Traditional economic indicators, while important, tend to lose their importance in times of widespread uncertainty due to their lagging nature. At best, they signal the economy’s response to problems it may have since moved from. Last week for example, crucial data in the United States signaled mediocre success in the federal reserve’s efforts to arrest fears of double dip recession as strengthened consumer spending raised expectations of improvement in the unemployment rate. Yet when the number came out flat a couple of days later, making sense of the consumer confidence sentiment when jobs failed to grow was the least of the US central bank’s problems. Going by market chatter, Bernanke and company now have little choice but to restart the stimulus program, pushing down the reserve’s currency lower into uncharted territory.
In such times, international financial markets tend to provide the most accurate pulse of underlying economic conditions. And going by unprecedented fluctuations in these markets, the international financial system is nowhere near restoring the calm that was broken with the collapse of Lehman Brothers that ushered the severest recession since the ‘30s. It is difficult to see which of the traditional powerhouses is in worse shape.
In America, reckless debt management and political bickering, in times when two rounds of monetary stimulus have devalued the dollar enough to prompt stakeholders to question its long-term reserve currency credentials, have resulted in serious loss of confidence and flight of capital into safer havens. With the economy slowing and authorities unable to contain unemployment, markets have priced in not only another recession but also more dollar devaluation. Going by precedent, the US central bank is set to create more money to flush capital markets, providing increased liquidity to banks. Considering the previous two rounds were hard on taxpayers yet did little to stir growth, further burdening of the working class bodes ill for an administration gearing for reelection as the economy stagnates.
In Europe, practically the entire continent’s continued reliance on German bailout money (read German taxpayer money), especially when new debt threats pop from capitals fairly regularly, has already split Merkel’s coalition, with increasing signs that Berlin will stop the largesse within the foreseeable future. Once that happens, and it will happen eventually, a serious restructuring of the entire European Monetary Union will commence. Again, the markets are increasingly posturing towards such an outlook, even if periodic data, pointing to increasing inability of peripheral states to meet debt obligations, will take its sweet time coming, delaying the eventual tolling of the bells.
To make things difficult, US and German governments need to sell difficult plans to already angered publics, demanding unprecedented austerity, just when elections are looming. So Obama and Merkel are going to have their hands tied just when, in their reading, the harshest steps are justified in favour of long-term economic revival. Yet as political considerations compromise respective responses, working classes in both areas will be subjected to increasing austerity that has its own long term negative affect on growth. Eventually, whichever way both elections go, America as well as Europe will have to incorporate measures other than quantitative easing as governments struggle to contain debt they took over when they bailed out errant giant financial institutions. Strangely, despite the most ominous signs, they seem set to do more of the same, even if precedents have proved otherwise despite heavy costs.
The nature of the present crisis is different from any other faced by the international economy since the Bretton Woods system. Increasingly, it is apparent that it will require novel solutions also. Going by recent examples, perhaps it is best to direct funds from saving hemorrhaging institutions to the working class whose creative and constructive potential alone can generate economic activity enough to spur growth. Since routing that money through banks has only increased banker bonuses, sooner or later markets will dictate that too-big-to-fail be rubbished, that these institutions be allowed to fail, and created funds be directed to the people.
The writer is a Dubai based currency strategist