At Vox EU, Peter Temin and David Vines observe that the debate over the efficacy of Keynesian-style stimulus in the response to economic turmoil in Europe is a case of plus ça change, plus c’est la même chose:
Keynes faced exactly this opposition in 1930…[people who] simply denied that increased government spending would have any beneficial effect.
Keynes opposed this view, but he did not have an alternate theory with which to refute it. The result was confusion in which Keynes was unable to convince a single other member of the Macmillan committee to support his conclusions. It took five years for Keynes to formulate what we now call Keynesian economics and publish it in what he called the General Theory.
He based his new theory on several assumptions, two of which are relevant here. He assumed that consumers are only forward-looking part of the time, being restrained by a lack of income at other times, and that many prices are not flexible in the short run wages in particular are “sticky.” These assumptions give rise to involuntary (Keynesian) unemployment which expansive fiscal policy can decrease.
Which theory is relevant today? We know that wages are sticky – countries in southern Europe have found it impossible to implement requests from their creditors that they reduce wages swiftly. And we know that not all private actors in the economy are forward-looking. Before the crisis, borrowing and spending increased in ways that could not be sustained; now consumers are not spending and business firms are not investing even though interest rates are close to zero.
Those are the conditions described by Keynes in which expansive fiscal policy works well. They also are the conditions in which monetary policy does not, even though modern macroeconomic policymakers came to rely entirely on monetary policy for stabilization. There is a disconnect between the needs of current economies and theories of current macroeconomists.
On the homefront
Crude at a four-year low. The TSX finished well in the red on Thursday as natural resource stocks slumped. The energy sector was the key contributor to the index’s decline, with WTI crude oil sinking to nearly $74 per barrel, a four-year low, in the afternoon. Market participants are increasingly confident that OPEC will not move to curtail production in order to give the price a bit of a boost at its meeting later this month, but will instead look to gain market share. WTI weakened further overnight, falling below $73.50 per barrel before paring its losses by a little less than a dollar. TSX 60 futures are virtually flat ahead of the open.
The Canadian dollar is back below 88 cents U.S. this morning thanks to the drop-off in crude.
BlackBerry spikes. At the company’s investor day in San Francisco, CEO John Chen rolled out BlackBerry’s (BBRY) new enterprise mobility management solution, BES 12, which is compatible with phones that do not operate on the company’s platform and unifies previous editions of the software. Moreover, the CEO also announced a number of partnerships that will help drive adoption, most notably, one with Samsung. Both BlackBerry and Samsung will gain when companies elect to outfit their employees with certain types of Samsung devices and use BES 12 as the platform that manages those devices. As BNN’s Amber Kanwar put it, there’s a pretty impressive compilation of companies that will be “selling BES 12 for BlackBerry.” Clearly, Chen & Co. have done everything in their power to ensure the success of the product essential to the company’s medium-term growth, which helps explain the price action — a seven per cent gain on the Nasdaq — seen on Thursday.
Will manufacturing sales bounce back? At 8:30 a.m. (EST), Statistics Canada will release the figures on manufacturing sales for the month of September. This metric has been a whipsaw over the past two months: in July, sales soared to a record high, only to be followed by their largest one-month drop in more than five years in August. This time around, economists expect that sales will increase by about 1.1 per cent month-over-month. Going forward, a lower loonie and firmer U.S. demand are expected to boost support for the long-struggling sector, which saw employment increase by more than 33,000 in October.
Home price surge in full swing. At 9:00 a.m., the Canadian Real Estate Association (CREA) will publish data on home sales and prices for October. In September, resales snapped a seven-month winning streak, but price growth remained north of five per cent on an annual basis. The Bank of Montreal is calling for the MLS Home Price Index to rise 5.5 per cent year-over-year. “Strong activity in the big three, Toronto, Vancouver and Calgary, continues to pace the gains,” writes deputy chief economist Michael Gregory. The Bank of Canada has singled out those housing markets as seeing a particularly robust rate of home price appreciation, but there has been little discussion of whether targeted macroprudential measures to cool those particular metropolitan areas would be wise.
Correction: CREA will not be publishing the October figures today. They will be released on Monday morning.
A changing of the guard in Europe? Euro area economies grew by a marginal amount in the third quarter — 0.2 per cent — but that was still better than what economists expected. While Italy’s economy contracted, France’s and Germany’s did not. Perhaps the most noteworthy tidbit is that, due to revisions and stronger than anticipated growth in Q3, Greece’s economy is growing at a faster pace than Germany’s over the past year — the first time that’s happened since 2007. While positive for Greece from a relative standpoint, this outperformance hasn’t come because its economy is knocking the cover off of the ball; it’s because German growth is slowing.
Credit growth in China is slowing. Total social financing fell to ¥662.7 billion in October, down nearly 25 per cent year-over-year and well shy of the ¥887.5 billion economists were expecting. There’s been a big unwind in the shadow banking segment over the past four months, as The Economist’s Simon Rabinovitch notes, which is something to keep an eye on in the months to come.
A plethora of hedge funds are set to tell the public exactly what they were holding at the end of September. These quarterly releases, known as 13Fs, are admittedly dated: there’s no guarantee that a fund manager continues to have the same positions today that he or she had a month and a half ago. However, there’s no doubt that this glimpse into how the thoughts of the best and brightest in the industry have changed since the end of June can be useful to investors. You might even see some stocks beloved by the so-called “smart money” get a bit of a lift in the after-hours session as retail investors look to mimic hedge fund managers.