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Europe’s Greek Showdown: The Sum Of All Statist Errors
Europe’s Greek Showdown: The Sum Of All Statist Errors
The politicians of Europe are plunging into a form of ideological fratricide as they battle over Greece. And “fratricide” is precisely the right descriptor because in this battle there are no white hats or black hits—-just statists.
Accordingly, all the combatants—the German, Greek and other national politicians and the apparatchiks of Brussels and Frankfurt—- are fundamentally on the wrong path, albeit for different reasons. Yet by collectively indulging in the sum of all statist errors they may ultimately do a service. Namely, discredit and destroy the whole bailout state and central bank driven financialization model that threatens political democracy and capitalist prosperity in Europe——and the rest of the world, too.
The most difficult case is that of the German fiscal disciplinarians. Praise be to Angela Merkel and her resolute opposition to Keynesian fiscal profligacy and her stiff-lipped resistance to the relentless demands for “more stimulus” from the likes Summers, Geithner, Lew, the IMF and the pundits of the FT, among countless others. At least the Germans recognize that if the EU nations are going devote 49% of GDP to state spending, including nearly a quarter of national income to social transfers, as was the case in 2014, then they bloody well can’t borrow it.
Notwithstanding the alleged German led austerity regime, however, that’s exactly what they are doing. Germany has managed to swim against the surging tide of EU public debt, lowering its leverage ratio from 80% to 76% of GDP in the last four years. Yet the overall debt ratio for the EU-19 has continued to soar—meaning that the rest of the EU drifts ever closer to fiscal disaster.
…click on the above link to read the rest of the article…
China’s Monumental Debt Trap—-Why It Will Rock The Global Economy
China’s Monumental Debt Trap—-Why It Will Rock The Global Economy
Bloomberg News finally did something useful this morning by publishing some startling graphs from McKinsey’s latest update on the worldwide debt tsunami. If you don’t mind a tad of rounding, the planetary debt total now stands at $200 trillion compared to world GDP of just $70 trillion.
Source: McKinsey
The implied 2.9X global leverage ratio is daunting in itself. But now would be an excellent time to recall the lessons of Greece because the true implications are far more ominous.
Today’s raging crisis in Greece was hidden from view for many years in the run-up to its first EU bailout in 2010 because the denominator of its reported leverage ratio—national income or GDP—–was artificially inflated by the debt fueled boom underway in its economy.
…click on the above link to read the rest of the article…
Charts showing the long-term GDP-energy tie (Part 2 – A New Theory of Energy and the Economy)
Charts showing the long-term GDP-energy tie (Part 2 – A New Theory of Energy and the Economy)
In Part 1 of this series, I talked about why cheap fuels act to create economic growth. In this post, we will look at some supporting data showing how this connection works. The data is over a very long time period–some of it going back to the Year 1 C. E.
We know that there is a close connection between energy use (and in fact oil use) and economic growth in recent years.
In this post, we will see how close the connection has been, going back to the Year 1 CE. We will also see that economies that can leverage their human energy with inexpensive supplemental energy gain an advantage over other economies. If this energy becomes high cost, we will see that countries lose their advantage over other countries, and their economic growth rate slows.
A brief summary of my view discussed in Part 1 regarding how inexpensive energy acts to create economic growth is as follows:
…click on the above link to read the rest of the article…
The Beauty of Deflation
The Beauty of Deflation
Deflation Paranoia
The euro zone’s consumer price inflation rate declined below 1% in early 2014, getting closer to zero during 2014, nowhere near the ambitious 2% benchmark set by central banks. A further small downward adjustment in the inflation rate has put it into negative territory, so harmonized euro area consumer prices are now declining. Western monetary authorities and economists appear genuinely fearful of deflation. Headlines in leading papers reflect this fear very strongly, describing deflation as “the world’s biggest economic problem”, or a “nightmare that stalks Europe” that could lead to its “demise and collapse”.
The real question is though, why do our governments fear deflation? Why do they perceive it as a chronic disease that could infect the economy and why do they go to such great lengths to avoid this “taboo” event? The mainstream argument is that we should avoid deflation because it causes a drop in overall demand and hence lowers economic growth (Germany and other European countries have experienced a slowdown recently which has resulted in a downgrade of 2014 and 2015 growth expectations). Also, deflation implies lower corporate earnings and asset prices, particularly real estate prices.
The euro area’s harmonized index of consumer prices has recently dipped slightly into negative territory, which is excellent news for European consumers – click to enlarge.
But the greatest concern to governments is not deflation itself; the real concern is the impact of deflation on the already over-indebted governments of Europe. Seven euro zone countries are projected to have public debt to GDP ratios of over 100% next year! The worry is quite legitimate from the perspective of indebted governments. With deflation, the burden of debt increases, making defaults more likely. So what are policymakers doing to tackle this problem?
…click on the above link to read the rest of the article…
We’ll Meet Again, Don’t Know Where, Don’t Know When
We’ll Meet Again, Don’t Know Where, Don’t Know When
I was having a post-Departmental Colloquium dinner with a small group of colleagues from the Harvard Chemistry Department in the Spring of 2008 when the subject turned to the then-recent shudderings of the stock market – a topic which at the time was of greater concern than usual but about which none of us actually knew anything at all. One of my colleagues (in fact our host) was an elderly professor with wisps of white hair and mildly expressed yet utterly inflexible opinions—a legitimately brilliant scientist whose certainty, alas, seemed to extended beyond his expertise. He was, in my mind, a model of the reflexively liberal, raised-on-the-Gospel-of-Saint-Krugman scientist that abounds at Harvard and in academia in general. And, despite a recent drop in the Dow Jones Industrial Average on the order of 10%, the professor dismissed any serious worry, suggesting that the ups and downs of the market were just meaningless tides of funny money.
“Rob” I said (not his real name), “I am sympathetic about that. And I too get the feeling that all these billions of created and lost dollars don’t seem to actually make a difference in our lives. But the Wall Street people are sounding a little more frantic than usual these days. They’re talking as though this time it’s really going to matter.”
Of course, the Wall Street people, as it turns out, were quite right, as the market dropped another 20% over the course of a few days in June and then (just to show they weren’t kidding) another 20% or so over the ensuing half year—taking with it down the rabbit hole around $11 billion of Harvard’s endowment. And, just to be explicit, because Harvard ran a substantial portion of its operation on interest from the endowment, that meant that building and hiring freezes, salary cuts, early retirement, and various other features of austerity weighed heavily on the Ivory Tower for quite a while. These days, I understand that Harvard has gone back to burying their money in an environmentally friendly tin can in the back yard, which might be about the only place that it is going to be safe this year.
…click on the above link to read the rest of the article…
Canada GDP shrinks, stirring talk of another rate cut
Canada GDP shrinks, stirring talk of another rate cut
OTTAWA (Reuters) – Canada’s economy unexpectedly shrank by 0.2 percent in November, prompting market talk that the Bank of Canada will cut interest rates in March for the second time in six weeks.
Analysts had expected no growth from October. The month-on-month decline was the largest since a 0.4 percent drop in December 2013.
Gross domestic product shrank on weaker manufacturing, mining and oil and gas extraction, Statistics Canada said on Friday.
Last week the central bank shocked markets by lowering its key interest rate to counter plunging oil prices that have cut economic growth in this oil-exporting country and the value of the Canadian dollar.
“The data in hand do support the Bank of Canada’s very bearish interpretation of the impact of lower oil on the Canadian economy,” said Bill Adams, economist at PNC Financial Services Group.
“If economic data remain this weak in early 2015, it could justify another rate cut from the Bank of Canada at either the March or April rate decisions,” Adams said.
The central bank is due to make an interest rate announcement on March 4 and market operators have priced in a 76 percent chance of another cut then.
…click on the above link to read the rest of the article…
Brazil’s Economy Is On The Verge Of Total Collapse
Brazil’s Economy Is On The Verge Of Total Collapse
Back when the BRICs were the source of marginal global growth, the punditry couldn’t stop praising them. However, in the past year, now that China’s housing bubble has burst and its shadow banking system has imploded, those who remember what BRIC actually stood for are about as rare as those who recall what it means for the Fed to hike rates. Which is precisely why nobody in the mainstream financial media has commented on the absolutely abysmal economic update reported earlier today out Brazil.
We are happy to do so because today’s data follows up quite well to our article from a month ago “Brazil’s Economy Just Imploded” and as the earlier article on the crashing Brazilian Real hinted, things for the Brazilian economy how gone from imploding to, well, worse because not only did the twin fiscal and current account deficits rise even more, hitting a whopping 11% of GDP – the worst since August 1999, but its government debt soared to 63.4% in 2014, up from 56.7% a year ago, and the highest since at least 2006. In short – the entire economy is now on the verge of total collapse.
This is what happened in a few bullet points:
- The fiscal picture has deteriorated very sharply since 2011 at both the flow (fiscal deficit) and stock (gross public debt) levels. The primary and overall nominal fiscal surpluses at year-end 2014 were at levels last seen in the late 1990s.
- The steady decline of the public sector savings rate is leading to a wider current account deficit despite weaker growth and low investment. In fact, the twin fiscal and current account deficits are now tracking at a combined, very troublesome 10.9% of GDP, the worst picture in 15 years (since August 1999). Repairing the severely unbalanced macro picture would require a deep, structural and permanent fiscal and quasi-fiscal adjustment and a significantly weaker BRL.
- The new economic team faces, among other things, the very significant challenge of repairing the severely deteriorated fiscal picture.
- The steady erosion of the fiscal stance pushed net and gross public debt up. Furthermore, fiscal and quasi-fiscal activism undermined the effectiveness of monetary policy, contributed to keep inflation very high and drove the current account deficit to a very high level despite weak growth.
…click on the above link to read the rest of the article…
Are Central Bankers Losing The Plot: “The SNB Move Signals A Spectacular Loss Of Nerve”
Are Central Bankers Losing The Plot: “The SNB Move Signals A Spectacular Loss Of Nerve”
As we have reiterated very frequently over recent years, the biggest vulnerability in the post crisis environment was that central banks start to make policy errors, by taking activist and precipitous decisions. Thus following on from last year’s error by Norges Bank (and noting that we would not call last week’s SNB decision a mistake, despite the shockwaves that it caused), the Bank of Canada joins that policy error club.
What does not compute, in an eerie mirror image of the Norwegian central bank’s rationale, is for the BoC to
- Slash headline CPI forecasts, while keeping core CPI forecasts around 2.0% (around target), and
- Tweak GDP forecast lower to 2.1% this year but upping the GDP forecast for 2016, and
- Still taking policy action
It signals a spectacular loss of nerve that central bankers should always try and eschew, above all when you have a country like Canada with the worst household debt levels in the developed world, and an overheated housing market.
The as expected cut in 2015 GDP forecast looks optimistic, when one considers that the energy sector accounts for 25% of business investment in GDP terms, and one might suggest that the GDP forecast should be closer to 1.0%, on the basis that there is likely to be a much broader fall-out from the energy sector “stall” (housing, transport, employment to name but a few).
As the evidence on this accumulates through the year, there appears to be considerable risk that the BoC’s forecasts look foolish – primarily in GDP terms, but quite possibly in CPI terms too, if the CAD starts a slide to USD 1.30 and the BoC’s disinflation problem evaporates. At which point memories of the very undistinguished period of Gordon Thiessen’s stewardship of the BoC may come back to haunt it.
But in broader terms, this is symptomatic of the whole mirage of stability that developed world central banks have sort to foster in the post crisis era starting to unravel in a rather disorderly fashion… the ECB’s task tomorrow looks ever more unenviable!
Empirical Proof of the Giant Con
Empirical Proof of the Giant Con
I want to continue on with my recent focus on the giant con and if you’ve been reading my work lately you’ll certainly know what that is. However, for those of you not familiar with the giant con, it is the idea that our economy is growing when, in fact, it hasn’t had growth in decades with the exception of the late 1990′s. In a recent article I wrote for the benefit of Steve Liesman, I showed that the giant con is entirely a function of debt. I explain why debt is actually a net negative given real interest rates and I strip out debt from GDP to show that GDP has actually been contracting for some time. Recently I’ve been I looking for other ways to prove that the giant con is truly happening. But let’s just have a quick look at what real GDP adjusted for Debt would like. We see in the past 40 years the only period of real GDP growth was between 1996 and 2000 and has collapsed since early 2007 to date.
Most of us are familiar with the concept of money velocity. It is a measure of how effectively or efficiently we are utilizing our money stock to generate output. The idea is that the more I invest the more notional returns I can generate. However, in the economy there is a downside to ‘investing’ with additional money supply, namely, inflation. And so we want to maximize the amount of output we generate from a given stock of money to optimize our returns. We gauge this via money velocity and often we use M2 Velocity as the key measure. Currently M2 Velocity is around 1.3, meaning that for every supply of dollar we are generating 1.3 dollars of output. This is down significantly from the late 1990′s at which time we were generating around 2.3 dollars of output for every dollar of stock.
…click on the above link to read the rest of the article…
Crossroads on Global Infrastructure
Crossroads on Global Infrastructure
Plans by the world’s most powerful countries are well underway to spend trillions of dollars for new mega-infrastructure projects to rejuvenate the global economy. The hope of the G-20 nations, the World Bank, China, and other powerful actors is that the infusion of several trillion dollars for infrastructure will boost the growth of GDP by 2.1% over current trends by 2018 and rescue a “sluggish” global economy.
The new feature of this approach to infrastructure involves expanded use of public money (taxes, pension funds, and aid) to offset the risks involved in huge projects. The approach also relies heavily on public-private partnerships, where the issue of accountability and failed projects has been a serious concern.
Those seeking a sustainable, true-cost, steady state economy should be alarmed at the new approach to global infrastructure because trillions of dollars spent on mega-projects in the energy, transportation, agriculture, and water sectors could put a sustainable, true cost economy further out of reach. Reviews of completed projects in these sectors have raised questions about corruption, cost overruns, fiscal accountability, human rights abuse, and the alarming destruction of natural resources.
…click on the above link to read the rest of the article…
US Sees Huge Energy Opportunity In Europe
US Sees Huge Energy Opportunity In Europe
If 2015 is anything like 2014 we can expect a wild ride. Oil price volatility – including its downward trend – will linger well into the first and second quarters as global production persists and key conflicts in Eastern Europe and the Middle East show no end. For its part, the United States is better positioned than most – the US is poised to carry the global economy in 2015 with projected GDP growth of 3.1 percent. However, converting this potential into meaningful energy trade and/or soft power is another matter altogether and 2015 offers limited opportunities.
US production has shown no signs of a significant slowdown and the Energy Information Administration predicts growth in 2015 – approximately 700,000 barrels per day. Despite the collapse, prices remain high enough to support the most vital development drilling activity in the Bakken, Eagle Ford, and Permian Basins. The rig count is declining, but data from the 2008-09 recession suggests a drop in production will not be so dramatic.
Perhaps in anticipation of greater volumes, the Obama administration and the Department of Commerce clarified existing regulations and opened the door for increased US exports last week – up to one million barrels per day (mbpd) of ultra-light crude oil. The exports will expose producers to more lucrative markets abroad and may further narrow the price spread between Brent and WTI. But who’s buying?
…click on the above link to read the rest of the article…
A statement full of Keynesian fallacies – Ludwig von Mises Institute Canada
A statement full of Keynesian fallacies – Ludwig von Mises Institute Canada.
From today’s Open Europe news summary:
Draghi: ECB ready to initiate QE to counter low inflation
In an interview with Handelsblatt, ECB President Mario Draghi warned that persistently low inflation in the Eurozone meant that “the risk that we do not fulfill our mandate of price stability is higher than six months ago”. Draghi reiterated that the ECB was ready to step in with a programme of Quantitative Easing, noting that “We are in technical preparations to adjust the scope, speed and composition of our measures for early 2015.”
ECB President Mario Draghi’s latest statement is full of Keynesian fallacies, to wit:
1. That price stability is a worthy goal. No, monetary stability is essential, so that prices may reflect the true preferences and productive limitations of the market in order to allocate scarce resources to their most important purposes as dictated by the market.
2015 World GDP Expectations Just Collapsed | Zero Hedge
2015 World GDP Expectations Just Collapsed | Zero Hedge.
World GDP Growth Expectations for 2015 just dropped dramatically to their lowest since expectations began to be tracked. From 3.40% in early 2013, the consensus is expectating world economic growth at a mere 2.72% (a 20% decline in growth expectations). Of course, there is one thing that is not going down…
Maybe bonds and crude oil are on to something after all?
h/t @Not_Jim_Cramer
Argentine Economy Contracts First Time Since 2012 After Default – Bloomberg
Argentine Economy Contracts First Time Since 2012 After Default – Bloomberg.
Argentina’s economy contracted more than forecast in the third quarter after the South American nation defaulted on its debt for the second time in 13 years, forcing the government to crimp imports amid a shortage of dollars.
Gross domestic product shrank 0.8 percent from the year-earlier period, the national statistics agency reported today. The median estimate of nine economists surveyed by Bloomberg was for a decline of 0.6 percent, after growth stalled in the previous three months.
South America’s second-largest economy contracted for the first time since the second quarter of 2012 on the heels of a default July 30 after a battle with creditors prompted a U.S. judge to block the distribution of its debt payments. Seeking to preserve international reserves that fell to an eight-year low in April, the government increased limits on imports, making it harder for manufacturing industry to obtain inputs.
Argentina posted a current account deficit of $736 million in the quarter compared with a shortfall of $1.7 billion in the same quarter a year earlier. The national statistics institute also reported today that economic activity rose 0.1 percent in October from the year earlier, while industrial production shrank 2.1 percent in November.
Brazil’s Economy Just Imploded | Zero Hedge
Brazil’s Economy Just Imploded | Zero Hedge.
China may have mastered the art of fabricating economic data to a level unmatched by anyone except the US Department of Labor, but its derivative countries have much to learn. And none other more so than one of China’s favorite sources of commodities over the past decade: Brazil. It is here that things are going from worse to catastrophic, as disclosed in today’s update of Brazil’s fiscal picture.
Here are the disturbing facts showing that behind the world’s propaganda growth facade, it is all hollow: Brazil’s consolidated public sector primary fiscal balance, which posted a significantly worse than expected R$8.1bn primary deficit in November driven by the R$6.7bn deficit of the Central Government, dipped into negative territory: -0.18% of GDP, driven by the significant deterioration of the Central Government finances.
This is the worst fiscal outturn since November 1998. Furthermore, the primary surplus of subnational government (States and Municipalities) has also been eroding, a reflection of the authorizations given by the Treasury since 2011 for increased borrowing by the States. For instance, the States and Municipalities posted a negligible 0.08% of GDP surplus during Jan-Nov 2014, down from 0.46% of GDP during Jan-Nov 2013.
