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By HaleStewart December 16, 2013 2:36 pm
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A Look Back At the Big International Economic Stories of 2013

This week is the last full week of 2013.  So, it seems appropriate to look back on the year that was to see what the big international news stories of the year were.  The following are presented in no order of importance.  And, please realize that people can disagree on these types of things.  So, without further adieu:

To taper or not to taper: we always knew the Fed would take the punch bowl away at some time, but the Fed made it official at the May 1 meeting.   This sent the financial markets into a trading frenzy, as money moved from risk assets (read: emerging market currencies and markets) and flowed back into less risky assets (read: the dollar and OECD equities).  While the Fed has not actually started to taper, the usual round of pontificating is going on regarding when that will actually occur.

The great inflation monster that never came: when the ECB, BOE and Fed started their program of quantitative easing several years ago, predictions of rampant inflation occurred as well.  What there economists failed to take into account is the fact that the world economies were rebounding from a debt-deflation recession; when a debt-fueled bubble pops, consumers spend their time and money during the first part of the recovery paying down debt.  Hence, monetary velocity drops.  In addition, banks are cleaning up their balance sheets, so they are making fewer loans.  This means the money on the bank’s balance sheets doesn’t get out into the economy.  Add to all this the great Chinese rebalancing, where China is trying to alter its consumption pattern from one dependent on exports and infrastructure spending to one based on consumption.  This dampens their appetite for raw materials, lowering commodity prices.  And the final piece in the puzzle is overall decreased demand at the world-wide level, as evidenced by the still high unemployment rate in the US, EU, UK and Canada.  All this leads to little or no inflationary pressures from either the demand or supply side.

The BRICs fall from grace: while China is still going strong (more on this below), the other three BRICs have fallen on hard times.  Russia was never really more than an oil-export play; they have yet to convert their economy to something more than a kleptocracy.  India is facing the daunting possibility of stagflation: rising inflation and slowing growth.  Brazil is facing something similar.  Both India and Brazil are in a rate hiking cycle, as their central banks work to establish or maintain their inflation fighting credentials.  Add to this the capital flight that occurred from the Fed’s tapering scare earlier in the year and you have a recipe for serious financial problems.

China just keeps on growing: the juggernaut that is the Chinese economy is still printing growth over 8% -- and this is after they were supposed to begin changing the structure of their economy to one more driven by consumer demand.  This despite threats/predictions of a real estate collapse and debt fueled spending at the municipal level.  At some point, their growth has to slow down – this happens to all economies when they begin to mature.  But it hasn’t happened yet. 

“Abenomics”:  when I was in college (the late 1980s), Japan bashing was rampant, largely because the US was terrified of the then surging Japanese onslaught.  Then came the popping of the Japanese real estate bubble in the late 1980s/early 1990s leading to nearly two decades of deflation.  Enter Prime Minister Abe, who proposed a three point plan: monetary loosening, fiscal stimulus and the creation of experimental enterprise zones to get the economy moving.  The doubling of the monetary base has sent the yen dropping verses the major currencies and there is some fiscal stimulus in the works.  However, the recent downward revision to the latest GDP figure has raised questions about the plans overall viability.

Next, I’ll look at 2014 to see that the major trends/events might be.

Hale Stewart is a former bond broker who has been writing about economics and financial markets since 2006 on the Bonddad Blog.  He is also a tax attorney with a domestic and international practice while also forming and managing captive insurance companies for US companies.   You can follow him on twitter at:@captivelawyer

 

 

 

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