How the world sees Greece
First it was Johnny Depp who had allegedly bought a Greek island for more than 4 million euro. Then it was glam couple Brat Pitt and Angelina Jolie who had an eye on another Greek island. A few days ago, it was billionaire Warren Buffett who had allegedly spent whole […]
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The most important debate in economics right now is the question of whether low interest rates in the US, UK and Europe are creating yet another bubble that will eventually pop with disastrous consequences. A new note to investors from economists at Morgan Stanley argues that yes, it is possible that the US Federal Reserve, the Bank of England and the European Central Bank are causing as-yet unseen inflation via their policies of holding interest rates at 0% for extended periods. Its title is: "Could We Be Underestimating Inflation?" First, the context. You can be forgiven for not noticing that a bubble might be happening because it isn't causing classic money-inflation. It's inflating assets instead. Money inflation, or monetary inflation, is scary because it makes you instantly poorer, as the price of everything around you goes up. There is only one good thing about money inflation: you can see it happening, every day. And it is easily fixed: central banks can raise interest rates sharply, making money expensive to lend or invest. When money becomes harder to get because it is more expensive to borrow, then inflation disappears pretty quickly. But people don't feel scared when assets get inflated. For one thing, assets don’t all rise in value at the same rate. Stocks may be at historic highs right now, but the price of oil may be at historic lows. And, frankly, asset inflation feels pretty good. Your stock/retirement portfolio suddenly looks very tasty and it's great that your house is suddenly worth so much money! Asset inflation is fixed the same way that money inflation is fixed: you raise interest rates, and all the cheap money that flowed into those assets suddenly starts flowing out again, especially when banks and bonds start to pay more than 0% interest. The problem — as we all learned in the 2000 dot com crash and the 2008 credit crisis — is that a collapse in asset inflation is painful for those left holding assets that are suddenly worth zero. (Assets are less liquid than cash, so when they fall they tend to fall hard. Think about property prices in 2008-2009.) Yet few people understand this debate, despite the fact that everything — literally everything — depends on the answer to the question Morgan Stanley poses. Here are some examples of what we're talking about: Private equity-backed tech companies are currently in the middle of an enormous boom. It's not on the scale of the 2000 dot-com bubble, but the number and value of deals is fast-approaching that size, according to these stats from PwC: Yet, within the tech world, people aren't screaming about interest rates. They are mostly enjoying the fact that there are 102 unicorns in the world. Unicorns are tech startups valued at more than $1 billion. They used to be rare. Now there is a new one every week. No one knows how many of them are profitable. We've also got full employment in the UK and the US, and signs of fierce price rises in property in London, Norway and Germany. Moody's, the credit rating service, recently all-but said the European Central Bank is blowing a new housing bubble in Europe. The central banks, however, are holding rates at zero. They are doing this because they believe that economic growth is weak. It’s certainly weak in Greece, Spain and Italy. So the ECB has an excuse for keeping the euro cheap even if growth in Germany is just fine. But the UK, Germany and the US all have close to full employment. Their economies look strong. And yet their banks also have 0% effective rates. Morgan Stanley’s Manoj Pradhan and his team decided to look for signs of inflation, they said: If our thesis is right, the upside risks to inflation that we highlight could materialise over the next 12-18 months and even beyond. Our thesis in a nutshell: the US, UK, Germany and Japan could show inflation surprises to the upside in a specific, nuanced and sequenced story because they have three common dynamics: i) labour markets are either already tight (except in the US now) or will almost certainly be universally tight in 2016; ii) housing markets in all four economies are doing well, giving breadth to the economic expansion because the housing market tends to lift more parts of the economy than most others; and iii) central banks in all four economies are unlikely to remove monetary accommodation in a way that jeopardises growth. In doing so, they are likely to encourage even more tightness in the labour and housing markets, paving the way for a pick-up in wages and compensation, and housing rents and prices They discovered these inflationary factors: inflation from wages and housing in US, UK and Germany But! deflation in the US from a decline in healthcare costs post-Obamacare deflation from cheap imports to US fueled by strong US dollar deflation from weaker areas of Europe (Greece, Italy, Spain) Frustratingly, Morgan Stanley came to a nuanced conclusion rather than a slam-dunk verdict: On the arguments we provide above, inflation measures may not adequately capture inflation. This may mean that more monetary accommodation than is ‘right’, or feedback from asset price inflation leads to more spending than would occur when inflation is correctly measured. Nonetheless, for bubble-watchers, Morgan Stanley raises a really interesting question: why the heck are interest rates at zero when the world's major western economies are at full employment? And why isn't that inflationary?Join the conversation about this story » NOW WATCH: You've been rolling your shirtsleeves wrong your entire life
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Washington (AFP) - The International Monetary Fund said Thursday that talks soon to open on a third EU-IMF huge bailout for the Greek economy will not be easy."To move forward we need sufficient progress to assess policy reforms, commitment, and implementation and financing," said Fund spokesman Gerry Rice. "Clearly it's a difficult path ahead, we're just at the beginning of the process."According to Greece's finance ministry, representatives from the European Union, European Central Bank and International Monetary Fund were likely to fly in to Athens on Friday to begin discussions on a third bailout worth up to 86 billion euros ($93 billion) over three years.But the IMF, which took part in the first two rescues that have failed to restore the country to solid economic growth, has conditioned its participation in the new plan on the other official creditors reducing the country's debt burden to make its finances "sustainable"."On the debt relief, there would need to be a specific, concrete commitment" from the Europeans, Rice said. Join the conversation about this story »
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"Agreeing to reform the judiciary and banking systems":http://www.euronews.com/2015/07/23/greek-lawmakers-pass-second-reform-package/ was a key step…
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Fresh from dealing with Greece, the French President is facing a crisis closer to home. Ahead of the start of the August getaway, farmers are…
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House Speaker Zoe Konstantopoulou was enigmatic coming out of her much-anticipated meeting with Prime Minister Alexis Tsipras, after her dissidence over Greece’s pending bailout agreement. “We had an honest and in-depth conversation with the prime minister regarding the developments of recent days and we discussed the institutional initiatives and steps that need to be taken
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Caterpillar does not have a cheery outlook for the global economy. In its second-quarter earnings report released Thursday morning, Caterpillar, a $48 billion international manufacturer of construction equipment and other heavy machinery, said the global economy was "stagnant." Caterpillar CEO Doug Oberhelman said in a release: While economic conditions in the United States are modestly positive, the global economy remains relatively stagnant. Many of the key industries we serve remain weak, and we haven't seen sustained signs of improvement. Continuing economic weakness in China and Brazil, as well as uncertainty in the Eurozone and over Greece, haven't helped confidence. Prices for commodities like coal, iron ore and oil are not signaling an improvement in the short term. So except for the US economy's "modestly positive" outlook, everything Caterpillar is looking at is simply bad and depressing. And this matters because Caterpillar is seen as a bellwether of economic activity given that its machines are big, expensive, and used in the kinds of projects — highway construction, large housing developments, mining projects — to which companies and governments are likely to commit only if they're confident in the economic outlook and their financial standing. This news from Caterpillar follows Apple's earnings report earlier this week, which in the eyes of at least one analyst confirmed what is, perhaps, everybody's biggest fear about the global economy: a major slowdown in China. Caterpillar, for its part, saw "continuing economic weakness in China," which runs a bit counter to official government data out of China that indicates gross-domestic-product growth held up better than expected. Other measures from China, including auto sales and commentary from other large US companies, have not painted a pretty picture. Caterpillar's report also doesn't paint a pretty picture for commodities, which have been getting demolished in recent weeks, with notable declines in oil and gold also accompanied by copper prices slumping to a six-year low, iron ore getting smoked, and the Bloomberg Commodity Index touching a 13-year low. On Wednesday, we highlighted Caterpillar's latest machine sales report, which was also a downbeat report showing sales declining across most all of its segments in most all of its sales regions (natural-resource equipment sales were up 1% in its Europe, Africa, and Middle East segment in June, the only positive reading). And Thursday's earnings report didn't really change that story. As for the company's second quarter, Caterpillar reported adjusted earnings per share of $1.27 on revenue of $12.3 billion. Analysts were looking for earnings per share of $1.26 on revenue of $12.8 billion, according to Bloomberg. Against the prior year, revenue was down 13%. In premarket trade on Thursday, shares of Caterpillar were down 2.5% to around $77.70, their lowest since 2011.SEE ALSO: Apple just confirmed everybody's biggest fear about China Join the conversation about this story »
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