Intriguing economic questions for 2010
What are the most intriguing economic questions for 2010? Here are my top four. I'm sure you can come up with others.
1. Will QE need a Plan B?
The dearth of credit around the major advanced economies has monetarists convinced that the world is heading for a double-dip. I'm not sure I agree, but the lack of finance available for the UK corporate sector is a serious worry.
As the MPC know well, buying nearly £200bn worth of gilts as part of quantitative easing is, at best, a roundabout way to ease credit conditions for British firms.
QE has helped push up asset prices, as it was supposed to to, and triggered a flood of UK corporate bond issuance this year. But I suspect the government's rather under-rated "time to pay" initiative, giving companies extra time to pay their tax, has done more to support the working capital of Britain's small and medium-sized enterprises.
At the Treasury and the Bank, they're still crossing their fingers and hoping that QE will have more impact on lending throughout the broader economy in the first half of 2010 - just as all the economic models suggest it should.
But behind the scenes in Whitehall and the Threadneedle Street, they are quietly thinking about a Plan B - some more direct way to channel credit to firms. Just in case.
We'll know by the spring - or summer, at the latest, whether it's needed. But whatever happens, I'd be surprised to see the Bank of England create a lot more money than already agreed. If £200bn doesn't work, it's hard to believe that an extra, say, £50bn is going to make all the difference.
2. Will Britain's showdown with the international bond markets come before, or after the election?
Everyone thinks that the markets will politely wait until Britain has gone to the polls to draw its verdict on the UK. Well, maybe.
But if sovereign debt is indeed the new sub-prime - at least where the markets are concerned - it's difficult to believe that Britain will get through the months before the election without at least one major market wobble.
Perhaps one ratings agency will put the UK on negative watch. Or investors will get seized with the idea of a hung Parliament. Or Britain will simply get caught in the crosshairs of a market panic over sovereign debt in Central and Eastern Europe.
Who knows what the trigger will be. But my hunch is there will be something, this side of polling day. The question will be how the major political parties react.
3. Will the private sector finally show up for the US recovery?
For anyone outside the UK this would probably be the first question on the list. Chances are, US growth in the last three months of 2009 will make up for yesterday's downward revision to growth in the third quarter, to an annual rate of 2.2%. But the new data brought home once again how lopsided the US recovery has been to date.
All the growth that the world's largest economy achieved in those three months was due to government demand, "cash-for-clunkers", and rising inventories. And the personal savings rate actually fell, suggesting that the adjustment process for households is rather less far advanced than people hoped.
2010 was supposed to be the year when the Federal Reserve could start taking its foot off the floor, and the Obama administration could at least sketch out a road map for bringing that enormous budget deficit back down. It still could be. But if the private sector doesn't show up, the administration's going to be doing the sums for yet another stimulus package as well.
4. Will the Euro area start to look like deflationary zone?
I took part in a mini-debate about the Eurozone on the Today programme this morning. Oliver Kamm, the Times writer, suggested that, in its handling of the financial crisis, the single currency had passed it's first major test "with flying colours".
It's certainly true that many potential disasters that policy-makers worried about in Europe earlier in the year have not materialised.
Eurozone ministers - notably the German and the French - looked into the abyss and realised that they could not afford to deal with this crisis the way they usually did. In the financial market environment of early 2009, there was no room for long months of obfuscation, followed by fudge. A clear message was sent that no country would be allowed to fail. And it worked.
But that was then. Now, Germany and the rest are pulling out of recession - even if we may wonder how strong that recovery will actually be. And that moment of solidarity may be passing as well.
I don't think that the likes of Greece or Ireland - or Spain - will default on their debt. But even the very best scenario for them, inside the Euro zone, is a long hard slog. And that long hard slog of slow growth, and savage cuts in public spending could have deflationary fall-out for everyone else.
I'm not the only one who's worried about this. Check out the interview with Athanasios Orphanides in the FT yesterday. He's a former Federal Reserve economist, now governor of the central bank of Cyprus. And he thinks there is a serious risk of "inflation continuing to undershoot".
He said "I think we can already say that we have avoided an experience as terrible, as catastrophic, as in the 1930s". I'm glad he thinks so. But, as I've discussed before one of the main factors that made the depression great - and global - was the deflationary impact of the gold standard. Unwilling to devalue, countries resorted to deflationary domestic policies to pay their bills, thus exporting the deflation problem to everyone else.
Europe in 2010 is not Europe in 1931. Nothing close. But if policy-makers aren't thinking about the potential for a more damaging dose of deflation in the Eurozone, they should be.
So that's my top four. Not a cheery list, perhaps. But I don't know many Western economists who are upbeat about the next few years - especially the UK.
Given our past record, that's probably the best reason to think that 2010 will be a Happy New Year after all. I will see you then.