Ahead of the Fed’s meeting to consider a flagging US outlook on Tuesday — and perhaps slip in some QE — here’s an interesting helping of US macro-doom from Lombard Street Research.
Basically, it’s less what monetary policy can or can’t do to fix the lack of a cyclical upturn, more that we seem to be losing the existence of a cycle in the first place:
America’s economic development has entered a new era. During the decade before the financial crisis growth was stable and around trend, but this was achieved at the expense of the huge build-up of debt. It is unrealistic to expect that the full workout of the financial imbalances would take much less than a decade itself. There is considerable uncertainty as to whether the crisis has permanently wiped out a sizable chunk of US output and lowered the potential growth rate of the economy. But the cyclical mode of operation is also likely to have changed. Gone are the days of protracted stable cycles…
(Although you could say the days of being able to predict cycles were never there.)
Cyclical stability is endangered in part because US bank lending was crushed in the crisis, Diana Choyleva writes, but there are other factors at work as well (emphasis ours):
…as a whole the US non-financial sector is flush with cash. It entered the Great Recession with balance sheets in fairly good shape. Even so, it restructured aggressively and accumulated a large financial surplus. Inventory re-building and increased cap-ex have been an integral part of this recovery. But inventories and investment are the most volatile components of output. With the US household sector in need to cut down debt and increase savings further, it is likely that business spending will be the main cyclical swing factor for some time. Last but not least is the effect China’s economic cycle is having. The protracted nature of the US cycle before the financial crisis owes a lot to what appeared to be a symbiotic Sino-US relationship. This has come to an end, with China’s own cycle becoming shorter and unstable.
Which suggests that unless Ben Bernanke is planning to sail QE2 to China, we may have a problem getting monetary policy to reboot economic activity.
Choyleva has thus made much in a separate note of the apparent softening of Chinese domestic demand, as shown by weak import growth data on Tuesday:
China’s cyclical story is turning from boom to bust, with negative implications for the rest of the world. Beijing engineered an impressive recovery which provided a substantial growth impetus to the rest of the world in the wake of the financial crisis. But policy resistance towards allowing a more flexible exchange rate meant that China’s economy not only overheated fast but also that the necessary slowdown is coming through weakening domestic demand rather then weakening export expansion…
China’s cycle has become much shorter and more volatile. The economy seems to have already turned down, with the growth correction necessary to get rid of the existing overheating likely to be sharp.
Anyway, it’s an intriguing take on what could really be the international scale of the task facing Ben. Or is it Zhou?
Related links:
Chimerica – Wikipedia
Chorus of QE calls is deafening – FT Alphaville
Bank lending to small businesses: supply vs demand – FT Alphaville