Revival in a Single Country: The United States
Published in Les Échos
(France) on 31 October 2014
by Eric Le Boucher (link to original)
(France) on 31 October 2014
by Eric Le Boucher (link to original)
Translated from
by Jessica Loizou.
Edited by Kyrstie Lane.
The United States knows how to make major landings. On D-Day, the means were never missing, neither technical nor human, much less financial. To hold off the crisis of 2007, which promised to be worse than that of 1929, the American central bank went to such measures that its balance sheet indicated expenditures of $4 trillion, 25 percent of the GDP.
Then again, the United States sometimes has difficulty in stepping back—hence the major doubts about the monetary plan in regards to the end of the Federal Reserve’s so-called “quantitative easing” policy used against the crisis, which was announced this week.
It’s the great paradox at the end of 2014. There is only one country in the world where the economy is in a satisfactory state: the United States—we’re glossing over Great Britain, where stability outside finance remains to be proven. America, the country of “subprimes,” the instigator of crises, is the one that got back on its feet the quickest and the best; and, the second part of the paradox, a country whose departure from crisis poses a huge headache for others, such as emerging countries, like in Europe. Will the instigator of crises be the world economy’s troublemaker in 2015?
In order to measure the risk, it will suffice to look at the problems of emerging countries over the past year, since the end of quantitative easing was announced: a drop in the stock exchange, a rise in rates, decline in growth. It could be the same in 2015 in developed countries.
The Dow Jones was worth 14,000 points before the crisis of 2007. It was halved by the crisis, falling to 7,000 points. But it has gone back up since the start of 2009 to reach more than 17,000 these days. All records are defeated. Le CAC 40, the French stock market index, reached 6,000 points before the crisis, fell more harshly than across the Atlantic to 2,500, and only climbed back up with difficulty to around 4,200 points. Far from its best.
The Federal Reserve’s news should lead to a legitimate correction of Wall Street. The floods of easy money allowed the economy to improve, if we base this on the fact that the unemployment rate has gone back down to 5.9 percent, but it firstly and most importantly favored the active financiers, as the record of the Dow Jones shows. With the Federal Reserve turning off the tap, feelings about stocks should fall. But, as European stocks are followers of Wall Street, the European markets will theoretically be brought down, which will further weigh down an already gloomy atmosphere.
That which is true about stocks could be true about interest rates in the long term, which would be worse. The Federal Reserve’s new policy isn’t to raise rates, not before what they consider to be a “considerable” period of time. However, the fact remains that the not-so-easy money should, or at least could, push investors to raise rates in the long term. And as global finance only does one of these, European equivalent rates could be yearned for, the exact opposite result of what the Central European Bank is seeking.
That which is true about stocks and rates could be true of the dollar. The Federal Reserve is worried about low inflation, 1.7 percent, and it estimates that a stronger dollar will weigh on import prices. The Fed said this, which is enough to counteract the logic of a rise in the American currency following the recovery and the Federal Reserve’s new policy. For Europe, which is desperately searching for drivers of growth, the decline of the euro is slowed or even nullified.
Will the American revival be bad news for Europe? It is not necessary to push the paradox that far. That would be the wrong target, just like the French accusing Germany of success. European exports across the Atlantic will be better, much better. But the divergence of the cycles will have unforeseeable effects on financial markets and complicate the task of the authorities.
For seven years and since the start of the crisis in August 2007, the four major central banks of developed countries—the United States, Europe, Japan and Great Britain—have carried out very close, historic cooperation in a wide “conceptual convergence,” as was detailed by Jean-Claude Trichet, former president of the European Central Bank. Continuous discussions, a decrease in contact rates, control of banks, unconventional policies: This unity of views has allowed central banks to progress swiftly and to earn credibility. This much can’t be said for many countries, though confronted with the same crisis, particularly in Europe.
Will the withdrawal of American monetary troops disturb this unity? Will the divergence of cycles cease the merging of ideas? Everything will depend on Janet Yellen and her Federal Reserve colleagues’ power to maneuver. The announcement has been successful up until now; it has not led to panic.
Essentially, everything depends on the effectiveness of this new monetary policy applied to the whole world, Jean-Claude Trichet is pleased with. If it really contributed to restoring growth to the United States, then it would suffice that Europe move more in this direction and everything will be better, if not good. But if this quantitative easing has only given “anabolic steroids” to an economy that is still ailing, its withdrawal will plunge it back into horrors. Has America found a way out of the crisis and into new growth? The response seems positive, but there remains a bit of doubt.
Then again, the United States sometimes has difficulty in stepping back—hence the major doubts about the monetary plan in regards to the end of the Federal Reserve’s so-called “quantitative easing” policy used against the crisis, which was announced this week.
It’s the great paradox at the end of 2014. There is only one country in the world where the economy is in a satisfactory state: the United States—we’re glossing over Great Britain, where stability outside finance remains to be proven. America, the country of “subprimes,” the instigator of crises, is the one that got back on its feet the quickest and the best; and, the second part of the paradox, a country whose departure from crisis poses a huge headache for others, such as emerging countries, like in Europe. Will the instigator of crises be the world economy’s troublemaker in 2015?
In order to measure the risk, it will suffice to look at the problems of emerging countries over the past year, since the end of quantitative easing was announced: a drop in the stock exchange, a rise in rates, decline in growth. It could be the same in 2015 in developed countries.
The Dow Jones was worth 14,000 points before the crisis of 2007. It was halved by the crisis, falling to 7,000 points. But it has gone back up since the start of 2009 to reach more than 17,000 these days. All records are defeated. Le CAC 40, the French stock market index, reached 6,000 points before the crisis, fell more harshly than across the Atlantic to 2,500, and only climbed back up with difficulty to around 4,200 points. Far from its best.
The Federal Reserve’s news should lead to a legitimate correction of Wall Street. The floods of easy money allowed the economy to improve, if we base this on the fact that the unemployment rate has gone back down to 5.9 percent, but it firstly and most importantly favored the active financiers, as the record of the Dow Jones shows. With the Federal Reserve turning off the tap, feelings about stocks should fall. But, as European stocks are followers of Wall Street, the European markets will theoretically be brought down, which will further weigh down an already gloomy atmosphere.
That which is true about stocks could be true about interest rates in the long term, which would be worse. The Federal Reserve’s new policy isn’t to raise rates, not before what they consider to be a “considerable” period of time. However, the fact remains that the not-so-easy money should, or at least could, push investors to raise rates in the long term. And as global finance only does one of these, European equivalent rates could be yearned for, the exact opposite result of what the Central European Bank is seeking.
That which is true about stocks and rates could be true of the dollar. The Federal Reserve is worried about low inflation, 1.7 percent, and it estimates that a stronger dollar will weigh on import prices. The Fed said this, which is enough to counteract the logic of a rise in the American currency following the recovery and the Federal Reserve’s new policy. For Europe, which is desperately searching for drivers of growth, the decline of the euro is slowed or even nullified.
Will the American revival be bad news for Europe? It is not necessary to push the paradox that far. That would be the wrong target, just like the French accusing Germany of success. European exports across the Atlantic will be better, much better. But the divergence of the cycles will have unforeseeable effects on financial markets and complicate the task of the authorities.
For seven years and since the start of the crisis in August 2007, the four major central banks of developed countries—the United States, Europe, Japan and Great Britain—have carried out very close, historic cooperation in a wide “conceptual convergence,” as was detailed by Jean-Claude Trichet, former president of the European Central Bank. Continuous discussions, a decrease in contact rates, control of banks, unconventional policies: This unity of views has allowed central banks to progress swiftly and to earn credibility. This much can’t be said for many countries, though confronted with the same crisis, particularly in Europe.
Will the withdrawal of American monetary troops disturb this unity? Will the divergence of cycles cease the merging of ideas? Everything will depend on Janet Yellen and her Federal Reserve colleagues’ power to maneuver. The announcement has been successful up until now; it has not led to panic.
Essentially, everything depends on the effectiveness of this new monetary policy applied to the whole world, Jean-Claude Trichet is pleased with. If it really contributed to restoring growth to the United States, then it would suffice that Europe move more in this direction and everything will be better, if not good. But if this quantitative easing has only given “anabolic steroids” to an economy that is still ailing, its withdrawal will plunge it back into horrors. Has America found a way out of the crisis and into new growth? The response seems positive, but there remains a bit of doubt.
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