Saturday, 21 January 2012

Even in the depthts of an Ice Age, the sun can shine

Just in case anyone wondered - the ECB's dramatic policy shift isn't going to save the Euro Zone from recession, nor will it cure internal imbalances. But lending half-a-trillion cheap  euros to the banking system for 3 years relieves all the worries about where the money will come from to repay maturing bank debt, and the success of the frst loan will probably increase enthusiasm to come back for even more in February  - and that cash will be used to buy higher-yielding assets, boosting profits and helping the process of financial rehab.

A word on those imbalances. It's fashionable (see Martin Wolf taking to John Authers on FT video) to talk about Europe's internal balance of payments imbalances in terms of 'the surplus countries' and 'the deficit countries'.  In practise, that's a bit simplistic. Almost all of Europe's balance of payments surplus comes from just two countries - Germany and the Netherlands. And almost all the deficit comes from Spain, France, Italy, Portugal and Greece. The other ten countries don't have much of a surplus or deficit at all. Maybe it's semantics but when we say 'surplus countries' we really mean Germany, and 'deficit countries' we mean 'Club Med, plus France'.

In the US, the housing market - crucial to economic recovery - has worked off its excess inventory and is very, very slowly coming back to life. The economics profession under-estimates lags between policy action and effect, and underestimates the multipliers that cause both recovery and recession. 'New normal' growth won't be anything like 'old normal' and we can reasonably term the new economic environment an 'ice age'. But even so, there will be days, weeks and months when things fell better. This is one such day, enjoy it.