There is not doubt that Larry Summers is excited by October G-20 and IMF meetings as the top policy makers meet to discuss the state of the world economy and other significant global interests. It’s a time when the media is focused on the world’s leaders and Mr. Summers likes the role of being a major player. There is no question about Summer’s academic qualifications and his wealth of policy making experience. If success in the field of economics was based on eugenics, well, Larry Summers would certainly have a Nobel Prize. My one major criticism of Secretary Summers was his running interference for Robert Rubin and Sandy Weil in their efforts to repeal Glass-Steagall, which even Mr. Weil has admitted was a great mistake. In today’s Financial Times, Larry Summers had an op-ed, “Why Public Investment Really Is A Free Lunch.”
In the fashion of public relations coordination, Summers’s piece is meant to provide discussion about the IMF‘s efforts to stimulate global growth by lobbying for Europe and the U.S. to undertake massive public works programs. China gets a pass because China has already leveraged itself up through huge infrastructure projects in an effort to stimulate its economy in the post-Lehman world. The FT piece argues that cheap interest rates makes it mandatory for governments to borrow now at ultra-low financing costs for long needed projects. Summers’ goes through the maths to show how the returns to developed economies will be far greater than the money spent. The IMF‘s “… recently published World Economic Outlook a remarkable and important document.I n its flagship publication, the IMF advocates substantially increased public infrastructure investment, and not just in the U.S. but much of the rest of the world.” This is a long-held Summers position as he argued at the IMF in 2012 that public expenditures were needed to offset the austerity budgets being imposed in Europe because of the adverse effects of the multiplier effects.
The IMF Chief Economist argued that austerity during weak economic times have a dynamic multiplier effect and that every one percent cut resulted in a greater percentage of lost growth. In an effort to show how the IMF has indeed seen the light, Summer s concludes, “The IMF, a bastion of ‘tough love’ austerity, has come to this important realization. Countries with the wisdom to follow its lead will benefit.” The table is now set for this week’s IMF and G-20 meetings and it also serves notice to the Germans. Massive European public works projects have been opposed by Berlin because the individual nations do not have their budgets in order, therefore any large infrastructure projects will be paid for with higher deficits. Pay close attention to these discussions, but if Summers’s arguments prevail I would look at three indicators:
- Copper should at least get a short-term bid because it has been under selling pressure in anticipation of a renewed global slow down;
- The stocks of large engineering concerns like Fluor and ABB OUGHT to rally on any type of IMF-inspired global public works initiative. Fluor has been under selling pressure of late falling 20% since June;
- If the IMF and G-20 follow Summers’s lead a short-term rally should ensue. Now if only they could find the money or unlock the value of the IMF gold hoard.
***Last night, the Reserve Bank of Australia and the Bank of Japan had their meetings and left interest rates and policy as is. RBA Governor Stevens remarked about recent slowdowns in China and their effect on the price of Australian exports. Monetary policy in Australia remains accommodative but with the Aussie dollar being at historically high levels the RBA feels justified in maintaining the status quo on interest rates. The BOJ also remained at its current levels of rates and monetary accommodation. It’s interesting though that BOJ Governor Kuroda was called before the DIET during the BOJ meeting and queried about whether the weak YEN was appropriate. Prime Minister ABE had noted that the weak YEN was good and bad. The bad being the hardship that some middle class consumers were feeling from rising import prices.
Depreciating one’s currency is a double-edged sword. The failure of Japanese wages to rise in harmony with rising import prices is having a negative effect on consumption. In looking at the crude oil/yen chart, Japan is getting some reprieve from a depreciating yen because of the recent drop in OIL prices. At 9560 yen to a barrel of WTI Japanese oil costs are the lowest since February, which should sit well with Japanese policy makers. But the pressure on Governor Kuroda to appear before the DIET should be noted that Japanese politicians are growing concerned about the positive outcomes for Abenomics.