The world changed this week, big-time, as markets struggled to keep up with political shifts, then economic, then political again. The markets are still behind.
Sad reports on housing routed the recovery brigade: May existing-home sales fell 2.2 percent from the previous month, and sales of new ones collapsed 32.7 percent.
First-quarter U.S. gross domestic product was revised down (again) from the original 3.5 percent gain to 2.7 percent, and two-thirds of that remainder was inventory rebuilding. May orders for durable goods were still strong (up 0.9 percent), but that was it for positives.
The Fed’s post-meeting statement had the feel of can’t-say-that. Prior statements have referred to "strengthening" recovery. This one said that recovery is "proceeding." Wherever this procession is going, nobody will mistake it for the Fourth of July parade.
Money ran to bonds for safety, the 10-year T-note to its 3.09 percent low, mortgages about 4.75 percent, for one fleeting instant 4.5 percent. Applications for loans faded anyway.
In the first political development, China announced last weekend that it would let the yuan float upward, and global trading sparkled in pleasure for four whole hours.
Then Monday’s yuan-trading reality exposed China’s utter deceit, exchanging its credibility for escape from more yapping by Treasury Secretary Tim Geithner at the G-20 summit (can’t blame them).
China obviously will continue a weak yuan, which will undercut wages and recovery everywhere else.
The second political shift has been long in coming, but this week’s sudden, global, and concerted lurch came as a surprise: all of Europe and Japan are embarking on simultaneous fiscal contraction. Stimulus be damned, all are determined to get their finances in proper order. If they can.
Japan’s newest prime minister in its lickety-split turnstile, Naoto Kan, proposes a 5 percent national sales tax and capped spending to chip at a national debt double its GDP. Such measures guarantee recession, and 10-year yen bonds now pay barely 1 percent.
France is taking unthinkable steps to cut its welfare state, raising the retirement age to 62 ("Incroyable! Citoyens aux barricades!" Translates: "Incredible! Citizens to the barricades!") All of the "Club Med nations" are attempting spending cuts in the range of 4 percent of GDP for each of the next three years, with recessions certain.
The one European nation that should not cut — already austere Germany — will do so. Angela Merkel and those competing to replace her are unmoved by the need to buy something from the rest of Europe, or to offer fiscal support. Europe will get an export boost from the devaluing euro, but not enough.
The United Kingdom has thus far done everything right (devalue, semi-nationalize banks, force them to lend), and its new government has embarked on the last step, a budget fix, in the right way: for each pound sterling in new taxes, four pounds in spending cuts.
Then there’s the United States.
Tim Geithner and Larry Summers, the White House’s National Economic Council director, have offered incoherent advice to the world for months: maintain fiscal stimulus while adopting restraint.
Maybe take a little time with the restraint, but don’t stop the stimulus. As of this week, the world is done with that.
So are we — whether we do it to ourselves, or markets force it upon us. An economy staggering forward somewhere between a flat-bottom "U" and a double-dip "W" cannot possibly generate enough tax revenue to close the chasm to the left’s social promises and the right’s dreams of low taxes and military adventure. Forty-five years of that are done now.
The arch-Keynesian of the hard Left, Paul Krugman, still in favor of big spending, this week seemed to abandon President Obama’s platform. He wrote that our long-run budget problem "will require, first and foremost, a real effort to bring health care costs under control."
Peter Orszag, talented director of the Office of Management and Budget, has quit.
President Obama’s thinking is opaque. Words, words, words, more words … farther off-point every time he speaks. He seems annoyed that the real world has intercepted his agenda, and is unwilling to adjust. Combined with apparent lunacy in the other party, markets face a leadership vacuum, and markets don’t like that one bit.