RGE Content: Weekly Roundup

Author: RGE Analyst Team · December 19th, 2008 · 254835RGE+Content%3A+Weekly+Roundup2008-12-19+13%3A39%3A45RGE+Analyst+Team › Share This Print

Check out all the great contributions that were published during the past week on RGE’s Nouriel Roubini’s Global EconoMonitor, RGE Analyst’s EconoMonitor, U.S. EconoMonitor, Emerging Markets Monitor, Global Macro EconoMonitor, Finance & Markets Monitor, Asia EconoMonitor, Latin America EconoMonitor and Europe EconoMonitor.

On Nouriel Roubini’s Global EconoMonitor, for once, Nouriel is not the most bearish of them all. Compared to Jim Rogers who sees the Dow falling as low as 4000, Nouriel seems like a relative bull as he expect U.S. and global equities to fall “only” another 20% from current levels. Check out: “Fortune magazine: 8 really scary predictions for 2009”

In his “Latest Project Syndicate Column: Has Global Stag-Deflation Arrived?” Nouriel elaborates on the idea of stag-deflation.

And how is the policy response in the U.S. to this risk of a global stag-deflation? The latest Fed decision to cut the target for the Fed Funds rate to a 0% to 0.25% range is just underwriting what was already obvious and happening in reality: while the target Fed Funds was – until yesterday – still 1%, in the last few weeks the actual Fed Funds was already trading at a level literally close to 0%. So the Fed just formalized what was already happening for weeks now, i.e. that the Fed Funds rate was already zero and that the Fed had already moved to quantitative and qualitative easing (QE) in the form of massive increase in the monetary base and aggressive use of monetary policy – via a range of new facilities and tools. Read: “Helicopter Ben goes ZIRP, QE and More…While the Global Economy Enters Stag-Deflation”.

And don’t miss the “Latest Roubini Interviews At Bloomberg On The Auto Bailout and Global Economic Crisis” and the “Lastest Roubini Interview With TNR On 2009 Global Economic Outlook”.

On the RGE Analyst’s EconoMonitor, Rachel Ziemba suggests that a range of countries are “Raiding The Sovereign Rainy Day Fund” as they support their domestic financial sector and support domestic demand through fiscal stimulus, meaning that sovereign wealth funds may be increasingly deployed at home rather than abroad in the near future. Central banks around the world have undertaken a number of measures to forestall deflation and lift the global economy out of economic slump and credit crisis. RGE Analysts ask “Will Aggressive Monetary and Fiscal Measures Prevent Stag-deflation in 2009?” Perhaps not. Italo Lombardi and Rachel Ziemba survey the Vulnerabilities of Ecuador and Venezuela to Cheaper Oil Prices, noting that these countries, which have become accustomed to higher oil prices to finance consumption are likely to devalue their currencies.

On the Finance & Markets Monitor, Joseph Mason argues that what is important for the U.S. government to do is to get banks to disclose their real losses, instead of directing them to lend more money. Read: “Should banks Lend? Loan Supply vs. Loan Demand “

As all the readers learned London Banker will not be blogging on a regular basis next year and his/her absence will be noticed. In this piece, the author presents a scenario where regardless of what the governments in the try to do, deflation will be unavoidable. As foreign governments, investors and even average citizens lose faith in their governments and stop lending money to either private institutions or to the governments themselves. Read: “Deflation has become inevitable”.

Finally, Ann Rutledge deconstructs some of the proposed changes of the Financial Economists’ Roundtable with regard to Statistical Rating Agencies (SROs). One of her key points is that we need better preparation of students in universities to deal with the complex field of structured products. Read: “Rethinking Our Inheritance”.

On the Global Macro EconoMonitor, Max Corden writes two interesting pieces. The first one he summarizes the four main reasons that triggered the current global financial crisis: 1) too much credit; 2) too much risk; 3) too many complex financial instruments and 4) commercial banks stopped lending. For a detailed analysis read: “The World Credit Crisis: A Simple Introduction Part I ”.The second part explains why the crisis became spread out around the world. The author gives three solid reasons. The firs one is related to the fact that mortgage back securities were bought by banks and investors all around the developed world. The second reason as to why the crisis became spread out is due to the uncertainty about the value of these “toxic” bonds, and hence uncertainty not just what a bank’s own position was but also about the financial situation of “counterparties” – other banks and institutions – led to the credit crisis. The third reason for the spread out is related to the trade channels, especially with the sharp decrease of commodity prices. Read: “The World Credit Crisis: A Simple Introduction Part II – Some Issues and Complications”.

In another very interesting piece, Galina Alexeenko and Sandra Kollen explain how trade financing might speed up the recession across the globe. The world economy is slowing and we are seeing trade decrease. If trade finance is not tackled, we run the risk of further exacerbating this downward spiral. Since about half of the U.S. exports are shipped to developing countries, the inability of the importers in those countries to finance their purchases of U.S.-made goods cannot help the U.S. exports sector, which is already suffering from falling foreign demand as the global economy slows. R
ead: “Credit storm hitting the high seas?”.

On the Emerging Markets Monitor, Alessandro Rebucci explains that this time around solvent and well run emerging markets should not tighten their belt in response to the global shocks they are facing. In his view, the international community must prevent economic slowdowns turns into recessions by supporting counter-cyclical policy responses financed in part with previously accumulated international reserves. Read: “Should Emerging Markets Tighten the Belt?”.

In very interesting piece, Guillermo Calvo and Rudy Loo-Kung Our argues that emerging markets should create liquidity facilities aimed at stopping financial unravelling. In their view, those facilities do not seem to be either large enough, or cover a wide enough spectrum of emerging markets. Read: “Rapid and large liquidity funding for emerging markets”.

On the U.S. EconoMonitor, economists discussed the GM bailout, the way policymakers frame the credit crisis, and the economic pessimism of CFOs worldwide. Edward Altman and Thomas Philippon explain why a government bailout in the form of a traditional loan to GM is destined to fail. They then propose a better course of action: Chapter 11 bankruptcy, plus a government-organized debtor-in-possession loan, vouchers for re-training workers who lose their jobs, and a government backstop to warranties and spare parts availability. See “Where should the bailout stop? And what to do about GM“ John Graham and Kate O’Sullivan discuss a CFO survey in which economic pessimism among CFOs is so strong that investment cuts could prolong the recession into 2010. Check out “Corporate Sector In Distress”. Joseph Mason debunks the “animal spirits” explanation of bank behavior during the current credit crisis. He elucidates why the unwillingness of banks to lend is a rational response to the uncertainty over how much of the massive amount of off-balance sheet items will come back onto bank balance sheets. Read Mason’s “Off-balance Sheet Accounting and Monetary Policy Ineffectiveness“

On the Asia EconoMonitor, Michael Pettis suggests that “Asia faces a tough 2009 as output decreases” noting that the economic crisis is now entering a second stage affecting trade-surplus countries. He worries that Asian countries may try to avoid the contraction in demand by increasing their ability to export overcapacity by enacting trade-related measures that enable them to force the adjustment on to their trading partners. In “Germany is fighting with Europe. Can China be far behind?” he foresees some type of nasty battles that are likely to erupt between the trade-surplus and trade-deficit countries as global demand continues to contract.

In a similar vein, Brad Setser argues that China’s November trade data (a y/y contraction in exports and imports) suggests that global trade (a large share of global output) is contracting quite rapidly. Read: “Global trade is shrinking, fast”.

On the Latin America EconoMonitor, Walter Molano explains the challenges that the Mexican economy should face in 2009. In his view, the decline in domestic demand will not bring much relief to the external accounts. The current account deficit may be even larger if remittances collapse. The worse is that the capital account will not provide any solace. Foreign direct investment will also decline, due to the downturn in manufacturing. There is a chance that the portfolio flows will be negative, as investors flee the emerging markets. Surely, the government will try to tap the international capital markets. But, they will have to compete against the multitude of sovereigns that will be doing the same. This means that the peso will have to devalue. Read: “Mexico: Iceberg Dead Ahead!”.

Finally, James G. Tillen and J. Matteson Ellis Recent explain that the recent corruption scandals in the United States involving Alaskan Senator Ted Stevens and Illinois Governor Rod Blagojevich highlight the problems that corruption continues to pose for governments. But despite these high-profile scandals, a September 2008 survey on corruption conducted by Miller & Chevalier Chartered found that business people operating in the U.S. are not significantly concerned on a day-to-day basis about corruption affecting their businesses. This finding is in stark contrast to another finding in the same survey regarding business conditions in Latin America that is respondents doing business in Latin America say that corruption there is a significant obstacle. For more details read: “Comparison of Effects of Corruption on Business in the United States and Latin America”.

On the Europe EconoMonitor, Edward Harrison argues that The Bank of England was correct in not having followed the U.S. Federal Reserve’s lead to a zero interest rate policy, given that such a move could produce negative unintended consequences. Read: “U.K. central bank does not follow Fed to ZIRP”.

Meanwhile, Edward Hugh looks at Spanish macroeconomic imbalances and argues that Spain could have a current account deficit of around 8% of GDP and a government fiscal deficit rising up into the 5% to 7% region in 2010. If this does prove to be the case, Spain could find itself just where Hungary was in 2006. See: “So Just When Does Spain’s Twin Deficit Problem Become Unsustainable?”

Also on the RGE Analyst’s EconoMonitor: