Monday, May 11, 2009

A Palpably False Spring

Economic writers have been seeing green shoots of renewed growth in Japan, or at least a slight upward turn from the horrendous dive of the first quarter. The stock and commodities markets have climbed out from out of their abysses on the prospect of greater global demand. The government is still predicting horrible results for 2009 but is surely doing so in order to justify the passage of the new, really big stimulus bill. Setting expectations so low also allows the government to claim some credit for pursuing farsighted policies, should the final contraction numbers turn out to be less dire.

I must admit, I have been a skeptic as regards the wisdom of the new stimulus package -- both for the likelihood of it being a giveaway to important Liberal Democratic Party and New Komeito constituencies and my own, idiosyncratic view of the Japanese economy.

However, no matter how big the stimulus package and the rises in the Tokyo and Osaka markets, the signs of renewal of this spring and the summer are on course for being derided at a future date as having been duplicitous harbingers of a revived world economy and trading system.

There is just no getting around this graph from the IMF's 2007 report on the threats to global financial stability (all credit, as usual, goes to Calculated Risk).

The world economy will not recover its former vitality until the global financial system is stabilized or possibly even super-stabilized. It taxes the imagination to think that such stability can be established under the onslaught of wave after wave of yet more bad debt washing out from the U.S. housing market as the option adjustable and Alt-A rate mortgages reset over the next three years.

At least that is the way it looks to me on this sunny morning.


Chris ( said...

One thing to note is that a large number of ARMs/Alt-As/adjustables, etc, are, and will continue to, reset *below* their present rate due to low rates in the US and elsewhere. I have friends back in the UK for whom this is happening - they are paying substantially less now than they were during the "teaser" period. It makes a considerable difference to their personal liquidity profiles...

MTC said...

Chris -

But what is the likelihood that the central bank rates will stay low enough for long enough to clear all of the backlog of resets? Three years is a heck of a long time for a ZIRP.

Chris ( said...

Well, we managed two and a half years of official zirp in our own backyard, and de facto rather longer than that.. My bet is that US rates stay low enough to significantly ease, even if it doesn't eliminate, the reset issue.