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Death by Narrative

Pete Wallison on how bad ideas destroyed ‘the most innovative and successful financial system the world has ever known’.  As Kevin Hassett notes:

It wasn’t a coincidence that equity markets posted their biggest drop in more than a year the day the U.S. Senate passed its sweeping financial reform bill…America has become the land of high taxes, big government, complex regulations and indignant politicians. The future of such a place is not bright. The markets understand that.

 

posted on 24 May 2010 by skirchner in Economics, Financial Markets, Rule of Law

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Adam Carr tried the “its all about regulation” line on Friday.  At best the current correction is 30% regulatory worries and 70% Euro debt fear.

David Llewellyn-Smith set him straight:

However, reason seems to have deserted Adam Carr of Business Spectator. Today he maintains that “...the confusion and panic over regulation has reached fever pitch. You could see it in late afternoon trading yesterday, where despite very strong GDP numbers out of Japan, Singapore and Taiwan, equities throughout the region dropped. So for mine this latest bout has got less to do with the growth outlook – it’s pretty easy to dismiss concerns over this when actual growth outcomes have been very strong, leading indicators continue to point (unanimously) to strong growth and policy is highly stimulatory. Fears about eurozone growth and austerity? Not really. France and Germany aren’t engaging in austerity measures and they, by themselves, constitute about 50 per cent of the euro zone. This is more about government interference and risk appetite is being savaged as a result. Look at our region yesterday. At one point the AUD lost a big figure in less than an hour of trade, soon after the government reiterated it wasn’t about to budge on the 40 per cent resource rent tax.”

A few points in response. Correlation is not causation. Growth numbers have been strong off low bases. Leading indicators in the US came in last night far below expectations and badly spooked the market. And Europe is being engulfed in a debt crisis, the outcomes of which are always lower growth if not recession. Finally, policy stimulation has a questionable effect in a debt-trap. This column will reiterate that what is happening here is a highly predictable and rather nasty convergence of falling European, US and Chinese growth ahead and it’s being exacerbated by the decline of the euro and consequent destruction of the decoupling thesis. It’s not some government-induced black-swan event.

Posted by .(JavaScript must be enabled to view this email address)  on  05/24  at  10:25 PM



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