Buttonwood's notebook

ANYONE who wants a comprehensive summary of the issues facing the global financial system should read the Bank for International Settlements' latest report. As Chapter 1 begins

The world is now five years on from the outbreak of the financial crisis, yet the global economy is still unbalanced and seemingly becoming more so as interacting weaknesses continue to amplify each other. The goals of balanced growth, balanced economic policies and a safe financial system still elude us.

While the BIS accepts that

The global economy is certainly better off today because central banks moved forcefully after the 2008 collapse of Lehman Brothers and in the years since

IT HAS been a while since this blog looked at those barometers of economic health - truck and train volumes. But with talk of a slowdown intensifying, the measures seem worth investigating. First, the trucks. The American Trucking Association just reported the second consecutive (seasonally-adjusted) monthly fall in volumes with chief economist Bob Costello saying that

The drops in tonnage are reflective of the broader economy, which has slowed.

However, compared with May 2011, volumes are still 4.1% higher, a respectable increase.

Over the Association of American Railroads, things initially look less promising.

THE American economy may have its faults but it works pretty well as a currency union. Everyone is happy to accept the dollar, workers can move freely between states in search of the best jobs, there is a national banking regulator, and so on. So why can't the euro-zone be more like the US? As has often been argued, in aggregate the EU has a lower debt-to-GDP ratio than America, a smaller budget deficit and a better current account position. Let us simply move to a fiscal union in which rich countries like Germany subsidise the rest.

The trouble with this proposition is that America has a tax and welfare system that is also national.

THE Spanish debt deal has pleased the equity markets this morning although a lot of the details are yet to be known. One issue that has cropped up elsewhere is what happens to private sector creditors when official creditors get involved; what usually happens is that the official bodies get seniority. That creates a problem of subordination; official help may make it clear that the private sector won't get paid back. That can cause capital flight.

The loan is being made, it seems, to the Fund for Orderly Bank Restructuring (FROB) and will be added to Spanish government debt.

LIKE the polls, the odds have narrowed on the Iowa electronic exchange's Presidential market. As you can see from the graph, a steady 60-40 Obama lead has narrowed over the last couple of weeks to 53/47 or 52/48. This is a winner takes all market, so you pay $53 to buy Obama and get $100 if he wins, and nothing if he loses. It has been pretty accurate in the past.

THE Dow Jones is up more than 200 points as I write and even Europe managed some very healthy gains. That was despite the inaction of the European Central Bank today although the bank stands ready to act if things get (even) worse. (Plague of frogs? New ice age?) The general hope is that the combination of weak economic data, falling commodity prices, bank runs in Europe and signs of panic in developed market bond yields will force the central banks into easing action. One could conceivably see the Fed, ECB and Bank of England all act, along with easier policy in several emerging markets, not to mention the willingness of both the Japanese and the Swiss to try to cap their currencies.

VERY disappointing payroll numbers, added to the mess in Europe, are weighing on markets today*. The headline was just 69,000, the previous numbers were revised down and the rate edged up again to 8.2%. They will be doing high fives at Romney HQ; this plays into the wrecked economy thesis.

So if economies are slowing, what can the authorities do? The US could, in theory, try fiscal stimulus; after all, its borrowing costs are close to all-time lows. But politically, that's impossible; Congress will never agree. So the Fed will have to start thinking about another round of QE. Will it work? Regular readers will know this blogger has his doubts but let's hope it does.