I have thought that the austerity fad would infect the US and that fiscal policy would be a significant dray on the economy in 2012. But I am wondering about that conclusion. The deficit “supercommittee” may well fail to decide anything, in which case there is plenty of time — and a presidential and congressional election — before the automatic cuts kick in in 2013. In other words, there is a reasonable chance that the automatic cuts would never happen, and in any case they will not bite in 2012. Further, the Bush tax cuts may be extended if that is all the Democrats can get out of the deranged Republican party. Fiscal policy may thus be less of a drag than I thought. I fear I will have to get into the CBO numbers to get a clearer picture here. If the “supercommittee” does fail to reach any conclusions, there may well be more noise from the ratings agencies.

I read a piece this morning that said that everything in Europe depended on the ECB, and the ECB was impossible to predict. I do not think that the second point is right. The ECB does not want to buy European peripheral bonds, but it also does not want a financial collapse. So I think it will do enough to prevent a collapse, but not enough that politicians will believe that the problem is solved. The ECB is pressing for a political solution in Europe and that is why peripheral spreads continue to rise. In this connection, the CDU approved a resolution yesterday that called for EU treaty change to bring in automatic penalties for countries that breach budget constraints (which would not have prevented the current crisis but will make the Germans feel better about moves towards fiscal union), the creation of a European Monetary Fund, and reforms to polish up the EU’s veneer of democracy. All this is now CDU policy, rather than the policy of Germany’s coalition government, but it shows that Merkel has grasped that Europe cannot have a hawkish ECB, a single currency and fiscal independence. Something has to give and, as I have been saying for some time, European politicians will first attempt to move further towards fiscal union. The EFSF and ESM are steps on the way to this, and in the short term the EFSF remains the only mechanism available for de facto fiscal transfers — and hence will remain at the core of the EU’s crisis-fighting efforts for the time being.

The PBOC has sold 1-year bills below its benchmark deposit rate for the first time since January. This is a marginal monetary loosening. As far as I understand the Chinese system, banks pay a regulated interest rate on deposits. If government bills yield less than the deposit rate, there should be an increase in inflows to the banking system. This is the first actual move towards loosening, although the market has been speculating about an easing of policy for some weeks. It seems unlikely that the Chinese will embark upon a serious loosening in the short term because inflation remains high, house prices have only recently started to fall on a MOM basis and are still generally positive YOY, and the downside threat of a collapse in Europe remains a mere possibility, although a bad recession is highly likely.

I have a thank-you this morning, and it goes to Christopher Wheeler of Mediobanca for using the phrase “the proof of the pudding will be in the eating” in connection with UBS’s new chief executive. This phrase is so often corrupted to “the proof is in the pudding” — an ugly expression with a daft literal meaning — that I had begun to fear that the corruption was becoming the standard use. Mr Wheeler has brightened up my morning.


Eurozone IP -2% b.e. Sep.
French prelim GDP 0.4% vs. 0.3%e. Q2 GDP revised down to -0.1%.
German prelim GDP 0.5% a.e. Q2 GDP revised up to 0.3%.
French payrolls 0% QOQ d.e.
Italian trade deficit contracted, b.e., Sep. Further evidence that European imbalances are being resolved by PIIGS weakness.
UK CPI 5% — slightly lower than expected. Core CPI 3.4% vs. 3.3%e. CPI excluding indirect taxes rose 3.5%.

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