"Kee" Points with Jim Kee, Ph.D.

Generally positive global economic news buoyed markets last week, where positive means “not great but not deteriorating.” Chinese export growth increased 14.7 percent in April from 10 percent in March (imports increased as well), though analysts cautioned that two extra working days in April (relative to March) explained most of the increase. And German industrial production rose 1.2 percent in March, suggesting that Europe’s core “powerhouse economy” is returning to growth (Financial Times). In the U.S., data on housing, retail sales, and layoffs all painted the same “not great but not deteriorating” picture. But as Allen Sinai of Decision Economics put it, “The economy is in vastly better shape than it was a year ago, two years ago, three years ago,” mostly because households, banks, and businesses “are the most solid they have been in years” (Financial Times). That’s consistent with the performance of equity markets over the same time period.


In the U.S., there is a growing focus on who will replace Federal Reserve Chairman Ben Bernanke if he departs when his second term ends in January 2014. He doesn’t appear to want to serve a third term, but of course the President could try to persuade him to stay. Most see Vice-Chairwoman Janet Yellen as the top candidate.  That would be my hope, and not necessarily because I am a fan of hers. I feel (based upon speeches of hers that I have attended and/or read) that she is less concerned about inflation than Bernanke, and more enthusiastic towards pre-emptive “macro-prudential policies,” which means identifying and dealing with “systemic risk,” presumably by preventing asset bubbles and too-big-to-fail institutions from growing. That’s easier said than done, which is why former Fed Chairman Paul Volcker said, “Somehow those words grate on my ears” when he addressed macro-prudential policies (Wall Street Journal). Nevertheless, Yellen has impeccable academic credentials and has worked closely with Bernanke. That ensures continuity and that’s why I favor her. Interestingly, former Treasury Secretary and White House Economic Council Director Larry Summers is also interested (Wall Street Journal), so this could get exciting (as economic appointments go, that is!).


Finally, the most interesting thing I saw last week was an article in the Financial Times: “Blame Bond Markets, Not Politicians, for Austerity.” The article served as a reminder of what has almost been forgotten regarding the European debt crisis, namely: “It was not Angela Merkel, the chancellor of Germany, or other political leaders who pushed austerity on to Italy, Spain, Greece, and the others. It was private lenders, beginning in the autumn of 2011, who declined to finance further borrowing by those countries.”  It’s an excellent article, arguing that in fact 21st century markets are much more powerful than any government leader.