By Douglas Ashburn
The message came through loud and clear last week – the world economy is slowing down.
In the U.S., last week’s paltry payroll number of 69,000 really deflated the recovery party balloon. Since then, several regional Federal Reserve Bank presidents have been making the rounds, dropping hints about further Fed action when Operation Twist runs its course at month’s end.
In the eurozone, the hits keep on coming. After weeks of denials, Spain finally acknowledged that its banking sector needed help. On Saturday, help came, to the tune of about $125 billion. According to the announcement, the European bailout loan is being made directly to Spanish banks, and thus should not affect the nation’s fiscal viability. Of course, as we have seen throughout the eurozone crisis, the difference between bank failure and a country’s implosion can be measured in months. As Charles Bronson used to say, “Dis ain’t over.”
Emerging markets such as China, India and Brazil proved that, in the era of globalization, there is no such thing as “decoupling.” All three nations cut rates last week; China for the first time since 2008. As goes the West, so go the BRICs.
For five solid years now, ever since the subprime meltdown in the U.S., the answer has come in “bold” proclamations and programs. I would use a different term to describe them, though – “Wimpy.”
I do not mean “wimpy” as in “not bold enough” but rather “Wimpy” as in J. Wellington Wimpy, the lovably lazy scam artist from the Popeye comic strip. For readers not familiar with Wimpy, suffice it to say that, while he was intelligent and industrious, he was also gluttonous, shiftless, and had a penchant for the bait-and-switch. His catchphrase, “I will gladly pay you Tuesday for a hamburger today,” pretty much summed up his life.
Now, whenever I read of another fiscal fix, program or solution to a slowing economy, all I see is “Wimpy.”
In last week’s Congressional testimony, Fed Chairman Ben Bernanke said the central bank “is ready to take action if conditions deteriorate.” He also expressed concerns about fiscal policy, calling for Congress to work toward long-term fiscal stability, but without “impeding the current economic recovery.”
Translation: “Congress should cut its deficit Tuesday after added stimulus today.”
As European leaders were putting the finishing touches on the Spain bailout, Nouriel Roubini and Niall Ferguson, two of the most respected economists in the world, were submitting a commentary on Europe’s prognosis. Their solution:
“Structural reforms that boost productivity growth should be accelerated. And economic growth needs to be jump-started. The policies to achieve this include further monetary easing by the ECB, a weaker euro, some fiscal stimulus in the core, more bottleneck-reducing and supply-stimulating infrastructure spending in the periphery (preferably with some kind of “golden rule” for public investment), and wage increases above productivity in the core to boost income and consumption. Finally, given the unsustainably high public debts and borrowing costs of certain member states, we see no alternative to some kind of debt mutualisation.”
Regarding Germany’s fears of inflation and moral hazard, and demand for austerity as a condition of bailout, Roubini and Ferguson say that structural reforms are “bound to take time,” but that the banking crisis is immediate and “could escalate in days.”
Translation: “Europe’s periphery will gladly reform its bloated public sectors Tuesday for a bailout and Eurobond program today.”
And so on.
As the world economy sputters, the calls for currency debasement, fiscal stimulus, debt forgiveness and transfers of wealth from savers to borrowers become more frequent and shrill. Implement the solutions and everything will be fine.
Until Tuesday, that is.