If the growth of the global economy is experiencing a good moment and if financial assets, with few exceptions, continue to turn near historical highs and to mark new ones almost every day, it is also thanks to the energetic stimulating treatments that are being administered to the old , to the weak, the sick and the indebted of the world.
The Grand Old Man of the global economy is the US cycle. Eight years is a venerable age for an uninterrupted cycle of growth and usually brings with it typical maladies of old age such as inflation, financial and real asset bubbles, rate hikes and inverted yield curves that herald the inevitable recession to come.
This time, however, the only clear sign of the old age of the US economy is thehigh level of financial assets. Of noteworthy inflation we still see little (we will see more from September, but not much). Another encouraging sign is the absence of new debt on the part of consumers, who have returned to saving and are no longer leading lives beyond their means. There is much talk of the debts contracted in recent years to change cars, in some cases not repaid, but there is no comparison with the debts contracted in the previous cycle to buy a house.
There is also a lot of talk about decline in auto sales and peak in home sales, two essential components of any business cycle. It's true, for cars, the golden moments, those in which the backward demand accumulated over the years of crisis had to be satisfied, are behind us, but now the market is in equilibrium and moves progressively, thanks to the low price of fuel, towards models that leave the manufacturers with higher margins. As for houses, the peak of construction has yet to be demonstrated, while the market remains orderly and devoid of any excess.
Another old age sign of a cycle is usually banks that start lending money in increasing amounts and with decreasing prudence. And indeed it has been noted in America, for a few months, a credit recovery, but we are starting from low levels and from very healthy bank balance sheets, so at the moment there is nothing of concern to report.
If American growth is colorless it is not due to cycle senility but to structural factors such as the low productivity growth and slowing population growth. Administration Trump it tried to combat this sclerosis in the first phase with supply policies, in particular deregulation and tax reform, but it is producing results only on banking and environmental deregulation. To recover growth, it is now focusing on a correction of the dollar and the maintenance of an accommodating monetary policy.
By circulating the hypothesis of a reconfirmation of the Yellen driving the Fed, Trump has softened his positions. It is not only out of legitimate personal ambition that Yellen has become more cautious on rates, but also to preserve the strategic autonomy of the Fed. Indeed, Yellen's alternative is Cohn who, beyond personal merits, would still be seen as Trump's man, alien to the culture and history of the Fed.
America's expansive choice on the dollar and rates has reflationary consequences for the whole world. Europe, Japan and emerging must compensate for their own revaluation against the dollar with more expansionary monetary policies than they would have adopted with a stable dollar. Here then is Japan resuming Quantitative Easing in a big way and Europe oriented towards delaying and slowing down the reduction of its Qe as much as possible. The devaluation of the dollar obviously does some damage to European exporters, but globally, for financial assets and for growth, it is not zero-sum but positive-sum.
Another Great Old Man around the world trying to recover through monetary means is Japan. Abe is in crisis of consensus, Abenomics has failed to bring inflation back to two per cent. However, the first arrow of Abenomics, the monetary one, has resumed working at full speed. Japanese Qe is now permanent.
Europe, for its part, has to worry about the Great Sick Woman, Italy, who is now in cyclical recovery but remains a political question mark and theweak link in the event of a new global recession. Italy can absorb a not excessive revaluation of the euro because it starts from a current account surplus of 2 percent, but it would have more difficulty absorbing a rise in policy rates, which would force it into a restrictive fiscal policy to compensate for the greater cost of debt, a risky solution.
Italy's weakness therefore induces the ECB to yield on the euro, allowing for its revaluation, but to yield as little as possible on Qe and sub-zero rates.
Recapitulating, theThe net effect of global monetary policies is still expansionary. The exuberance of the financial markets will be calmed in America (starting in September) by the daily sales of securities by the Fed and in the rest of the world by the revaluation against the dollar.
The European stock exchanges, especially those most exposed to cyclical exporters such as the German one, have been the collateral victims of this reflation and ribilance. They will have the opportunity to get back on track and recover when the dollar's descent begins to slow down. The damage produced by the recovery of the euro on the margins of European exporters is irreversible, but the multiples will be able to at least partially offset it when it is understood that this rebalancing action makes the world more solid and lengthens the life of the global growth cycle.
