12 months on

Macro Maestro stopped blogging 12 months ago, when the his day job began to expose him to market sensitive data and information. But now he has resigned from policymaking and will rejoin the private sector in October. So, for the time being, he can resume posting his views here on the internet.

So, how has the the world evolved over the past 12 months? Unfortunately, things have turned out largely as MM anticipated. (Good to see his buy-side learned skills of self-promotion are still intact.) The acceleration in US economic activity that begun in autumn 2010, shortly after the Fed announced QE2, turned out to be temporary. Growth soon reverted to a sub-trend path. Employment has again stalled. This shouldnt have been a surprise - a long period of weakish growth was always likely following a financial crisis of the magnititude we experienced in 2008-09. The deleveraging process is continuing and still has significantly furher to run. Additional rounds of policy stimulus can push growth above that level for a while, but such periods are unlikely to persist for long. In turn, financial markets naturally become more volatile, as investors repeatedly switch between expectations of recovery and depression. Macro maestro continues to expect sluggish, but uneven, growth in 2013.

But, of course, the risks are to the downside. For deleveraging to take place in a relatively benign way (MM still calls his forecast 'benign' - though others wouldnt agree), incomes must continue to grow. If growth falls too low, the adjustment process can become disordely. Falling incomes intensifie the pressure to delever, which in turn damages income. (Sustainable levels of debt are only meaingful relevative to income as a reference value.) Such negative feedback loops will start in the financial sector - notably in the banking sector - but could quickly spread to households. For this reason, the concept of a 'stall speed' in the US (or indeed any indebted economy) seems more likely to bite now than it was in the past.

Then, of course, there is the euro area. MM has always believed there are only two possible outcomes to this crisis: full fiscal union or total collapse. Given their reltive costs, fiscal union - notably common bond issuance - always seemed the most probable outcome. But he assumed rational policymaking and that is increasingly looking like an error. Angela Merkel's recent comments - notably her objection to the eurobond - have made MM increasingly concerned. MM still thinks we'll get to the eurobond in the end, but it will take a further intensification in the crisis to get us there. MM is bracing himself for a deeply uncomfortable autumn.