Guide to financial hurricane season
Most crises occurred in the six weeks from late August to mid-October, writes Anatole Kaletsky
AS THE northern hemisphere’s summer holidays wind down, the world is again moving into the financial Hurricane Season, which coincides uncannily with the meteorological hurricane season in the North Atlantic.
Most great financial crises were in the six weeks from late August to mid-October.
This year, exactly on cue, the risks are again building up: war in the Middle East; a watershed decision in US monetary policy, plus the announcement of a new Fed chairman; a German election that could make or break the euro; the long-awaited “third arrow” of Shinzo Abe’s Japanese reform programme; and another internecine conflict over the US budget and Treasury debt limit that could result in a government shutdown or even a temporary default.
And I am not even counting probable policy upheavals in China, India, Brazil, Indonesia, Turkey and other crisis-ridden emerging economies.
While Syria is the most frightening, it is also the easiest to dismiss. War in the Middle East is effectively a continuation of the permanent status quo.
Neither the global oil supply nor the balance of power between Sunni and Shi’ite Muslims is likely to be significantly affected by whatever action the US may or may not take — and that is what matters for global economics and geopolitics.
Once the missiles have exploded, financial markets will enjoy a relief rally, as they usually do after military engagements in the Middle East.
The German election on September 22 now seems equal- ly predictable. Recently, both positive and negative expectations have been deflated by the blandness of the German campaign, combined with the modest improvement in Europe’s economic conditions.
In Japan, by contrast, the outlook is uncertain. Shinzo Abe could announce significant structural reforms, backed by further monetary and fiscal stimulus.
Japan would then enjoy an accelerating recovery and probably a continuation of the bull market that began last November.
On the other hand, Abe could lose his nerve and fail to deliver reforms. In that case Japan would sink back into economic torpor, and the rest of the world would revert to ignoring Japan, as it has for the past decade.
That option will not be avail-
Once the missiles have exploded, financial markets will enjoy a relief rally, as they usually do after military engagements in the Middle East
able if events in the US veer off course — which brings me to the main source of financial and economic uncertainty, a confluence of four closely related events in Washington: the monthly employment report on September 6; the Fed’s decision on monetary tapering on September 18; the announcement of a new Fed chairman at about the same time; and the Congressional vote on Treasury debt limits by mid-October.
A very weak payroll report, with employment growth of under 100 000, would stir serious worries about the tapering decision two weeks later, about whether the Fed would actually dial back monetary expansion and about whether such a decision could be dangerously premature.
A big number, on the other hand, would guarantee tapering and provide some reassurance that the US economy could withstand this move.
In either case, attention will shift to the Fed succession and the debt ceiling vote.
The appointment of Larry Summers seems a foregone conclusion, but a worrying question remains: why has President Barack Obama apparently decided to back a candidate who will face furious opposition from both parties in Congress and whose views on monetary policy appears dangerously hawkish?
An optimistic answer is that Summers may be proposing more radical combinations of monetary and fiscal policy stimulus than Ben Bernanke was willing to contemplate — for example, quasi-fiscal policies to support housing finance, or perhaps even the direct distribution of newly printed money to US citizens, which economists call “helicopter money” and “quantitative easing for the people”.
A grimmer alternative is that Obama believes a financial crisis is inevitable and is impressed with Summers’ firefighting skills. Whatever the motivation, the Fed appointment will make investors nervous until it is settled and fully explained — which may be why Obama is uncharacteristically accelerating this decision, instead of prolonging the agony.
The same may be true about the debt ceiling vote, brought forward from November to midOctober. This may reflect confidence about striking a deal with Congress, as Republican leaders back off threats to shut down the government or trigger a Treasury default.
Alternatively, the White House may fear that the US economy will soon face a crisis and wants to trigger an early budget confrontation, so as to blame Republicans for whatever economic disappointments lie ahead. Either way, the fiscal uncertainty will be resolved by mid-October — and the financial hurricane season will be over for another year.