Anyone got a clue?

The song remains the same, to borrow a song title.  Countries that have been deeply affected by the recent economic turmoil are still in the spotlight.  A risk aversion has permeated the currencies again, Euro and Sterling starting another bout of weakness. 
One difference is that the US dollar is having difficulty capitalising on this flight to relative quality.   The price for the worst affected European countries debt widens over the strongest member of the euro club, being Germany.  When you see the spreads widening you can usually count on a Euro sell-off, and no change is seen this time.

The main benefactors of this risk off trading have been the Japanese Yen and Swiss Franc, but in reality the US dollar has settled into safe haven flows from risk off trading boosting its value, only to be reigned in on the top side from weakening fundamentals.
I find the most interesting aspect of this whole economic fiasco is the usually socialist European governments who might be typecast as borrow, spend and supporting large governments have been the most radical in slashing costs, reducing (or attempting to) borrowing and unaffordable governments.  The US, who I think we all can agree is at least the poster boy for capitalism, or survival of the fittest, has gone completely the other way, preferring to print money and run up more debt in an attempt to pump that back into the economy as a shot of adrenalin. 
If you extrapolate that thinking a little, you might even come to the conclusion that no-one knows what to do; except that whatever they do it can’t be what they did before.  I’ve become a little cynical of governments and treasuries, almost philosophical in the view that perhaps the emperor is butt naked and that all they (governments) have done is just ridden the economic tides, taking credit for stuff they ultimately have little control over.
Take the US, the economy lives and dies by the power of the consumer, change nothing but consumer confidence, that feel good factor, and you can really stymie any economic revival. I guess happy pills in the water supply might work but is it really that simple that to keep the US economy afloat you can drop the boring suits at the Fed and increase the re-runs of Chevy Chase movies? 
Well no, unless you can make sure people have a job, which is where I guess the US government is going with its efforts of providing government funded employment. It’s unsustainable but I’m assuming that the hope is the positive feelings and economic spending will re-ignite the economy. 
If you look back to the Great Depression, Roosevelt embarked on a similar round of economic stimulus with government money; Keynesians point to the Second World War economy as the massive amount of injection of stimulus that was needed to end the depression.  Even if they called that correctly they also called for a similar collapse of the economy after the war. What they hadn’t accounted for was a massive pent-up demand.
If we assume we aren’t headed for World War III, or that this economic collapse was anything like the Great Depression, then all we are left with is perhaps the underestimations of pent-up consumer demand.  I still have a feeling we are in for a ‘hockey stick’ recovery, maybe 18 months of flat line and a rapid rise in demand, inflation and interest rates.

Disclaimer: The views expressed are the opinions of the writer and whilst believed reliable may differ from the views of Butterfield Bank (Cayman) Limited. The Bank accepts no liability for errors or actions taken on the basis of this information.


Money Markets by Butterfield Bank’s Phil Turnbull