Around the Economic Globe in Five Minutes

The financial panic that began in early September has been a body blow to global business confidence and the global economy that, according to the Survey of Business Confidence of the World conducted by Moody’s Economy.com, is now in recession.

Just how bad is the shape of the U.S. and global economy? As part of my ongoing research, I study a large array of economic statistics - usually in graphic form. Below are a number of charts, together with cryptic comments, that I have just compiled in order to cast some light on the economic outlook. As the saying goes, a picture tells a thousand words …

The recession in global manufacturing is intensifying.

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Latest reports have it that China has joined the manufacturing recession.

The global non-manufacturing (services) sector has also caved in, especially in the light of what is happening in the global banking sector.

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Even before the collapse of the global banking system, a global recession was in the cards.

The U.S. economy probably grew by 1.5% in the third quarter on a year ago basis, registering the first negative quarter-on-quarter growth. The liquidity crisis and the resulting stalling of global trade must have had a severe impact on the purchasing managers’ indices in October (to be published in November) and could be suggesting that the contraction of the U.S. real GDP has gathered momentum.

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The same applies to Japan.

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When compared to a year ago, the U.K. economy is also headed towards zero growth.

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Economic growth in Europe has stalled.

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China is not providing any relief either as growth is losing momentum rather rapidly.

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The poor global economic environment is reflected in lower commodity prices.

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As far as the current state of the U.S. economy is concerned, the U.S.’s 10-year government bond yield is an excellent indicator of the current state of the MZM money-supply velocity and is indicating that the velocity has stabilized at the lower levels.

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Given a constant velocity of 1.64, the current MZM money supply (mid-October) and a 4% inflation rate, it means the U.S. economy has contracted by approximately 2% in the current quarter (the largest decline since 1980) or more than 7% quarter on quarter annualized, or -3% year on year (largest since 1982).

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Is there any light at the end of the tunnel? Desperate times call for desperate measures.

The Fed’s bailout of the banks and significant injection of funds have only addressed the solvency of banks and nothing has followed through to the economy. Not only is growth in money in circulation declining,

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but the actual money supply is also shrinking.

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To ensure that the money supply does not fall back to the trend line the Fed needs to pump $700 billion into the economy - incidentally the same as the recently enacted $700 billion bailout law to inject money into banks.

Therefore, expect the same trend in the Fed funds rate as in previous recessions.

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Consumer confidence is the backbone of the U.S economy due to its relationship with the velocity of money supply in the economy.

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The Fed needs to restore consumer confidence urgently to get the economy out of its current malaise. One major factor could be to relieve the interest burden on households. In fact, the Fed needs to cut the Fed funds rate aggressively and significantly in the near future. Failing to do so will effectively mean that the Fed is tightening its monetary policy,

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as the significant drop in commodity prices and especially the oil price will result in the U.S. CPI inflation rate falling to approximately 1% in the next three months.

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In short, expect the FOMC to cut the Fed funds rate by at least 50 basis points on Wednesday, to be followed by a further rate cut probably by December or January next year. The European Central Bank and a number of other central banks will have to ease in a coordinated fashion.

Failure by the central banks to ease decisively will endanger the U.S. and global economy even more as deflation looms around the corner.

Note: All of the graphs used in this post are based on data from I-Net Bridge.

Comments

[blisterchicken:]

Well, good thing we are experts at FHA lending in my shop. I suppose a little socialism is OK. It seems to be the only way to stem the tide of greed that got us into this mess.

2008 Oct 28 09:29 AM

[ARP:]

Great News. Either Capitalism is dead or there is no place to go but up. How can a relatively few American homeowners cause all this?

2008 Oct 28 10:55 AM