The current economic environment reminds me of the great old soul singers who used to drop to their knees to scream, beg and shout as they pleaded for their baby’s love. Sadly, the likes of Ray Charles, James Brown and Solomon Burke are gone, but there has been plenty of pleading, begging and beseeching afoot as central bankers, government officials and ordinary citizens lament the woeful state of the world’s economy. For the last two years the volume has been rising and the only thing missing seems to be a chorus of back-up singers like the Raelettes. I wonder if Barney Frank and Christopher Dodd can carry a tune? We may be about to find out.
During the two years since Lehman went bust, economists have been urging our leaders to avoid repeating the missteps that helped bring on the Great Depression of the 1930s. This time around, global policymakers have largely avoided the most serious pitfalls by coordinating massive fiscal stimulus programs with a dramatic easing of monetary conditions, all while keeping public bickering to a minimum. Photo ops featuring smiling, confident leaders at various economic summits have promoted the notion that global leaders are united in their struggle to keep the world economy from falling into the abyss, but I’m betting those smiles will be a bit more forced than usual when the G-20 leadership gets together next month in Seoul. Tensions are rising and a whiff of war is hanging in the air.
The smell I’m referring to isn’t grapeshot or cordite. It’s the stench of decaying international relations as nations begin to mimic the “beggar thy neighbor” policies that swept the globe in the wake of the passage of the Smoot-Hawley Tariff Act of 1930. The popular press has dubbed these competitive devaluations “currency wars” and if they are allowed to play out unimpeded, there is a danger that rising protectionist sentiment could seriously impede international trade and thereby weaken global growth. Even as they accuse others of manipulative practices, nations are increasingly taking steps to weaken their own currencies in a bid to boost exports.
The dollar has been one of the most conspicuous of the early casualties, declining significantly since the Fed began floating the prospect that QE2 would soon set sail, and other nations are complaining loudly as China’s pegged currency has gone along for most of the voyage. Long a concern primarily for American policymakers, Europeans are now pressuring the Chinese government to allow the renminbi to appreciate and investors would be well advised to pay close attention to the rhetoric emanating from Washington, Brussels and especially Beijing. A soft dollar is likely to exert pressure on consumer stocks as American household budgets are increasingly diverted to pay higher gasoline prices, but the shares of American exporters are benefitting from continued greenback weakness versus the Euro. An increase in the value of the renminbi would be welcomed by nearly everyone, and the Chinese government has signaled flexibility, but ever reluctant to be viewed as yielding to foreign pressure, Beijing is vowing to act according to its own timetable.
Central bankers haven’t been the only public supplicants on display in recent weeks. Last week’s employment report showed a troubling contraction in public sector jobs, unsurprising since most states and municipalities have long since been reduced to a state of beggary. Governors across the nation are increasingly beseeching Washington for assistance but their entreaties are likely to go unanswered by an administration focused on the midterm elections and fearful of an electorate weary of new spending initiatives. Administration officials won’t be getting much good news on the employment front between now and early November, and they will be pinning their longer-term hopes on export-driven jobs growth fueled by the weak dollar. Don’t be surprised to hear U.S. officials turn a deaf ear to Eurozone complaints, even as they urge Beijing to devalue.
They may need that deaf ear for their own constituents in the coming days as senior citizens and their advocates lament the second consecutive annual denial of a social security cost-of-living increase. Those lamentations could provide comfort to Fed officials worried about deflation, since it appears that inflationary expectations are alive and well despite the fact that inflation has been virtually non-existent for the last couple of years. Perhaps our retirees are anticipating the much ballyhooed price surge that the inflationistas have been predicting, but more cynical types suspect that they are merely keeping with the tenor of the times.
Cue the band.
Bernie McSherry is senior vice president for strategic initiatives at Cuttone & Company.