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We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty and the pursuit of Happiness.–That to secure these rights, Governments are instituted among Men, deriving their just powers from the consent of the governed, –That whenever any Form of Government becomes destructive of these ends, it is the Right of the People to alter or to abolish it, and to institute new Government, laying its foundation on such principles and organizing its powers in such form, as to them shall seem most likely to effect their Safety and Happiness. Prudence, indeed, will dictate that Governments long established should not be changed for light and transient causes; and accordingly all experience hath shewn, that mankind are more disposed to suffer, while evils are sufferable, than to right themselves by abolishing the forms to which they are accustomed. But when a long train of abuses and usurpations, pursuing invariably the same Object evinces a design to reduce them under absolute Despotism, it is their right, it is their duty, to throw off such Government, and to provide new Guards for their future security.–Such has been the patient sufferance of these Colonies; and such is now the necessity which constrains them to alter their former Systems of Government. …

We, therefore, the Representatives of the united States of America, in General Congress, Assembled, appealing to the Supreme Judge of the world for the rectitude of our intentions, do, in the Name, and by Authority of the good People of these Colonies, solemnly publish and declare, That these United Colonies are, and of Right ought to be Free and Independent States; that they are Absolved from all Allegiance to the British Crown, and that all political connection between them and the State of Great Britain, is and ought to be totally dissolved; and that as Free and Independent States, they have full Power to levy War, conclude Peace, contract Alliances, establish Commerce, and to do all other Acts and Things which Independent States may of right do. And for the support of this Declaration, with a firm reliance on the protection of divine Providence, we mutually pledge to each other our Lives, our Fortunes and our sacred Honor.

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So what follows is more like a stream of consciousness than a post. The global recovery is going to take much longer in coming than most seem to recognise, and meanwhile Sweden still needs to eat. There can be first mover advantage here, and I don’t see why others should play at “sour puss” if they simply didn’t see this. At the end of the day, is our system a competitive capitalist one, which rewards innovation and smart thinking (and state of the art monetary policy), or isn’t it? Sweden seem to be going for Lars Svensson’s ideas, and I am with them, so why shouldn’t they get the benefit of listening fo what a good economist has to tell them, rather than get all the rubbish which comes your way in a country where the government doesn’t bother to take this kind of advice. I think Svensson knows what he is doing in this regard, and bravo!

I also think we need to consider time horizons here. So many people are so busy trashing Keynes, that they forget that his greatest insight was into time horizons and policy, and not about fiscal deficits and stimulus. In the long run devaluation goes nowhere, but in the short run it can be life and death for a patient on the operating table.

So we need to consider short term dynamics here, and not long run “equilibrium” settings. Look at the depth of the Q1 contraction in Sweden. But, while everone else is sitting back and waiting (look at the mess in Japan and Germany, countries with some similarities) Sweden is reacting. Good for Sweden is all I can say.

This kind of move need have no long term implications for whether you do high value or low value work, since it is only about how to kick start an economy. Yesterday’s decision by the Swedish National Bank is equivalent to a significant fiscal stimulus, and Svensson knows this very well, and at a time when people are becoming increasingly nervous about rising fiscal deficits, then good old fashioned devaluation can get the same sort of result by different means.

Also, it is important to bear in mind that the principal objective here is to avoid deflation.

Obviously, I am not in favour of “beggar thy neighbourism”. But look, what we are testing day in and day out here are economic theories. Some said that having your own currency and having your own monetary policy didn’t matter, and those people went off and joined the euro. Economists in the UK and Sweden did not agree, and they maintained some control over their own affairs, are they now to be told by the others that this is unfair?

Basically, Latvians have decided not to devalue. That is their democratic right. But Latvians do not have the right to tell Swedes they are “disloyal” when they do devlaue, I do not follow the logic here.

Latvians are running an experiment, which will need to be followed by many other euro member countries - that of internal devaluation - we need to follow the experiment to see if it can work.

Sweden is making another experiment, people need to keep their minds more open, and be empirical. Let’s see what we can learn.

People at the ECB do not think European economies are headed for deflation. They maintain the interest rate at one percent, and do not want to practice quantitative easing. That is their right. But the Swedish National Bank do not agree with them. They think there is a significant risk of deflation in Sweden and they wish to take measures to try to protect themselves. They have the right to do that.

US citizens - according to the opinion polls - are very worried about the fiscal deficit, more worried than they are about low economic growth. That is their right. But this - and the growing concerns from Germany - means that fiscal strategies are going to be very constrained to get us out of this. So the Swedes want to know, what do we do? Answers please.

Basically our economies are stuck - weighted down by all the accumulated debt - in the absence of other adequate instruments, periodic devaluation can work like a kind of implantable cardioverter defibrillator (ICD). An ICD is basically a small device placed in the chest or abdomen. This device uses electrical pulses or shocks to help control life-threatening, irregular heartbeats, especially those that could lead the heart to suddenly stop beating (sudden cardiac arrest). If the heart stops beating, blood stops flowing to the brain and other vital organs. This usually causes death if it’s not treated in minutes. Economic biorhythmns may be remarkably similar.

Basically, this our economies are on the critical list right now, and we need some equivalent of that constant electrical stimulus to keep them afloat while we sort out the problem of what to do with all that accumulated debt in the longer term.

I was lead to think about what has happened in Sweden in this way, and about the monetary and fiscal easing potential of rotating devaluations by reading this piece from Barry Eichengreen and Douglas Irwin, where they suggest that the so called “competitive devaluations” carried out in the 1930’s may well have had the (positive) and inintended consequence of making much looser monetary conditions available than would otherwise have been the case. My principal argument though is that devaluation can serve as a kind of “short sharp shock”

Countries that remained on the gold standard, keeping their currencies fixed against gold, were more inclined to impose trade restrictions. With other countries devaluing and gaining competitiveness at their expense, they adopted restrictive policies to strengthen the balance of payments and fend off gold losses. Lacking other instruments with which to address the deepening slump, they used tariffs and similar measures to shift demand toward domestic production and thereby stem the rise in unemployment.

In contrast, countries abandoning the gold standard and allowing their currencies to depreciate saw their balances of payments strengthen. They gained gold rather than losing it. As importantly, they now had other instruments with which to address the unemployment problem. Cutting the currency loose from gold freed up monetary policy. Without a gold parity to defend, interest rates could be cut, and central banks No longer bound by the gold standard rules could act as lenders of last resort. They now possessed other tools with which to ameliorate the Depression. These worked, as shown in Figure 3. As a result, governments were not forced to resort to trade protection. his relationship is quite general, as we show in Figure 4. It also carries over to non-tariff barriers to trade such as exchange controls and import quotas.

Basically, the analogy here is that monetary policy is becoming increasingly weaker to have an effect, fiscal policy is either unpopular or unsustainable, and in the absence of either of the former, devaluation can act as something of a surrogate stimulus. Well, that’s it. Sorry this is a stream of consciousness. It needs more thought, but my stomach is calling, and I must rush for lunch.

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Two general themes seem to stand out in this months PMI report. Firstly the key role being played by some emerging market economies, and secondly the important nudge upwards that some national industrial sectors have received from currency devaluation - with the UK and Sweden being the most obvious cases.

Sweden

Some people have been saying in response to warnings that this recovery will be export lead, “exports what exports”? What a load of tripe! Without exports there will be no recovery. The next lesson in abc economics: in times of crisis relative currency values matter more. And to prove it, Swedens PMI just poked into the growth zone, 50.5, following 43.7 last month. The 17% odd devaluation with the euro would have nothing to do with this, would it? Welcome Sweden, the worlds fourth 50+ PMI.

Here’s a twelve month chart for the Euro vs the Swedish Krona.

UK

I don’t have a nice chart here, but the UK manufacturing PMI figure rose for the fourth consecutive month to post its highest reading in over a year, and was up more than anticipated to 47.0 in June from 45.4 in May. Still contraction though, and the relations between output levels and destocking have still to sort themselves out.

Eurozone

Activity in the 16-nation euro zone’s manufacturing sector continued to fall in June, but contracted at the slowest pace in nine months, according to the Markit manufacturing purchasing managers index released Wednesday. The PMI rose to 42.6, up from 40.7 in June and slightly higher than a preliminary estimate of 42.4. The PMI has been in negative territory for 13 consecutive months, the longest stretch since the survey began.

Germany

Germany’s manufacturing sector shrank for the 11th month in a row in May, but the severity of the contraction was the least marked for any month since October, and the PMI at 40.9 was up from 39.6 last month, and better than the flash reading of 40.5. This still represents a very strong contraction, however, and Germany has a long road ahead before it returns to expansion.

France

The decline in French manufacturing activity also eased in June, although firms reported they continued to slash jobs at a rapid pace. The final Markit/CDAF manufacturing purchasing managers’ index rose for the fourth straight month in June, hitting 45.9 compared to 43.3 in May. Much better than Germany, but not as good as the UK. UK industry is evidently benefiting from the devaluation effect at this point.

Spain

One of the great mysteries for people in Spain is why the German economy seems to be doing even more badly than theirs is. In this sense June was not a disappointment, since the Spanish PMI, which rose to 42.8 from 39.8 in May, the highest reading since May 2008 and well off December’s record low of 28.5, also was above Germany’s 40.9, and Germany has no housing bust.

Ireland

Irish manufacturing PMI data for June pointed to another sharp deterioration of operating conditions. However, the rates of decline of output, new orders and employment all eased over the month. The seasonally adjusted NCB PMI rose to 42.5 in June, from 39.4. Although the sector continued to deteriorate at a considerable pace at the end of the second quarter, June’s contraction was the slowest since last September. Even so this was the sixteenth month in a row that output at Irish manufacturers has decreased.

June’s fall was driven by fragile demand (particularly from domestic sources) and the negative impact of this on new orders. New export business decreased at a weaker pace than overall new orders, although the reduction was still solid. The relative strength of the euro against sterling made new orders from the UK harder to secure, according to the report.

Greece

Greece’s seasonally adjusted Markit Manufacturing PMI came in at 47.7 in June, up from 46.1 in May, the PMI rose further from March’s record low to its highest position since October 2008. Employment, however, fell for the fourteenth successive month, by far the most sustained period of workforce reduction in the survey history.

Eastern Europe

In Eastern Europe, the Polish manufacturing PMI rose slightly to 43.0 in June, from 42.5 in May. This is still quite a weak performance for an economy which, in theory, is holding up rather well, and was below consensus expectations for a rise to 43.2. Still, the PMI was at its highest level since October 2008.

Czech Republic

The Czech PMI also inched up to a nine-month high in June but still registered its 12th straight month of decline. The reading rose to 41.9 from 40.5 in May and a record low in January. The Czech economy shrunk by 3.4% in the first quarter from the previous three months but the PMI has now been for for five months in a row. May industrial output fell 21.7% y-o-y, and new orders fell 27.6%.

Hungary

Hungary’s contraction is more or less moving sideways at the moment. The June PMI came in at 45.8 in June, a slight uptick from 45.4 in May. The output improvement is almost all due to the export sector. Hungary is in deep recession but June exports offer a slight positive sign. The government projects that GDP will contract this year by nearly 7% as Germany also contracts. Germany and central europe are in lockstep.

Russia

Russia’s manufacturing industry shrank last month at the slowest pace since September, and VTB’s Purchasing Managers’ Index advanced to 47.3 in June from 45.3 in May. Russia’s industrial production has now stabilized at between 15 percent and 17 percent below last year’s level, according to Prime Minister Vladimir Putin last month. The government currently expects an 8.5 percent GDP contraction this year.

Turkey

Well Turkey is the fourth in the 50+ growth group since PMI data surprised positively – reading 53.9 up from 51 in May. This result is good news for Turkey following yesterday’s very disappointing GDP numbers, which showed that the Turkish economy contracted by a whopping 13.8% y/y. The immediate future looks a bit more promising than Q1.

Asia

Japan

The pace of contraction in Japanese manufacturing activity slowed for a fifth straight month in June, a survey showed on Tuesday, as companies gradually recover from Japan’s deepest postwar recession. The Nomura/JMMA Japan Manufacturing Purchasing Managers Index (PMI) rose to a seasonally adjusted 48.2 in June, the highest since 48.6 in April 2008, from 46.6 in May.

However, the figure remained below the 50 threshold that separates contraction from expansion for the 16th straight month. The current output component of the PMI index gained for the fifth straight month, to 50.6 from 47.9 in May, edging above the boom-or-bust line for the first time since February 2008. The index for new export orders rose to a seasonally adjusted 51.2 in June from 49.8 in May, also the fifth month of improvement. That also marked the first growth in export orders in almost a year and a half as global trade recovered from last year’s sharp declines.

China

China’s manufacturing expanded in June, adding to signs the world’s third-largest economy is rebounding from the collapse in global trade, but few new jobs were created, according to both the Chinese PMI surveys. Brokerage CLSA Asia-Pacific Markets said its purchasing managers index rose to 51.8 from May’s 51.2. The government-sanctioned China Federation of Logistics and Purchasing said its own PMI edged up slightly to 53.2 from May’s 53.1.

India

Manufacturing activity in India slowed slightly in June but still expanded for a third straight month, reflecting strong local demand, according to the survey, even as exports showed some creeping signs of improvement. The Markit PMI fell back slightly - to 55.34 in June from May’s 55.7, the highest in eight months. The Indian PMI hit a trough of 44.4 in December and has steadily risen since.

South Africa

South Africa’s industrial output continued to fall sharply, although the PMI gained for the second month in a row in June. The seasonally adjusted index increased to 37.9 from 37.3 in May, Kagiso Securities said in the statement released in Johannesburg today. The index has now been below 50 since May 2008.

Americas

United States

The U.S. manufacturing sector shrank once more in June, but again at a slower pace than in May.The Institute for Supply Management said its index of national factory activity edged up to 44.8 to in June from 42.8 in May. This was slightly above Reuters economists median expectation for a reading of 44.5. So we continue to improve, but the next 3 months will still be critical to confirm or otherwise the improvement.

Brazil

Well, just about to wind the day up on the PMIs now. Brazil is in and posted 48.1 in June. That was the highest reading for nine months, and means the Brazilian industrial sector is nudging its way back towards expansion. However, the index rose only 0.3 points from 47.8 in May, so the recovery rate which we have seen since the end of the first quarter stalled somewhat in June.

Methodological Note

The Global Report on Manufacturing is compiled by Markit Economics based on the results of surveyscovering over 7,500 purchasing executives in 26 countries. Together these countries account for an estimated 83% of global manufacturing output. Questions are asked about real events and are not opinion based. Data are presented in the form of diffusion indices, where an index reading above 50.0 indicates an increase in the variable since the previous month and below 50.0 a decrease.

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For Background Reading and Arguments on All This, See:

Why The IMF’s Decision To Agree A Lavian Bailout Programme Without Devaluation Is A Mistake
Why Latvia Needs To Devalue Soon - A Reply To Christoph Rosenberg
Latvia - Devalue Now or Devalue Later
The Long And Difficult Road To Wage Cuts As An Alternative To Devaluation
Why You Need Devaluation - An Open Letter To The People Of Estonia<
Devaluation, Euro Membership And Loan Defaults - Some Thoughts For My Critics

And For Why It Is The Baltics Have The Problem In The First Place, See

Is The Latvian Economy Running Out Of People?

The Clock Is Ticking Away Under Latvia
Taking Solow Seriously - Does Neoclassical Steady State Growth Really Exist?
Latvian Population Dynamics
Hard or Soft Landing in Latvia?
Latvian Fertility

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