So Ms Lagarde was in Montreal yesterday for the "Montreal Conference" a watered down version of Davos that aspires to do... something. Anyway, the lunch speaker was Christine Lagarde the current head of the IMF (Washington based) and all around cheerleader for capitalism!
The highlights was that the global economy is back on its feet, yep we're looking at 3.5% growth in America and "something positive in Europe" China should be around 7% -- less than before but still respectable, shifting towards consumption...
Ok so there are a few things wrong here, Q1/2014 GDP growth in America was -0.7%, so to make the 3.5% target Q2/3 and 4 are going to have to be gangbusters. Still, Europe is going to get something positive because the ECB is so brave -- they have entered into the land of negative interest rates. If you accept a deposit from the ECB, you pay them interest. There's no way that this can go wrong, and deflation is not just around the corner. As for China there is no doubt that the leadership wants to shift from investment to consumption, they are just not too sure how to go about it. Moreover, local governments' entire tax base is driven by capital expenditure -- they get property taxes up front.
So granted the US economy is seeing some interesting credit growth -- usually a signal that the economy is pumping, but and this is a big BUT! median income continues to fall... BTW interesting stat. In 2013 average income in the US was $300,000 p.a. (placing America in third place), but it turns out that Median income is around $40,000 (placing America in 19th place). The obvious reason for the massive difference is income inequality, which is a big today as it was in the 1930s.
Which brings me back to Lagarde, when she was minister of finance in France she gave to the Greek government a list of 2,000 names of Greeks who had Swiss bank accounts -- a part of a larger list that was sold to the German and French government by a Swiss national. A local newspaper published the 2,000 names -- Government's reaction -- arrested the journalist for sedition (that was in 2009) continue to harass him to this day. Number of Greeks that were questioned in connection with this list ZERO. Yep, and this is my favourite part Ms Lagarde said that governments have to continue to reform the banks (i.e. give banks time to sell their junk to the ECB, and to recapitalize). One neat trick has been to reduce all forms of lending to a minimum -- so that their balance sheet shrink and meet their capital requirements. Obviously the impact of that is to stop all possible growth. And so next for the Euro-zone has to be deflation.
Granted Ms Lagarde has few options, and cannot speak the truth. What would happen if she said that Europe is in for massive deflation and that the growth of the US economy is in its past? Not good for the capitalist system (or the stock markets). No extend and pretend that the problems will go away. In a sense its kind of working, as of last week Spain (85% debt/gdp) debt cost was below that of the US, in fact as of Monday Spain's borrowing cost are lower (in absolute terms) than they were in 1790. Right now government borrowing in Spain is the cheapest it has been in more than 300 years.
Clearly the markets believe that Spain's economy has never been so healthy....
The highlights was that the global economy is back on its feet, yep we're looking at 3.5% growth in America and "something positive in Europe" China should be around 7% -- less than before but still respectable, shifting towards consumption...
Ok so there are a few things wrong here, Q1/2014 GDP growth in America was -0.7%, so to make the 3.5% target Q2/3 and 4 are going to have to be gangbusters. Still, Europe is going to get something positive because the ECB is so brave -- they have entered into the land of negative interest rates. If you accept a deposit from the ECB, you pay them interest. There's no way that this can go wrong, and deflation is not just around the corner. As for China there is no doubt that the leadership wants to shift from investment to consumption, they are just not too sure how to go about it. Moreover, local governments' entire tax base is driven by capital expenditure -- they get property taxes up front.
So granted the US economy is seeing some interesting credit growth -- usually a signal that the economy is pumping, but and this is a big BUT! median income continues to fall... BTW interesting stat. In 2013 average income in the US was $300,000 p.a. (placing America in third place), but it turns out that Median income is around $40,000 (placing America in 19th place). The obvious reason for the massive difference is income inequality, which is a big today as it was in the 1930s.
Which brings me back to Lagarde, when she was minister of finance in France she gave to the Greek government a list of 2,000 names of Greeks who had Swiss bank accounts -- a part of a larger list that was sold to the German and French government by a Swiss national. A local newspaper published the 2,000 names -- Government's reaction -- arrested the journalist for sedition (that was in 2009) continue to harass him to this day. Number of Greeks that were questioned in connection with this list ZERO. Yep, and this is my favourite part Ms Lagarde said that governments have to continue to reform the banks (i.e. give banks time to sell their junk to the ECB, and to recapitalize). One neat trick has been to reduce all forms of lending to a minimum -- so that their balance sheet shrink and meet their capital requirements. Obviously the impact of that is to stop all possible growth. And so next for the Euro-zone has to be deflation.
Granted Ms Lagarde has few options, and cannot speak the truth. What would happen if she said that Europe is in for massive deflation and that the growth of the US economy is in its past? Not good for the capitalist system (or the stock markets). No extend and pretend that the problems will go away. In a sense its kind of working, as of last week Spain (85% debt/gdp) debt cost was below that of the US, in fact as of Monday Spain's borrowing cost are lower (in absolute terms) than they were in 1790. Right now government borrowing in Spain is the cheapest it has been in more than 300 years.
Clearly the markets believe that Spain's economy has never been so healthy....
Comments