Wednesday, 16 November 2011

The Great Unravelling

The European Central Bank intervened in debt markets yesterday & earlier today, driving down (ever so slightly) bond yields. Those bond yields are now already back up to where they were before the intervention, according to the FT.

French-German bond spreads have widened at an alarming rate, indicating that France is about to get sucked into the vortex of 'peripheral' countries with dubious abilities to handle their debt burdens.

Meanwhile unemployment climbs, with Youth Unemployment in the UK reaching the pretty scary figure of 1 million, with 2.62 million on the records unemployed in the UK. Growth in the first half of 2012 expected to be below 1% (in other words, the output gap is going to widen, if anything), and the only weapon governments are using to change this is the terminally ineffectual Quantitative Easing program, which they are hindering with fiscal austerity. Experience has shown us that the money is being using to shore up balance sheets, not lend to businesses and as a result the stimulative effect is very limited. QE should either be a 'helicopter drop' direct to businesses who need it, or else should come with strict lending requirements for the banks (for example, we can demand Banks improve balance sheets by doing more to raise capital, as opposed to shrinking assets). Consumer price inflation, by the way, is still at 5%, although it is expected to come down, since wage inflation is low.

At the same time, in the US, it is now expected that 2012 will be (another) recession year, according to the Federal Reserve Bank of San Francisco. That will hurt exports in the rest of the world, and could well prompt the election of Mitt Romney, who is arguing for what amounts to starting a Smoot-Hawley style trade war with China (which he excuses on the grounds that there is already a trade war going on between the two countries, apparently).

This really is a quite terrifying situation. If the Eurozone breaks up, as is looking ever more likely, then even the European Commission's cataclysmic prediction of 0.5% Eurozone growth in 2012 and 1.5% in 2013 look hugely optimistic (the same report puts recession in 2012 at a probability just a fraction under 50%).

This is all, very, VERY bad.

PS on the inflation issue, see this BoE report, which Krugman described as 'courageous'. The speed of declining Inflation estimates definitely look 'courageous' to me!

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