A new analysis from Goldman Sachs answers a number of questions I had been thinking about, including how big the fiscal contraction will be this year (I have not checked yet how well this matches up with my own estimates) and the likely effect of the continuing troop drawdown. GS argues that there will be a sharp and significant contraction in the coming years. I expect this contraction to be a headwind to the economy — a tip back into recession is possible — and to cause domestic corporate profits to fall. The chart is here: http://wapo.st/XmRA2M.

I do not understand why Ireland has wound up IBRC (part of which was formerly Anglo Irish).

The Irish plan (which was first floated some months ago and which I thought the ECB had killed off) appears to be, in essence, to swap government promissory notes issued to Anglo Irish as part of its bailout for long-term government bonds. That would greatly reduce the Irish government’s cash-flow needs in the next decade or so (the promissory notes have annual repayments of principal and interest that are quite large).

But I do not understand why it was necessary to close IBRC and transfer its assets to NAMA. Perhaps it was to stave off a legal challenge from creditors — that was at least the reason why the legislation was passed by a rushed session of the Irish parliament overnight.

I also do not understand why some reports suggest that the whole thing would be funded by the issue of NAMA bonds. To whom would these bonds be issued? Perhaps it is the shareholder of IBRC, which I think is the Irish government; but, as far as I know, the Irish government also owns NAMA, so why issue bonds and not equity? NAMA bonds are no help at all in changing the government’s future cash flows — to do that, it has to swap the promissory notes for government bonds. I presume that that is what is actually going to happen.

There has been some chatter from politicians (Hollande and now Stournaras) about how EUR is too high. They are right — it is — and it is the ECB’s fault. But it is hard to see what governments could do about it. And even if they could do anything, a German spokesman poured cold water on the idea, saying that sustained improvements in competitiveness cannot be achieved by currency depreciation. Actually, I cannot see why that is true. If a currency has a one-off fall and stays low, there has been a one-off cheapening of its exports. Perhaps the chap means that a fall in the EUR would not help to reduce the imbalances within the Eurozone. But that is not much of an objection: it would make things rather better while the painful adjustment is going on.

The PBoC has released its fourth-quarter monetary policy report. It says that China must be alert to increases in inflation expectations and imported inflation. In my piece on Chinese monetary policy earlier this month, I said that policy settings remain relatively tight, and this statement means that they are likely to remain so. I also said that China had seen strong growth in total social financing, and that it was hard to know whether this was the result of a deliberate relaxation of administrative controls or of processes outside the government’s control; either way, the process had gone too far. This statement consistent with these views. We will never know, I suspect, exactly what caused total social financing to increase so sharply, but given the tightening bias of the PBoC, we may be about to see a test of whether it can be reined in but the central bank (though the data releases for the next couple of months may be hard to interpret, because of the Spring Festival — an annual annoyance).

On the data front, the UK’s trade deficit narrowed somewhat but remained wide, while France’s widened, d.e. UK manufacturing production put in a strong performance at 1.6% MOM b.e. Australian unemployment was flat, b.e., at 5.4%.

 

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