Shaw Capital Management Korea: World Economy and Raw Material Shortages - We have seen major developing economies like China and India apply the brakes earlier this year, as inflation grew on the back of commodity shortages.
World growth was running at 4.5%, only 1% or so below the record growth rates of the mid-2000s. This was too fast for raw material supplies to accommodate with current technology.
Shaw Capital Management Korea: - World productivity growth has been slowed down by this raw material shortage ... this in our view was the cause of the sharp slowdown in 2006 which in its turn caused the collapse of demand for houses in the US and so the sub-prime crisis.
It will take a decade for new technology and possibly new supplies to allow renewed productivity growth; with plentiful supplies of raw materials this was the era of computer-led growth in productivity.
As growth has been slowed worldwide, so already slow growth in developed countries has slowed even further. This is inevitable.
If these countries were to speed up, demand for commodities would rise faster, spurring sharp price rises, which in turn would force them to slow back down.
Shaw Capital Management Korea: - It is convenient to focus on shortage of credit and excess debt post-banking crisis. But the fundamentals would not permit much growth even if there were plenty of credit and no debt; if the latter situation were the case, then monetary policy would need to tighten. As it is monetary policy can remain easy with the banks in endless disarray.
Seen against this background, the slowdown is natural and should not surprise us. Equally natural is that equity markets are settling, while bond yields fall, with inflation being held down and return on capital depressed by slow productivity growth.
Shaw Capital Management Korea: World Economy and Raw Material Shortages - However, none of this implies a return to recession in OECD countries. This would be prevented by a return to quantitative easing and even a deferral of fiscal tightening. Governments and central banks in the OECD are under no pressure from inflation to force down activity. Debt/GDP ratios are rising and this is forcing fiscal tightening. But the pace of this is a matter of choice.
Shaw Capital Management Korea: World Economy and Raw Material Shortages - "As far as monetary policy is concerned, the need remains to stimulate recovery of the banks since they remain the primary channel of intermediation"
Furthermore there are investment opportunities in the present environment: high returns to technological advance in commodity use, for example, and to exploration for new sources of supply.
Exports are growing well, as capital goods flow to the fast-growing developing world. Consumption is no longer depressed but rather beginning to grow.
Shaw Capital Management Korea: World Economy and Raw Material Shortages - As far as monetary policy is concerned, the need remains to stimulate recovery of the banks since they remain the primary channel of intermediation, despite all the ways in which firms and individuals have managed to find alternative finance sources since the banking crisis.
This points to further quantitative easing. Interest rate policy has become irrelevant; the rates at which private loans are being made bear little relation any more to the rates of interest on government short-term loans.
Shaw Capital Management Korea: The very low rates central banks are charging banks for loans are merely a subsidy to banks; better instead to release banks from the neurotic demands currently being made by regulators for much more capital, for greater caution in loan-making and so on.
Meanwhile it is time to restore official interest rates to their proper function as regulators of the private rate of interest; they should now be raised towards more normal rates.
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