that. Then to stimulate demand governments have introduced measures like the car scrappage scheme. All this at a time when we should as nations be looking to downsize our use of resources in the west. So there is artificial stimulation to the market and we are encouraged to consume and take on debt instead of living within our means.

    Maybe the solution lies in a slow realisation that we could start to consume less, work less and take life a bit easier and to re-jig our manufacturing so that we produce more of what we need rather than carry on with the same industries which are making too much of what we don’t need. Surely we should be making our cars last as long as possible rather than trading them in. If markets were truly free then I agree with Drf that there would not be over-supply but it doesn’t seem to work like that.

    • I highly recommend reading ‘The Great Crash, 1929’ by J. K. Galbraith. He makes the point that the rich do not generate reliable demand (because they want to increase their wealth rather than spend – either by lending money to others or investing in new business, i.e. even more productive capacity). Inequality is natural, as are the consequences. So it goes.

  5. Shaun,

    I think that to be able to discuss ideas on your questions one has to address different economic zones with different politics/cultures differently.

    For example, in the US where there’s no social security network, I read that joblessness drives people out of society when it becomes very hard to claim them back to “employability” as (apparently) they might not even get the facilities to take a shower and dress. So, I’d say, in the case of US, fiscal stimulus therefore may be a good idea for the ‘overall good’ of the economy and, remote a danger it may look now, to save the political system from an incoming danger of collapse. Also, it’s easy to argue that Americans are culturally more fond of grand projects which would come in the form of fiscal stimuli – as close as you get to socialism in a market fundamentalist society I suppose.

    In the UK with a culture much more friendly for left-wing policies, there’s no such short-term (political/systemic) danger. The problem is rather an efficient/fair (re)allocation of resources/capital in a highly leveraged economy. I’d say, monetary stimulus, as long as it takes. Pros? Fairer, and easier to calibrate, I’d venture. Inflation as a bonus.

    In EU, with a(n apparent) fondness for hierarchical structures (which seem to take the form of corporate champions these days), arguing for more stimulus would prove impossible, and not necessarily good anyway… Why kill your champions when the times are hard after so much investment?

  6. The fiscal stimulus engine-rooms of US Japan and China have a) coordinated as far as national interest allows b) frontloaded with tax cuts to accelerate. Relative to lost global output you can question whether the boosts were big enough to compensate. We are where we are. To do more now carries its own risks. More could put upward pressure on interest rates and exchange rates whilst households,corporates,banks and soverreigns deleverage. That could undermine monetary stimulii. Credit markets are disfunctional. Policy makers need to innovate.

  7. There are several posts above, both from author and contributors, saying “productivity expands or contracts to meet demand”. Sorry folks, but it is production that expands or contracts, productivity is a totally different concept, and it truly worries me that people who feel qualified to pontificate about economics use the terms interchangeably.

    • Hi John,

      Actually I have looked in detail hereon, and cannot find any such thing as you “quote” being posted by Shaun, Graeme or anyone else – “productivity expands or contracts to meet demand”.

      Clearly it is essentially production that will expand or contract according to demand increasing or reducing, and initially that will be usually without any change in productivity. However, the relationship is not linear and is not fixed, so of course if demand increases and continues at a higher level consistently, that may also tend to stimulate improvements in productivity, so as to increase profits. Improvements in productivity may also occur indirectly due to increased wage demands or natural technological progress in production methods.

  8. I appreciate that productivity and production are two different things – I am sorry for this inaccuracy (and no doubt others) in my comments. I am not an economist, but in this case I did know what I meant and used the wrong term accidentally. I will read more and comment less. Also, I am sorry I inadvertently ended up starting a long, off-topic discussion about right versus left etc. I only brought up wages and labour in the first place to try to explain why I don’t think that tinkering with monetary policy will produce a sustainable recovery in the near future.

  9. @ Graeme B, please don’t refrain from commenting in future. I for one have read all the above comments and discussion with great interest. It’s good to discuss these things. Many of us reading such blogs learn as much from the comments section as we do from the OP.

  10. Drf Says:
    September 12, 2010 at 8:24 pm | Reply

    Hi John,

    Actually I have looked in detail hereon, and cannot find any such thing as you “quote” being posted by Shaun, Graeme or anyone else – “productivity expands or contracts to meet demand”.

    How about:
    Graeme B Says:
    September 10, 2010 at 6:30 pm | Reply

    To clarify a few things (can’t see how to edit posts here) –

    – I think we both agree that productivity expands or contracts to satisfy demand

    This was the comment that prompted my original, very poorly judged, post. I am certainly guilty of overreaction to a simple error of grammar, and to conflating matters to include the author of the article, but I didn’t make it all up entirely. However I promise to be a lot more circumspect before commenting on anyone else’s mistakes in future, given my own fallibility.

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