Monday, December 01, 2008
Macro Man was pleasantly surprised today when he purchased his morning coffee-and-a-smoothie on his way into work. Forgetting that the VAT cut took impact today, he was flabbergasted to see that the cost of his morning necessities had been trimmed by a handsome ten pence, all the way down to £3.90. At this rate, the positive income shock from that 10 p a day will enable him to get a "free" coffee-and-a-smoothie ever eight weeks.
With deals like that, the recession will soon be a thing of the past.
Speaking of recession, the flow of data remains very grim indeed. A host of PMIs have been released today....and among those from China, Switzerland, France, Germany, South Africa, and the UK, only the Swiss have managed to notch up even a 40 (and that was only barely!) Apparently cuckoo clocks are the Christmas present of choice this year.
One outcome of today's execrable data, whether intentionally linked or not, has been a sudden and (relatively speaking, of course) sharp devaluation of the RMB. Having been an oasis of stability (against the USD) for the last three months, the RMB has weakened more than half a percent against the dollar....which looks very sharp indeed on a six month chart.
If this is the result of a deliberate policy change on the part of the Chinese authorities, this could kick-start another leg of dollar strength, led by USD/Asia. After all, most of the Asian economies keep an eye on each other's currencies, with China as an erstwhile anchor of stability. If the RMB goes, look out above!
Unless, of course, quantitative easing submarines the dollar. As Macro Mac noted last week, he is skeptical. While it's undeniable that that the monetary base is increasingly, this is not feeding through into broader monetary aggregates...which Macro Man would suggest is a precondition for QE to feed through into asset purchases/sales.
Observe, for example, how the 6 month annualized change in the monetary base has shot higher....offsetting a sharp deceleration in the 6 month growth of MZM (money of zero maturity, which also includes demand deposits). MZM growth had been rising steadily for the previous two and a half years...coinciding with the disastrous decline in the dollar. Coincidentally or not, EUR/USD and MZM growth both peaked in July and have come off sharply since.
This, Macro Man would suggest, is a perfect example of Ricardian equivalence at work. The time to sell the dollar on the back of QE will come when the velocity of money begins to rise again; i.e., when QE gains traction and begins to filter through into strong growth in broader monetary aggregates.
Until then, trading the buck on the back of QE is likely to be as effective as Alistair Darling's temporary VAT cuts.