Global Growth to slow further

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The OECD’s CLIs suggest that all the major economies are set to slow further. This includes China and India.

The WSJ covers it nicely; but to my mind does not adequately link the growth slowdown to the difficulty stabilising debt dynamics. If we have even a mild recession, there are going to be very few AAAs left – and fiscal policy is going to get painfully tight.

I expect further monetary easing from the ECB, BoE, BoJ, SNB, RBA and FOMC over the next year or so. Next up is probably the FOMC at their 13 Dec meeting.


  1. Just shows how silly people are. you tighten fiscal policy in good conditions.
    For pete’s sake let the automatic stabilisers do their job at least.

    A lok at some of the rates would indicate the Central Banks can’t do much more

    1. It is just going to be lots of QE, and the SNB is going to raise their FX peg.

      The problem is that in a fixed FX regieme, if borrowers lose market confidence, all the work must be done on the budget side. Saving goes up, investment falls, govt spending contracts, and that is how you close that funding gap. Sure, you are chasing lower revenues, but if the market has lost confidence you cannot use deficit spending.

      Peripheral EUR is in that trap just now, because folks were not disciplined in the good times. Once the market loses confidence, fiscal stimulus is no longer an option.

      I think the big lesson here is to be as tight as you can, because you never know.

      Sent from my iPad

  2. You should be as tight as you can be in good times as Keynes said in 1936.

    being tight as you can in bad times simply makes things worse as we all can observe now in some of Europe.

    the problem of classical economics is that it is pro-cycical and thus completely useless

    1. Actually Europe’s problem is that the EUR is like a gold standard, and they have what is basically a sudden stop on their capital account inflows due to the loss of market faith.

      they are locked into their NX position in the SR due to their nominal FX fixed peg (they can get REER lower by relative deflation only) so they only have (S-I) and (G-T) available as tools to balance things out. and they must balance their CA — they cannot borrow anymore. so austerity is the only option. it’s no longer a choice.

      that is why it’s so important to have room for increasing (G-T) by being tight early.

      The important sins aren’t Classical v. Keynesian theory right now, it’s their history of fiscal management for the last 20yrs (or longer). i believe that governments that profess to be keynesian are less strict on fiscal discipline, and that classical governments tend to be tighter – and the real long term welfare upside is that in a crisis the latter are able to respond.

      both because they have less debt, and because their credibility as a payer and saver allows them to run higher deficits.

  3. You are repeating what I said.

    Keynes stated Austerity was great economics in good times. There is a good little paper co-written by john Quiggin which shows most European countries were too lax and Keynesian economics is far more stringent than classical economics in good times.

    Keynesian econmics almost assumes little debt over the medium debt.

    Thus we are in agreement

    1. Well, i was trying to disagree :)

      Where i was trying to take issue was your insinuation that they ought to be running expansionary fiscal policy now, rather than austerity. I was trying to point out that they do not have the choice as they have lost the faith of lenders.

      But yes, we agree that these are the sins of the past come back to haunt them, and that in the past they were indeed naughty.

      Sent from my iPad

  4. They have two major problems.

    Debt which only gets worse by Austerity and competitiveness. That is improved as Ireland has shown but at a tremendous cost.

    Friedman and Krugman were correct. Now that is one hell of a unity ticket

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