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Tuesday March 2, 2010 - 15:46:28 GMT
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The Free-Market System Couldn’t Care Less

Key News

- LONDON, March 2 (Reuters) - The cost of protecting Greek government debt against default fell to 310,000 euros per 10 million euros of exposure, according to five-year credit default swap prices from CMA DataVision on Tuesday.  
The cost was at 344,600 euros at the New York close on Monday. 
The 10-year Greek/German government bond yield spread also narrowed to 294 basis points at one stage -- the tightest since mid-February -- from 315 bps at the European settlement on Monday, as investors bet the country will ultimately receive some form of aid to tackle its debt crisis.
- WARSAW, March 2 (Reuters) - Poland's economic growth surged to 3.1 percent year-on-year in the fourth quarter of 2009, a touch above expectations and against 1.7 percent annual growth seen in the previous three months.
- ZURICH, March 2 (Reuters) - Switzerland's economic recovery gathered speed at the end of last year as growth broadened, reflecting a faster-than-expected rebound from the worst recession in more than three decades. 
Gross domestic product rose by 0.7 percent in the fourth quarter from the third quarter after seasonal adjustments, the State Secretariat for Economic Affairs (SECO) said on Tuesday. That was well ahead of analysts' expectations of 0.4 percent growth. 
Third-quarter growth was revised up to 0.5 percent from 0.3 percent. 
“Who loves me will love my dog also.” 
FX Trading – The Free-Market System Couldn’t Care Less
From the very first hint at a government stimulus effort in the US, there were plenty voices in the opposition’s camp trying to point out the perversity of pumping money into an economy that was already awash with debt and over-leveraged. Then the argument of letting market forces play out as they may – bankruptcy, layoffs, price declines, whatever -- really took hold when the too-big-to-fail bailouts arose.

The government wanted to promise several hundred billion dollars to companies that made irresponsible decisions, to enable an economy that was drowning in excess.
And now that some semblance of recovery is visible, these same politicians and/or officials are crediting their action for stopping the tide from flowing further out. The big concern that is still be battled amidst an improvement in economic numbers: high unemployment.
Just today, scanning through the handful of websites that I frequent every day, I came across several perspectives on the unemployment situation in the US. (Then again, maybe that’s what everyone is searching for in the days leading up to this Friday’s February US Nonfarm Payrolls report.
In the Financial Times, I came across this 14-minute video with Larry Summers and the FT’s Washington Bureau Chief. (Many of you probably came across this too as it was posted in plain view atop the FT homepage.)
For the most part, Mr. Summers spoke of things just as you might imagine someone of his rank would, glamorizing the job done by the Barack Obama economic team while reiterating the success stories that we already know; though he did it in a rather soft and non-confrontational way.
But when asked about why unemployment has climbed so sharply, despite the fact that the US has so far averted economic Armageddon, Mr. Summers mentioned one word that caught my attention:
The first thing I thought when he uttered the P-word: “that must be big government’s worst nightmare.”
With a productive workforce and a healthy economy, what on earth might we need government for? (Ok, don’t answer that.) But what on earth would we need rampant fiscal spending for?
Prior to the credit crisis, the US economy was chugging along ... but it was doing so inefficiently and dangerously. The biggest worry of limited government involvement types – me included – was an artificial exacerbation of the current excesses that got us into such a vulnerable economic balancing act. As I saw it, it was similar to preventing a hangover by taking more shots.
What non-Keynesians believed was best was to let the market run its course; whatever happens, happens. This is not to be taken as “close your eyes and hope for the best,” but rather “show some restraint and responsibility so as not to encourage reckless behavior.”
In the end, Mr. Summers’ FT interview was sounding a lot like Richard Berner over at Morgan Stanley.
Obstacles to hiring.  Worries about the sustainability of recovery are legitimate and probably are holding hiring back.  Such concerns are characteristic early in recovery, but this time they are worse because of the lingering fallout from the bursting of the housing and credit bubbles.  As a result, it remains essential to pursue policies oriented towards reducing housing imbalances, reducing debt and improving the functioning of financial markets and financial institutions. 
In addition, we think there are four obstacles to hiring that magnify the normal, early-recovery hesitation: Rising benefit costs; mismatches between skills needed and those available; labor immobility resulting from negative equity in housing; and uncertainty around policies in Washington. 
Of course Mr. Summers didn’t dare utter anything about “this time they are worse,” because that of course heightens the worry level.
Despite everything that’s happened, the market process has played its usual role of scraping away the malinvestment. Yes, the Fed had dumped money into the economy in response to the economy’s contraction, but what has it done in the face of altered consumer and corporate attitudes? 
Based on the latest Federal Reserve Flow of Funds data, domestic nonfinancial sector businesses pared back 2.6% of debt in Q3 2009; consumers also continued working off debt. Borrowing by the aforementioned groups dropped by $283.9 billion and $81.6 billion respectively. For businesses, that was easily the largest quarterly reduction in borrowing since the onset of the credit crunch.
As Mr. Summers mentioned, productivity is high – work is getting done with fewer employees. It’s tough to precisely gauge the impact fiscal policy and stimulus had on economic and market sentiment. But I think what we should remark on is the effectiveness of automatic adjustment mechanisms inherent in a free-market system.
Productivity (blue line); Capacity Utilization (black)
[Chart not available in text format.]

John Ross Crooks III 


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