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2012 World Tour of Pain
To comment on this or any other article, go to Facebook, Twitter, or the Absolute Wealth Youtube Channel. James R. Gorrie, Managing Editor, Absolute Wealth.
Today I will resist the temptation to talk about California’s economic ills again. They are many, and most are self-inflicted; but we won’t go there. Instead, let’s broaden our view. Haven’t looked at the world economy lately, and it deserves an update.
In broad terms, the powers that be—the major bankers of the world—are doing their damnedest to keep global economies from deflating. As my friend and colleague John Frederick Carter will tell you, deflation is more difficult to control than inflation, and more dangerous to the long-term economy as well as bankers’ financial interests.
So, how is the world doing this Friday? Let’s take a brief tour shall we?
In the US, the Federal Reserve will continue to pump money into the economy to buy US assets such as T-bills and other debt instruments. The idea is to avoid deflation by providing additional capital to the economy to spur growth from cheap money, which, they hope, will mean more economic activity.
The Fed is essentially buying old debt and replacing it with larger, new debt. But, as noted here before in The Gorrie Details, the capital is not making it into the larger economy. It remains at the top, with the banks, and major corporations.
Where does the money go? One way or another, much of it ends up in the stock market. So what happens then? Stock prices rise; large firms convert some stock into cash…and then sit on the cash. How much cash are they sitting on ? About $1.74 trillion worth so far, earning zero net interest after inflation is taken into account.
Why are firms not spending the cash? That’s easy, isn’t it? They have no confidence that the economy will get better in the near future. Doesn’t it seem that the Fed is pursuing a self-defeating, “Kool-Aid” strategy? It tastes sweet, but kills you.
Other portions of the Fed’s capital injections go right back to the federal government in the form of T-bills bought by the banks for a small but riskless return. In the meantime, we go deeper and deeper into debt. But, the idea, according to Nobel Prize winning economist Paul Krugman, is to “spend now and cut later.”
How much money does Dr. Krugman think needs to be spent? He suggests that the entire world spend money as if we were fighting off an alien invasion from outer space…
Uh-huh…No more Kool-Aid for him.
Meanwhile, across the pond, Europe is descending into a sort of divided purgatory…
Those nations trying austerity as a means of recovering their financial footing are finding that going cold turkey from 60 years of welfare statist economic policies to leaner, cost-cutting, bootstrap economies results only in social disintegration. This is because the leap is too far in too short of a time. Would it work over a longer period of 5-10 years? Probably yes. But in the mean time, the catastrophe of failing social structures will be more than they can politically bear.
Those nations in favor of “growth policies” of adding more debt such as the path that the US is walking, are finding that a “single Europe” must truly become singular via loss of the lion’s share national sovereignty. This not only includes fiscal policies, but pervasive control across the spectrum of both the complex and the mundane.
Furthermore, the money will come from, where else? Germany. And that is not a politically easy choice for German leaders.
And who can blame them? If they’re going to be responsible for carrying the rest of the Eurozone for the next fifty years, they should at least be able to change their national anthem back to that classic and well-loved ditty (in Germany, at least) “Deutschland Uber Alles.” In fact, it should probably become the new Eurozone anthem. Why beat around the euro? Sure the Germans and ECB bankers have looted the Greek government of all their gold and treasure, but damn it, sometimes you want slavishly public acknowledgment of your superiority.
The cold reality is that the Eurozone is collapsing because Greeks lived relatively exorbitantly lives off of borrowed euros that their economy would not otherwise been qualified to borrow had they not been a part of the Eurozone. 47% of Greek GDP was government spending, which was borrowed money. Ireland’s GDP is similar and Italy’s and Spain are better, but not by enough to matter in the end. And of course, Germany, France and Holland were stupid enough—or savvy enough?—to keep lending the PIIGS the money…
Who do they think they are, the United States? Well, we can forget about Europe rescuing the world; it can’t even rescue itself. Many in Europe are hoping that the Chinese will come to the rescue…
But that thankless task will most likely fall to the Federal Reserve and IMF…if it’s even possible.
China pays and Iran plays
Why won’t China’s economy rescue the world…or at least the Eurozone? Because today, China is busy trying to rescue itself. Even with over a trillion dollars in liquid reserves to pump into its economy, China is slowing down. In fact, it’s slowing down a lot quicker and deeper than they care to talk about. They will put more money into the economy every where they can, but the reality is that demand from the Eurozone—China’s largest trading partner—just ain’t what it used to be…and won’t be for the foreseeable future.
At the same time, China’s labor force is aging, requiring more services from the government, and younger Chinese are not thrilled with the prospect of growing poorer with more political crackdowns on their growing protests against shortages and pollution. Yes, pollution in China is so bad that an estimated million people die from it each year and arable land is being destroyed at an astonishing rate. So China, although it is buying farms and forests around the world, can’t buy demand, either at home or abroad. (I write about this in my forthcoming book, “China Crisis”, due out in March of 2013.)
And while all of this is going on, Iran is ramping up the rhetoric and the risk as they once more threaten to blockade the Strait of Hormuz, with the predictable US response of sending more naval warfare assets into the region. As I’ve noted before, this threat may be more of a way to generate more oil revenues via higher prices than it is a plan for war itself. But you know, things like this can get out hand, can’t they? And need I mention the Russians and Chinese war games, along with the Iranians, in Syria again? Seems the Syrians are breaking out their chemical weapons…just in case. Talk about putting out fire with gasoline…
Where does all of this leave us in 2012? Helpless? No, but certainly challenged. With US, Europe, China and Iran all vying for economic growth in an increasingly growth-starved environment, things can get dicey, to say the least. As Guido the killer pimp warned Joel in the film “Risky Business”…
“In a sluggish economy, never ‘fool’ with another man’s livelihood.”
Apt advice in a world becoming more dangerous, and affirms the adage that wisdom can be found in the most unlikely of places.
And those are…The Gorrie Details.