Interest rates on US, German and UK government bonds have fallen to all-time lows. Yields on 10-year US Treasury securities, for example, are below 2 per cent. That is the lowest recorded since the Federal Reserve began publishing market data in 1953. In addition, yields on the inflation-protected 10-year Treasuries are zero. These are almost incomprehensible levels whose implications are profoundly negative. Namely that Tuesday’s International Monetary Fund report is quite correct to warn that America and Europe are on the verge of renewed recession. It is only the anticipation of negligible demand for capital and negligible inflation – both hallmarks of recession – that could drive rates this low.
For the American and western European economies to decline again, when unemployment levels are already so high, would be disastrous. It would shock consumers, businesses and financial markets. Fearful, they would retrench further, causing the economic decline to accelerate. Weak labour markets would worsen as would the already swollen government deficits and debt. Overall, we could be in for a repeat of the experience of 1937, when America fell back into recession after three years of recovery from the Great Depression.
How do we know that another recession is approaching? For starters, there is no other credible explanation for the relentless fall in interest rates. Yes, monetary policy is on maximum ease and that controls short-term rates. Safe haven psychology also is at work. However, these cannot explain such low yields on longer-term government and corporate bonds. Further, bond markets usually signal recession through an inverted yield curve, when long-term rates are lower than short-term ones. Technically, this is impossible now given short-term rates are zero. But the recent movement in long-term rates is the equivalent.
Moreover, recent US and European economic data convey serious weakness. US household net worth has begun to fall again and jobless claims have been rising for several weeks. Retail sales are flat and consumer confidence is hovering around modern lows. Onshore corporate liquidity has reached a record $13,000bn, which signals that businesses are uncertain over the outlook.
Across the Atlantic, the trend is also poor. Neither Germany nor France grew in the second quarter. Household consumption in the eurozone actually fell during that period. Moreover, the European Commission is forecasting only 0.2 per cent and 0.1 per cent growth across the region for the third and fourth quarter respectively. The worsening of the sovereign debt crisis surely means that actual results will be worse.
It is the debilitating sovereign debt crisis in Europe that is pushing both regions back towards the brink. It is causing credit conditions to tighten again for sovereign credits, weaker borrowers and small and mid-sized business. It also is suppressing consumer and business confidence and the export outlook.
The never-ending nature of this crisis was avoidable. At every opportunity Europe’s leaders have delayed, taken the tiniest steps possible and generally averted their eyes to the elephants in the room. Yes, everyone knows that the country-by-country politics are difficult, starting with Germany. But the risk of another Lehman-like market collapse and subsequent economic contraction is huge. Faced with this, European leaders must confront the politics. Instead, their grudging incrementalism is deepening the risks. Implicitly, this was the message behind Treasury Secretary Geithner’s presence in Poland last week.
A single currency representing 17 separate nations inevitably requires a unified balance sheet behind it and, following that, a form of fiscal union. The time for denying the latter is over. The European financial stability facility must be enlarged exponentially so that it can stand behind nations such as Italy or Spain. In addition, the mandate of the European Central Bank must be expanded. Just like the Federal Reserve, it should be responsible for maintaining a sound banking system and stable capital markets. This requires a permanent capacity to finance banks directly, just as a group of central banks did last week. It also requires the flexibility to buy and sell sovereign debt securities in secondary markets. These reforms must be accompanied by tighter, eurozone-wide bank regulation and supervision. It also requires IMF-like conditionality to accompany direct EFSF loans to member nations. Finally, the ECB should ease monetary policy now as there is no visible inflation risk.
America also must stop its own partisan bickering and undertake one last round of fiscal stimulus. The $447bn job-creation plan by President Obama, or another quick-acting plan of similar magnitude, should be enacted immediately. The Fed should also initiate further moves to promote credit availability and lending.
Another recession would be profoundly damaging to labour markets and public confidence. It would take years to fully overcome. We must try to avoid such an outcome at all costs. That requires the type of far-sighted leadership that we haven’t seen much of lately.
The writer is founder and chairman of Evercore Partners and former US deputy Treasury secretary under President Bill Clinton
Response by Peter Spiegel
The EU is hoping structural reforms can stave off a double-dip
While Roger Altman is right that national politics has hampered a European response to the ongoing debt crisis, there is a mounting realisation in Brussels and elsewhere on the continent that the constant drumbeat for austerity risks pushing the European Union into a double-dip recession.
Olli Rehn, the European Union’s economic chief, has in recent weeks taken to imploring countries with room to manoeuvre to start implementing the kinds of jobs and growth-promoting policies Mr Altman advocates – though instead of using fiscal stimulus, as the Obama administration is proposing, he has argued that structural reforms, particularly wholesale economic liberalisation, can do the trick. As Mr Rehn recently told the European Parliament, “The scope of macroeconomic stimulus is very limited – nonexistent in many member states - [so] growth-enhancing structural reforms have become even more central.”
-- The writer is FT’s Brussels bureau chief
