Make you nervous?

Recently installed head of the IMF, Cristine LaGarde, told the elite of economic policy-makers gathered at Jackson Hole that economic risks "have been aggravated further by a deterioration in confidence and a growing sense that policymakers do not have the conviction, or simply are not willing, to take the decisions that are needed.” The former could be remedied by the latter. In the same venue, Fed President Ben Bernanke politely chastised Congress for the debt ceiling debacle and as clearly as a central bank president is ever likely to say so, argued for a fiscal stimulus to save the economy from falling into a prolonged  slump. 


The odds on the "worst case" scenario are rising.

Easy come, easy go...

Foreign investment poured into Mexican government peso-denominated money market obligations in the first five months of this year: through May, it totaled US$17.58 billion. As concerns about the vitality of growth in the US and Europe as well as fears over the Europe-centered debt crisis revived during the summer, Mexico felt the backlash. In June, for the first time since May 2010, foreign investors pulled money out of government money market instruments -- US$0.89 billion.  Inflows into Mexican money market instruments in the second quarter still totaled US$6.15 billion (a billion dollars more than FDI in the quarter), but 41.7% less than in the first.

Any guesses about what the July and August figures will show? Looking at the peso's slide, my money is on big outflows....

Mexico's growth...

The second quarter GDP figures published on Friday report an economy that grew 3.3% compared to the second quarter of 2010. That's the lowest year-over-year growth rate since the fourth quarter of 2009, when the economy contracted 2.0%.

If Mexico's growth rate is reported using the same methodology as the US headline growth rate (measured against the previous quarter and annualized), the Mexican economy grew 4.5% in the second quarter, not such a bad performance at all. In fact, the second quarter growth rate exceeded the "versus previous quarter" growth rate in both the first quarter of this year and the first and third quarters of 2010.

The "versus previous quarter, annualized" methodology is especially useful for capturing turning points in the economy's performance. From this perspective, the secondary (industrial) sector of the economy grew 5.3% in the second quarter, outpacing its growth in the previous three quarters. The tertiary (services) sector grew 3.9%, an acceleration with respect to that of the first quarter.  The drag on growth, for the second consecutive quarter, was the primary (agricultural) sector, which contracted 9.8% in the second quarter.

The industrial sector drove growth in the second quarter -- in spite of the impact of the Japanese tsunami. Is it surprising that fears that the US is in for a spell of weak growth or even recession have led so many other analysts to cut substantially their growth projections for Mexico this year?

A herculean task...

In the US, the twelve members of the newly created Joint Select Committee on Deficit Reduction have until November 23 to come up with a workable plan to achieve a US$1.5 trillion reduction in the deficit over the next ten years. The Committee can recommend measures to increase revenues as well as expenditure cuts.

The Committee is chaired by Senator Patty Murray (Dem., Washington). It is comprised of six Democrats (three senators and three representatives) and six Republicans (four senators and two representatives).

Why $1.5 trillion? Because when Congress agreed at the very last minute to raise the debt ceiling by US$2.4 trillion, they also agreed to cut US$0.9 billion (also over ten years).

Not only do seven of the twelve committee members have to agree on where to cut government expenditures, they have to come up with a plan that Congress will approve and that enjoys credibility in the markets and with the ratings agencies.

There are two reasons, apart from the market reaction to the budget brinksmanship, to think that the Select Committee might possibly manage to do what Congress and the President couldn't. One is that the plan, which must be voted on by December 23, is subject to an up or down, take it or leave it vote. Neither amendments nor filibusters will be allowed. That strategy worked in several decades ago when Congress confronted the politically tough question of which military bases to close in the US.

The other reason is that if the Committee doesn't come up with a plan or the plan is not approved, the government must automatically enact across the board spending cuts. The "trigger cuts" would hit both defense and domestic programs, the idea being that everybody's ox would get gored.

Here, courtesy of Catherine Rampell via Maplight, are the industry and organizations that  contributed most to the Select Committee's members.  (http://economix.blogs.nytimes.com/2011/08/15/who-pays-the-supercommittee/?ref=jointcongressionalcommitteeondeficitreduction) 

Top 10 Industry Contributors to Supercommittee Members

Industry	Totals
Lawyers/Law Firms	$31,529,149
Securities & Investment	$11,221,416
Democratic/Liberal	$9,647,264
Health Professionals	$9,321,588
Real Estate	$8,793,350
Education	$8,568,460
Misc. Business	$7,902,021
Business Services	$6,563,524
Women’s Issues	$6,396,728
Insurance	$5,693,595

Top 10 Organization Contributors (PACs and Employees) to Supercommittee Members

Organizations	Totals
Club for Growth	$990,066
Microsoft Corp.	$810,100
University of California	$629,495
Goldman Sachs	$592,684
EMILY’s List	$586,835
Citigroup Inc.	$561,081
JPMorgan Chase & Co.	$494,316
Bank of America	$349,566
Skadden, Arps, et al.	$347,356
General Electric	$340,935

Financial markets: 2008 and now...

A fascinating series of graphs, courtesy of the New York Times, can be found at this link:

http://www.nytimes.com/interactive/2011/08/11/business/economy/20110811-the-stock-market-then-and-now.html?nl=todaysheadlines&emc=tha2

Has the sky fallen?

No, but the bottom seems to have dropped out of the stock market. Market reaction to the last minute resolution of the self-induced US debt ceiling crisis and S&P's downgrade of the US from AAA to AA+ status (yes, it's spawned bad battery jokes) serves to remind how vulnerable exchange rates, stock prices and capital flows are to confidence. 


To my mind, the key phrase in S&P's announcement is this one:

"More broadly, the downgrade reflects our view that the effectiveness, stability, and predictability of American policymaking and political institutions have weakened at a time of ongoing fiscal and economic challenges to a degree more than we envisioned when we assigned a negative outlook to the rating on April 18, 2011."

Whew...

At the very last minute, the US increased the debt ceiling, averting a default. It's not so clear the US will avoid a downgrade of its debt rating. The markets weren't overly impressed by the resolution: on August 2, the Dow posted its 8th consecutive day of losses, dropping 2.19%. The Nasdaq and S&P 500 didn't do any better, falling 2.75% and 2.56%, respectively. In Mexico, the peso weakened 0.12% against Monday and the IPC dropping 2.56% in pesos.

Obviously, it's going to take more substantive efforts to confront the twin dangers of a weak economy and unsustainable deficit to re-establish faith in the US as a triple A player.