Wednesday, July 8, 2015

Global Economy: More Secular Stagnation (excerpt)

Is it a banana? In the 19th century, downturns were called “depressions.” However, the term got a bad name in the 1930s, and “recession” was coined. Alfred Kahn, one of President Jimmy Carter’s economic advisers, was once rebuked by the President for scaring people by talking of a looming recession. Mr. Kahn, in his next speech, substituted the word “banana” for “recession.”

“Secular stagnation” also has lots of negative connotations. Alvin Hansen was a professor at Harvard University who introduced Keynesian economics in the US during the 1930s and helped create the Council of Economic Advisors. His first book at Harvard was titled Full Recovery or Stagnation? (1938). He outlined what came to be called the “secular stagnation thesis.” He claimed that the American economy would never grow rapidly again because all the growth ingredients had played out, including technological innovation and population growth. The only solution, he argued, was constant, large-scale deficit spending by the federal government.

The economic boom of the 1940s and 1950s buried the term “secular stagnation” in the dust bin of economic history until Professor Lawrence Summers of Harvard University recently dusted it off to explain the slow pace of the current economic expansion. He too is all for more deficit-financed government spending.

I agree that the global economy is struggling with secular stagnation. However, I think it is mostly attributable to too much fiscal and monetary intervention by our governments. More of these policies will make things worse, not better. I’ve discussed my views on this subject on a regular basis in the recent past. For now, let’s review the latest data showing that the global economy is just muddling along.

Global economic growth slowed during June led by a significant contraction in emerging market output, according to Markit’s latest report. The J.P. Morgan Global Composite PMI fell from 53.6 in May to 53.1 in June, down from a recent high of 55.6 during July 2014. The Global M-PMI fell from 51.3 to 51.0 in June, back down at April’s reading, which was the lowest since July 2013.

Most of the weakness was in the BRIC economies, while Japan and the Eurozone posted growth. The US remained well below recent highs, yet above the global average. On a positive note, employment rose m/m for the overall index, albeit at a slower rate, with declines posted in the BRICs.

The HSBC Emerging Markets Composite PMI fell to 49.6 during June. It was only the second reading below 50 since the start of the data in January 2010.

Today's Morning Briefing: Ban Buybacks? (1) Who’s on first? (2) Financial engineering in one easy lesson. (3) Strategists shouldn’t be preachers. (4) Elizabeth Warren: The Fairy Godmother of the Bears. (5) Are buybacks sugar highs for corporations? (6) Meet Senator Baldwin. (7) Professor Lazonick explains how buybacks worsen income inequality. (8) Goldman prefers M&A to buybacks. (9) Depressions, recessions, secular stagnation, and bananas. (10) Mostly ho-hum indicators around the world. (11) Focus on overweight-rated S&P 500 Health Care industries. (More for subscribers.)

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