Let’s get a move on! Your editor is getting a late start after a glazier spent the better part of the morning chipping out a cracked window pane in the living room. The frame had buckled just enough from the recent cold snap that the old three millimetre square pane started fracturing. It started off pretty and quickly became dangerous as little shards started falling on the street below.
Here’s the thing about broken windows: they cannot be repaired. They can only be replaced. A broken frame? That can probably be repaired. But there’s nothing that can save a broken window. It must be smashed and destroyed. The glazier smiled while he cut the window away in arcs, tapping it with a hammer. It looked satisfying, although not as satisfying as say, throwing a brick through it.
In any event, can a shattered financial system burdened with trillions in bad debts and still heavily leveraged be so easily repaired? Can a twenty-year credit bender be sweated out through an 18-month bear market? Those are the questions today’s Markets and Money takes up. For all intents and purposes, there is a growing confidence-or at least a suspicion-that maybe that Ben Bernanke can really pull this thing off.
More on that in a moment. But first to local matters. The Reserve Bank stood pat yesterday and held the cash rate at 3%. Today’s GDP figures now take centre stage. But we predict a flop. Why?
Well, a surge of excitement went through the market yesterday when the Australian Bureau of Statistics reported the first quarter trade figures. Those figures showed that export volumes were up 2.8% in the March quarter. Iron ore exports (mostly to China) were up 6.7%. And agricultural exports (meat, wheat, and wool) were up 19.2%.
That increase, coupled with the decline in imports, led to a 27% contraction in the current account deficit. Don’t get us wrong. The trade deficit still clocked in at over $4 billion. Australia still imports more than it exports. But the big surge in exports will contributed around 2.2% to the March quarter GDP figures.
Do you realise what this means? It means that Australia might avoid the technical definition of recession. We don’t know why this has come to be accepted wisdom, but people now readily say that a recession is when you have two consecutive quarters of economic contraction (or “negative growth” in Ruddspeak).
You’ll recall that the Aussie economy did contract by half of one percentage point in the fourth quarter. That was pretty mild compared to the 6.2% contraction in the U.S. But if the trade-supported Q1 GDP figures can eke out a gain (“positive growth”), well then Australia will join the odd couple of Poland and South Korea as the only economy in the industrialised world not to fall into a recession as result of the financial crisis.
So does it matter one whit? One jot? One tittle perhaps?
Well, you could argue that the collision between the commodity super-cycle-the world-historical industrialisation of China and India-has only knocked the super cycle off course for a few years. The credit crunch is winning the battle, but the commodity super cycle will win the war, as one commentator put it.
If you were making that argument, then avoiding a technical recession would confirm that Australia really is uniquely positioned in the industrialised world to ride out the worst of the financial crisis and benefit (perhaps the most) from the commodity super cycle.
But frankly, after the last twenty months, we’re wary of saying anyone is immune from anything (and this was before Swine flu). Technical definitions of recession don’t really tell you a thing about the health of the economy. And while exports are chugging along, we are still worried about commercial property and another wave of global deleveraging that could send markets right back down to new lows.
Of course, maybe we’re just being grumpy old bears about the whole thing. Maybe it’s time to admit that the bailouts, the asset purchases, the cash splashes, the quantitative easing, and the credit facilities all worked. They got us through the worst of it and good times are here again. Or at least less bad times (negative but improving good times).
The only problem with that idea is that it’s not true. That is, a good deal of bad debt remains on bank balance sheets (or held by pension funds and insurance companies). And even if the market interventions were temporary (a big IF), the debt added by national governments to pay for the pain alleviation is not temporary.
All that debt is a big fat drag on growth. And so it’s no surprise that when U.S. Treasury Secretary Tim Geithner went to China-America’s creditor-and told the Chinese America would not inflate its way out of debt and that Chinese assets denominated in American dollars were safe-he was greeted with laughter.
Everyone knows otherwise. The debt amassed by households, corporations, and governments is real. It must be paid off, defaulted on, or inflated away. That’s why this balance sheet recession-the liquidation of bad debts and the scaling back of debt itself-is far from over, no matter what today’s figure says. But enjoy the good vibes while they last. There are more broken windows ahead…
for Markets and Money