October 16, 2014 1:22 pm
The markets are right to be anxious
The US no longer controls its own destiny nor, indeed, the destiny of others, writes Stephen King
The mood in Washington during the weekend IMF meetings was bad enough but the mood in markets now appears a lot worse. Last week the big issue was the eurozone. This week the big issue appears to be the US. Rapidly declining US Treasury yields and plunging equity markets are broadly consistent with a US economy that, one way or another, might be running out of steam.
Sometimes, though, another analogy makes more sense. In this story, the US is the first to climb a cliff. Other countries are tethered to the US by ropes. The overall pace of ascent depends on the burden of debt each country has to carry. One false move by the US will wreck the entire enterprise. Yet the US will only get to the top if the others also make steady progress. At the moment, they are more in danger of losing their footing, thereby dragging down the US.
Still, it is difficult to see why a clutch of moderately weak US economic data – of which retail sales is the most obvious culprit – would be enough on its own to trigger a major attack of the jitters.
There are other things happening too. Ebola has raised the anxiety levels. So too have widening Greek bond spreads. There may also, belatedly, be a heightened sense that the US economy could be undermined by bad developments elsewhere in the world.
Most economists tend to think that where the US leads, the rest of the world follows. They regard the US as the locomotive of a train with other economies the carriages that follow. On that basis, a recovery that begins in the US will eventually pull the rest of the world along. That, broadly, was the consensus at the beginning of the year. The US was evidently doing better. It was only a matter of time before economic conditions in the rest of the world would also improve.
Admittedly, some worried that a US recovery would be followed by higher interest rates. But as Stanley Fischer, vice-chairman of the Federal Reserve, noted over the weekend, “tightening should only occur against the backdrop of a strengthening US economy … [which] should directly benefit our foreign trading partners by raising the demand for their exports, and perhaps also indirectly, by boosting confidence globally”.
There are good reasons for thinking the cliff analogy is, today, a better bet. Deleveraging is a huge burden and there is no obvious end in sight given still remarkably high debt levels. The US economy’s share of the global pie is shrinking and therefore it no longer exerts the same gravitational pull on the rest of the world. And, increasingly, economic and financial developments elsewhere are reshaping US economic performance in ways that domestic policy makers cannot easily offset.
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