Friday, August 28, 2009

Recovery everywhere - why to be scared?

Back from a long summer recess, although the lack of posts recently was not due to my activities (however overburdened I'm am with tasks and responsibilities) rather the lack of impulses and events. One could have seen a rising tide of good news (maybe even the favorite color has changed from green to a more ripened one), a series of countries posting positive growth figures for the second quarter (quarter-on-quarter, in yearly comparison it is rather pathetic) and economic sentiment soaring almost everywhere. As the latter is considered to be a so-called "leading indicator" (i.e. signaling in advance the trends of the respective economy) further economic expansion is expected in the coming month. The change was abrupt, and rather peculiar. While only a half a year ago (almost) everyone forecasted that the world is doomed, now (almost) everyone is prophesizing that our torture is already ended or it will soon end.

However, one can rightfully be suspect that something could be wrong with this wave of positive news. And there are really cautious people, who try to announce that some doubt regarding the exclusively positive interpretation of the events could at last turn out to be well founded. Even the "bright sideists" are usually eager to put in their statement something cooling expectations, sometimes leading to a contradiction in itself. The recovery is here, but there is a long and bumpy road ahead, although we forecast 2,5% growth for next year - sounds a typical statement today. And even tough such phrases are stupid in itself (although conceivable from people whose credibility is terribly shaken at least in the eyes of the public) the real problem is perceptible: is it only a minor surge to be followed by another fall in next year or in the fall, or is it sustainable? Even though most of the analysts would like to see a sustainable growth returned (I suppose it is conceivable emphatically, they future depends on the continuation of the pre-crisis economic models, otherwise they would became obsolete and useless or at least will be sent back to the universities to learn a bit more) nothing is really certain. (Although it is easy to predict that the mood will change in one month as no really bad news is expected in that time span.)
But there are legitimate concerns regarding the sustainability. China was blowing its own bubble in the last few months and it is not easy to deflate it. Recent positive trends in the US industry are also linked to the stimulus package, especially to the car for clunkers program, and it is sometime calculated that US households, already suffering under a huge burden of debts amidst deflation took another 10 billion $ in this program. Once again a kind of bubble. The same applies for Germany and the "recoveries" in ECE based on exports to the former. Not to speak of the fact, that Germany is before elections late this month and campaign periods usually bring positive expectations and mood, not necessarily kept after the decision took place. All in all, the sustainability comes down to the point whether states can run their stimulus programs until consumer demand returns and whether the accumulated debt can managed without restricting that?
Most of the concerns are connected to this issue, especially as amidst the globalized economy individual states gradually lost the possibility, that still existed in the first half of the last century, to freeze international financial transfer, restrict currency flows and take as much state debt as they wish in order to inflate not only their own debts but the private ones. Now the main issue is not to inflate debts - as it can lead to soaring government bond yields and even more burden on the state households - indirectly on the taxpayers - but to defend debtors from the effects of the crisis, keep mortgage rates as low as it could be. States are not inclined to restructure their debts - either tacitly or publicly - even though the economic history proved that on the long run it is not more harmful than the other way. Crisis ended surprisingly many times with huge inflation, even sovereign default in the last two centuries and many of he defaulted countries remained in the forefront of the world economy or at least could have kept its relative position vis-a-vis other countries on the long run. (Just take the recent period: Poland effectively defaulted and never repaid foreign loans after 1981, while countries like Hungary or Romania took the other way.) Anyway, this is not a possible road today, not with almost every state in the mercy of a globalized financial market and the remnants of a not enough deflated bubble floating in it.
But the insecurity of the situation can be grasped not only through short term predictions, there is a cacophony regarding the necessary steps to return to the growth track before the crisis or concerning the issue which countries will benefit from the aftermath of the crisis. In some countries tax hikes seem imminent, advisable and necessary to satisfy the growing demand for public services, in other countries the political elite defends low (and usually flat) tax rates as part of the national pride, sticking to the idea that their so called pre-crisis miracles were the results of this. (Well it is worth to consider how confined the policy options of governments can be with the low tax, low redistribution rate models in times of crisis. Not better than the options of those running huge deficits. In the former group it is almost impossible to keep revenues or at least minimalize losses while economic production is declining, in the latter it is impossible to find financing for the deficit. The result is identical: spending cuts and declining demand.) Another issue is the necessary restructuring of the world economy, making China consuming more and exporting less, and the US exporting more and consuming less. It would mean building a more universal, more generous social security net in China, concentrating less on competivity on the export markets, raising incomes at home, the total opposite of economic policies prescribed in the last two decades fro almost every transition country.
As for the countries benefiting from the crisis or at least returning earlier to a more robust growth "Analysts" and "economists" can not agree over the issue. In the last two weeks there were predictions that Hungary will be the winner of the crisis - and not as part of the governments efforts to portray itself as successfully handling the crisis -, the Czech Republic and Poland, then Slovakia, and Moody's even stated that Romania will be the best performing country in ECE in the coming years. (Well, the reasoning is quite peculiar: because it is the poorest. I was taught in the last few years, yes, by Moody's as well, that not the poverty but the low tax, low redistribution model, the elimination of social security as it is only a burden on the economy is the safest road to fast and sustainable growth. Maybe the miracles in ECE were only due to the relative poverty? And what if a country is not poor enough after a period of growth?) One of Unicredit's leaders went as far as to predict the ECE will return to growth earlier than the West and this growth will be more robust. Even though the present signs of recovery are clearly dependent on Germany's performance (I know, Unicredit, the Austrian branch of which needs huge capital injection because of ECE business tries to defend its image, but anyway a respectable newsportal published this statement without reflection, and I suspect that among their reason was that it echoes quite clearly hat unfounded belief, prevalent in the first few years after the accession that the more open, more reform oriented, more liberal and less social market economies in the transition countries will lead the whole of Europe to its redemption.)
Anyway, one can rightfully conclude that economics - or at least the version practiced by "analysts" - is still not a credible and trustworthy discipline. (Why those who buy the idea of a fast recovery don't check the predictions of the same guys two-three-four months ago? Just to have an idea how reliable those could be?) Moreover, a fast recovery could restore confidence not only in mainstream economics but in the advocated economic policies and it is clearly the personal interest of this professional group and those who buy their services - the "markets" and business. (Not that it is something unethical. But it is better o be clear with personal interests and the possible distortions of disciplines due to them.) But amidst this crisis either this statement or the fast recovery theories can only be proven by time and facts. So, let's lean back and watch the show!

No comments:

Post a Comment