Archive for January 15th, 2012
Capitalism is an approach to economics that is organic. Self-interest drives individuals to pursue wealth. Through entrepreneurship and hard work and ingenuity, an economy morphs into existence. Capitalism is the ultimate meritocracy; the smartest and the most creative and the most tenacious thrive; those who cannot compete ultimately fail and must find another way to be productive market participants.
That describes what happens in a capitalist system that has not been corrupted and gamed to the point where institutions are incentivized to direct more money and effort to lobbying for political protection, and less to competing harder and smarter.
“You cannot have capitalism without failure.”
Jim Rogers, when he made that statement, was referring to the lunacy of using public money to preserve failed private enterprise in a “capitalist” economy. That is what we did, after all. We saved failed institutions, failed individuals, and failed thinking. That is wrong on many levels. But we went a step further: we saved dishonesty, criminality, and corruption. That is a far more serious proposition.
Bill Black is arguably the most important voice when it comes to the criminality that was preserved. If you are not well-versed in the criminal aspects of the crisis and in Gresham’s Dynamics, the following is an important video to watch (I recommend following the Powerpoint presentation while running the video – filmed 2/18/2010):
Powerpoint slides from the presentation can be viewed here.
Capitalism requires failure. Without failure, the worst actors game the system so that they are able to thrive. In the process, they deprive honest entrepreneurs of opportunities that make a capitalist economy stronger and more resilient. Without failure, Gresham’s Dynamics – in banks, in ratings agencies, in government, in academia – are perpetuated and catalyzed. And without failure, moral hazard corrupts the thinking of all market participants; they are taught that crime pays and honesty is, in some ways, punished.
We have perpetuated criminal environments that are not going to resolve themselves. Those environments are once again buried in profits and bonuses and rising stock prices and lobbyist-written legislation that creates opacity. But the criminality has not been addressed. Since our leaders are not undertaking the house-cleaning that could rid us of the worst actors and send a message to others, we have to expect the corrosive results of institutionalized dishonesty to continue to undermine our capitalist economy in fundamental ways. Unfortunately, we likely will not have the luxury of being able to lower interest rates and loosen credit availability so as to paper over our economic problems next time… we have played those cards.
The USA has arguably been stressed to its limits when it comes to public debt, private debt, currency debasement, and interest rate drops. Add in rampant dishonesty in the highest echelons of private and public power, and we are facing a serious threat to our well-being.
Predicting how this will play out is impossible. But ignoring the big issues is a mistake. At the very least, if you want to protect yourself and your community, you have to pay attention to what is happening in our macro-economy. And since no mortal with a job outside of finance can possibly stay on top of these issues, it is vital to find analysts who are not compromised.
Greece’s creditor banks broke off talks after failing to agree with the government about how much money investors will lose by swapping their bonds, increasing the risk of the euro-area’s first sovereign default.
Proposals by a committee representing financial firms haven’t produced a “constructive consolidated response by all parties,” the Washington-based Institute of International Finance said in a statement yesterday. Talks with Greece and the official sector are “paused for reflection on the benefits of a voluntary approach,” the group said.
Aha. The Greeks have figured out that when you owe someone money and borrowed it unsecured, as is always true for sovereigns, you have the trump hand. The only real “price” to be paid by telling your creditors to piss off is that you won’t be able to borrow again in the future.
This is a material price, but it is not the end of the world. It means you have to balance your budget immediately, but that’s good — not bad.
Of course everyone is freaking out about triggering Credit Default Swaps and similar instruments. That’s misplaced — there simply isn’t that much outstanding for Greece in that regard.
No, the real contagion risk is not Greece. It is that once Greece does this, and the world does not immediately end, then other nations (hint: Italy?) may come to the conclusion that they too should tell creditors to stick it where the sun does not shine.
They’re right, incidentally. The utter and complete fraud in our banking structures that allow institutions to hold these sorts of debts as “risk free”, requiring no reserves and no capital behind them, is an outrage. It is systemic and intentional fraud perpetrated upon the world for the sole benefit of making possible national overspending with impunity, destroying any sort of market discipline aimed at budgetary deficits.
Well, Basel, you’re about to “get yours.”
Not today, not tomorrow, but once the standard is set you can take to the bank that other nations will consider the same action — as well they should — and then the folly of so-called “regulators” who put together this outrage will become apparent.
Welcome to the 1930s — uh, I mean, the 2010s…..
Japan’s Prime Minister Seeks Doubling National Sales Tax; S&P Downgrade of Japan Likely; No Winning Play for Japan
In an effort to halt expansion of Japan’s massive public debt, Japan’s Prime Minister Seeks Doubling National Sales Tax.
Prime Minister Yoshihiko Noda said containing Japan’s public debt load, the world’s largest, is critical after Standard & Poor’s downgraded credit ratings on France, Austria and seven other European nations.
Europe’s fiscal situation “isn’t a house burning on the other side of the river,” Noda said on TV Tokyo Holdings Corp.’s program on Jan. 14. “We must have a great sense of crisis.”
Noda reshuffled his cabinet last week, aiming to win support for doubling Japan’s 5 percent national sales tax by 2015 to trim the soaring debt. S&P said in November Noda’s administration hadn’t made progress in tackling the public debt burden, an indication the credit-rating company may be preparing to lower the nation’s sovereign grade.
Japan’s government, which has enjoyed borrowing costs that are around 1 percent, wouldn’t be able to manage its finances if bond yields surged to 3 percent, Noda said last week. The country risks seeing a spike in government bond yields unless it controls a debt load set to approach 230 percent of gross domestic product in 2013, the Organization for Economic Cooperation and Development said on Nov. 28.
‘Worse and Worse’
Japan’s finances are “getting worse and worse every day, every second,” Takahira Ogawa, Singapore-based director of sovereign ratings at S&P, said in an interview on Nov. 24. Asked if this means he’s closer to lowering Japan’s credit rating, he said it “may be right in saying that we’re closer to a downgrade.”
S&P rates Japan AA- and has had a negative outlook on the rating since April. Ogawa said Japan needs a “comprehensive approach” to containing its debt burden, which the government has projected will exceed 1 quadrillion yen ($13 trillion) in the year through March as the nation pays for reconstruction costs from March’s record earthquake.
The International Monetary Fund has said a gradual increase of Japan’s sales tax to 15 percent “could provide roughly half of the fiscal adjustment needed to put the public-debt ratio on a downward path.”
No Winning Play for Japan
If Japan hikes taxes and reduces spending, the Yen will strengthen, and Japanese exports sink.
Demographics and balance of trade issues suggest there will still be insufficient buyers of Japanese bonds that need to be rolled over. Raising taxes in a global recession is not a wise thing to do as it will inhibit growth.
On the other hand, if Japan turns to printing, which I believe it eventually will, Japan would likely go into an inflation spiral.
Massive Debt Rollover Problem
|Country||2012 Bond, Bill Redemptions ($)||Coupon Payments|
|Japan||3000 billion||117 billion|
|U.S.||2783 billion||212 billion|
|Italy||428 billion||72 billion|
|France||367 billion||54 billion|
|Germany||285 billion||45 billion|
|Canada||221 billion||14 billion|
|Brazil||169 billion||31 billion|
|U.K.||165 billion||67 billion|
|China||121 billion||41 billion|
|India||57 billion||39 billion|
|Russia||13 billion||9 billion|
For a discussion of the global debt rollover problem, please see World’s Biggest Economies Face $7.6T Debt Led by Japan $3 trillion, U.S. $2.8 trillion; Rollover Problems in Japan and Europe
There are no winning plays for Japan, given a debt load set to hit 230 percent of gross domestic product. The US would be advised to pay attention.
Mike “Mish” Shedlock – Global Economic Analysis
2012 is shaping up to be a very tough year for the global economy. All over the world there are signs that economic activity is significantly slowing down. Many of these signs are detailed later on in this article. But most people don’t understand what is happening because they don’t put all of the pieces together. If you just look at one or two pieces of data, it may not seem that impressive. But when you examine all of the pieces of evidence that we are on the verge of a devastating global recession all at once, it paints a very frightening picture. Asia is slowing down, Europe is slowing down and there are lots of trouble signs for the U.S. economy. It has gotten to a point where the global debt crisis is almost ready to boil over, and nobody is quite sure what is going to happen next. The last global recession was absolutely nightmarish, and we should all hope that we don’t see another one like that any time soon. Unfortunately, things do not look good at this point.
The following are 22 signs that we are on the verge of a devastating global recession….
#1 On Thursday it was announced that U.S. jobless claims had soared to a six-week high.
#2 Hostess Brands, the maker of Twinkies and Wonder Bread, has filed for bankruptcy protection.
#3 Sears recently announced that somewhere between 100 and 120 Sears and Kmart stores will be closing, and Sears stock has fallen nearly 60% in just the past year.
#5 Richard Bove, an analyst at Rochdale Securities, is projecting that the global financial industry will lose approximately 150,000 jobs over the next 12 to 18 months.
#6 Investors are pulling money out of the stock market at a rapid pace right now. In fact, as an article posted on CNBC recently noted, investors pulled more money out of mutual funds than they put into mutual funds for 9 weeks in a row. Are there some people out there that are quietly repositioning their money for tough times ahead?….
Investors yanked money out of U.S. equity mutual funds for a ninth-consecutive week despite a bullish 2012 outlook from Wall Street and a December rally that’s carried over into the New Year.
#7 There are signs that the Chinese economy is seriously slowing down. The following comes from a recent article in the Guardian….
Growth had slowed to an annual rate of 1.5% in the second and third quarters of 2011, below the “stall speed” that historically led to recession.
#8 The Bank of Japan says that the economic recovery in that country “has paused“.
#9 Manufacturing activity in the euro zone has fallen for five months in a row.
#11 According to a recent article by Bloomberg, it is being projected that the French economy is heading into a recession….
The French economy will shrink this quarter and next, suggesting the nation is in a recession as investment and consumer spending stagnate, national statistics office Insee said.
#12 There are a multitude of statistics that indicate that the UK economy is definitely slowing down.
#13 The credit ratings of Italy, Spain, Portugal, France and Austria all just got downgraded.
#14 It is being reported that the Spanish economy contracted during the 4th quarter of 2011.
#16 According to a recent article in the Telegraph, the Italian government is forecasting that there will be a recession for the Italian economy in 2012….
The Italian government predicts GDP will contract 0.4pc next year, but many economists fear the figure is optimistic.
“We can say without mincing words that we have already slipped into recession,” said Intesa Sanpaolo analyst Paolo Mameli. “We expect GDP to keep contracting for the next 3-4 quarters.”
#17 Italy’s youth unemployment rate has hit the highest level ever.
#18 The unemployment rate in Greece for those under the age of 24 is now at 39 percent.
#19 Greece is already experiencing a full-blown economic depression. About a third of the country is now living in poverty and extreme medicine shortages are being reported. Things have gotten so bad that entire families are being ripped apart. According to the Daily Mail, hundreds of Greek children are being abandoned because the economy has gotten so bad that their parents simply cannot afford to take care of them anymore. The note that one mother left with her child was absolutely heartbreaking….
One mother, it said, ran away after handing over her two-year-old daughter Natasha.
Four-year-old Anna was found by a teacher clutching a note that read: ‘I will not be coming to pick up Anna today because I cannot afford to look after her. Please take good care of her. Sorry.’
#20 In Greece, large numbers of people are simply giving up on life. Sadly, the number of suicides in Greece has increased by 40 percent in just the past year.
#21 In many European countries, the money supply continues to contract rapidly. The following comes from a recent article in the Telegraph….
Simon Ward from Henderson Global Investors said “narrow” M1 money – which includes cash and overnight deposits, and signals short-term spending plans – shows an alarming split between North and South.
While real M1 deposits are still holding up in the German bloc, the rate of fall over the last six months (annualised) has been 20.7pc in Greece, 16.3pc in Portugal, 11.8pc in Ireland, and 8.1pc in Spain, and 6.7pc in Italy. The pace of decline in Italy has been accelerating, partly due to capital flight. “This rate of contraction is greater than in early 2008 and implies an even deeper recession, both for Italy and the whole periphery,” said Mr Ward.
#22 The major industrialized nations of the world must roll over trillions upon trillions of dollars in debt during 2012. At a time when credit is becoming much tighter, this is going to be quite a challenge. The following list compiled by Bloomberg shows the amount of debt that some large nations must roll over in 2012….
Japan: 3,000 billion U.S.: 2,783 billion Italy: 428 billion France: 367 billion Germany: 285 billion Canada: 221 billion Brazil: 169 billion U.K.: 165 billion China: 121 billion India: 57 billion Russia: 13 billion
Keep in mind that those numbers do not include any new borrowing. Those are just old debts that must be refinanced.
As I mentioned at the top of this article, things do not look good.
The last thing that we need is another devastating global recession.
As I wrote about yesterday, the U.S. economy is in the midst of a nightmarish long-term decline. The last major global recession helped to significantly accelerate that decline.
So what will happen if this next global recession is worse than the last one?
Sadly, the people that will get hurt the most by another recession will not be the wealthy.
The people that will get hurt the most will be the poor and the middle class.
So what should all of us be doing about this?
We should use the time during this “calm before the storm” to prepare for the hard times that are coming.
As always, let us hope for the best and let us prepare for the worst.
But things certainly do not look promising for the global economy in 2012.