All in all they still believe in the
US in the long run and there is optimism about that will grow because of reconstruction spending. Japan
Why so optimistic about the US?
is so flexible, innovative and business has done the deleveraging that was needed, households have to do only a bit more and government is not that much of a problem on the long run. The financial sector is not that big that it will create problems (unlike the US UK, , Italy etc.). The Spain US $ is now competitive, even versus . China
The short term is more of a problem in the
: the fiscal cliff will come into force in January and take 4% of growth. He thinks half of it will be repaired but with big risks: maybe the lifting of the debt ceiling will not be managed in time (because of elections there is only about one month left to arrange things, that is way too short as we saw in 2011) and with big disputes. US
China: LSR is the most negative on China in a decade: there are structural problems (the mid income trap that caused a growth pause in 85% of the countries that got from poverty to that middle income level), the transition from investment/ exports to consumption will be difficult. They cannot increase market share in exports with the old products now wages have become too high.
Short term cyclical problems: stop and go problems cause way too little growth of M3 now. Credit growth too low for high growth, government stimulus a problem. GDP growth is clearly lower than official statistics indicate, only about 6%.
Europe: the frog will be slowly boiledEurope is repeating the errors of the
Further decline of house prices in Spain, Italy etc will increase the problems of banks while the banking sector is too big in several economies.
He sees underestimation of the probability of bank runs (Greek banks already have 50% less saving deposits)
Politics Greece: right wants lower taxes, normal parties at best 45% of votes, extreme parties 55%: so a big majority will be for no more fiscal austerity = quarterly help for Greece will get less support in the rest of Europe, the core will throw Greece out of the euro.
ECB: no targets yet for bond yields Spain Italy at say 6% because of opposition from core Europe: sustainability will force this over some time.
FED: Bernanke has done a very good job with avoiding deflation expectations to get hold, he needed unconventional policies that had no majority in any central bank. He got it and radicalized against the will of the hawks. Because of diminishing return of QE etc theFiscal policies:
needed more and more radical things and that happened. He still is limited because he doesn’t want to enter the history books that blew the monetary policies with unconventional measures. US
All in all are big parts of Europe sinking away. What happens with France will be critical. The help to the PIGS is unsustainable (5 to 8% of GDP of the Eurozone every year). Their wages have to become competitive with Germany. The euro will remain too strong because the market expects that the weaklings will leave the euro and the strong countries will remain in the euro. So European governments will not get rid of their high debt/GDP ratio with more austerity, banks will go down the drain because of very bad real estate markets especially in countries with too big banks, bad real estate markets and a lot of government debt.