Sinking Japan Keeps Adding To The National Debt

WASHINGTON – As we Americans watch with growing concern our crazy presidential elections politics, other crazy things are happening around the world, without anybody paying any attention. Western governments (US included) keep piling up more and more debt, while Central Bankers do all they can to keep interests rates at zero, or close to it, this way allowing the insane perception that getting deeper into debt is painless, and therefore fundamentally OK.

Japan’s enormous public debt 

David Stockman illustrates this point very well in a recent piece in his www.davidstockmanscontracorner.com that focuses on Japan:

“The government of what can only be described as an old age colony sinking into certain bankruptcy sold 30-year bonds at an all-time low of 47 basis points. Let me clear here that we are talking about a record low not just for Japan but for the history of mankind. [Emphasis added]

To be sure, loaning any government 30-year money at 47 basis points is inherently a foolhardy proposition, but it’s just plain bonkers when it comes to Japan.

Here is its 30-year fiscal record in nutshell. Notwithstanding years of chronic red ink and its recent 2014 consumption tax increase from 5% to 8%, Japan is still heading straight for fiscal oblivion. Last year (2015) it spent just under 100 trillion yen, but took in hardly 50 trillion yen of revenue, stacking the difference on its already debilitating mountain of public debt, which has now reached 240% of GDP.”

“That’s right. A government which is borrowing nearly 50 cents on every dollar of outlays should be paying a huge risk premium to even access the bond market. But a government with a 240% debt-to-GDP ratio peering into a demographic sinkhole would be hard pressed to borrow at any price at all on an honest free market.

[This is] what lies 30 years down its demographic sinkhole. To wit, Japan’s population will have declined by 30% to 90 million, while its working age population will have plummeted from 78 million to about 52 million or by 33%. Moreover, its labor force participation rate has been declining for years, but even if it were to stabilize at the current 60% level, it would still mean just 31 million workers.”

A horrible picture 

Yes, these are the facts. Japan’s revenue covers at best 50% of its spending. The remaining 50% is financed by issuing bonds. As a result, the national debt is now equivalent to 240% of GDP. And yes, as Stockman points out, going forward this horrible picture gets a lot worse. Given Japan’s rapid demographic decline, the number of active workers and therefore tax payers is rapidly decreasing, while the number of retirees receiving pensions, health care services and other benefits is increasing relative to the overall population. This means that going forward there will be even more spending for seniors, while less revenue will be coming in.

No trouble selling bonds 

And in all this, notwithstanding this brewing fiscal catastrophe, the Japanese government has no trouble selling 30 year bonds at a nominal interest rate. How is that possible? In a sane world, no government in this fiscal predicament would be able to sell any bonds, let alone at these rates!

Yes, as Stockman points out, there is a fix. Bond traders “know” that the Bank of Japan, BOJ, eventually will buy these bonds. So, they are not concerned that these will turn out to be like Argentina’s bonds right before bankruptcy. There will always be a reliable buyer.

But here is the question. The BOJ will keep buying worthless paper, paying real money for it, for ever?

Everybody is doing it

As absurd as this sounds, at the moment this seems the consensus. What makes things worse is that this insanity linking fiscal profligacy and Central Bankers’ madness is now the official orthodoxy. Indeed, what Japan is doing is pretty much in line with what other Central Bankers in Europe and America are doing. The difference is only one of degree.

Getting into debt is good 

So, here is the picture. Formerly rich Western countries keep spending way beyond their means, this way accumulating more and more debt. However, thanks to their Central Banks, the cost of borrowing is way below what it should be. And this of course encourages more fiscal irresponsibility. Indeed, at least in the short term, there is essentially no heavy price to pay for profligacy. Japan is an extreme case, but all the others, the US included, are quickly catching up.

More red ink with Trump 

And, by the way, if we take a quick detour back to US politics, most estimates indicate that Donald Trump’s proposed public policies would add another $ 10 trillion in 10 years to the US national debt. This staggering figure would be on top of the $ 19 trillion the US already owes.

And, of course, Trump is leading in the polls. Amassing more public debt seems to be a good way to “Make America Great Again”.

Maersk Warning About Global Slow Down – Recession In the US?

WASHINGTON – Maersk, (based in Denmark) is the largest shipping conglomerate in the world. Their business is to transport every day tens of thousands of containers from exporters to importers around the world. The company just announced losses for 2015. Just a temporary setback? Well, apparently not. Maersk ascribes this setback to shrinking global trade volumes. Their profits are way down because a much weaker world economy generates much less shipping of goods.

The worst since 2008 

Maersk’s CEO is quoted by the WSJ saying that the conglomerate is facing a “massive deterioration”, adding that this is the worst they have seen since the onset of the Great Recession of 2008. Got that? We are back to a 2008-like scenario. I suggest that this is really bad.

And Maersk believes that this weak trade flows trend will continue in 2016. We should pay close attention to what Maersk managers say. Global shipping volumes are a very good proxy for world economic health. 95% of all manufactured goods are transported via containers that get to destination thanks to global shipping companies like Maersk.

Less activity in ports world-wide

Maersk is not alone in predicting bad times. DP World, a very large Dubai based port facilities management company, with operations in 70 terminals in practically every continent, chimed in, indicating that their business (handling the containers moved by Maersk and other shipping companies) is down, significantly. And the IMF confirms this pessimism about a global economy that run out of steam. They have lowered their forecasts for both growth and international trade flows.

So, here we go. The big companies that handle global trade are hurting. Their business is down because the world economy is slowing down, at a rapid pace. They are worried.

Weak economies 

And why is that? Because the day of reckoning is finally getting close. The jig is up. For several years we have lived in a fools’ paradise created by easy money created by central banks that caused asset price inflation in developed countries, and too much easy credit in emerging markets. Underlying economic conditions all over were rather weak, but everything looked good because of the artificial froth created by monetary easing.   `

Central banks to the rescue 

Until recently, when stock market worldwide showed signs of weakness, investors simply waited for central banks in the US, the EU, UK, and Japan to come to the rescue. And they were never disappointed. Trying to boost sagging economies, central bankers would launch, or relaunch, monetary easing, and zero per cent interest.

They would ladle quantitative easing, or QE. If it wasn’t enough, they would ladle some more. When that did not do the trick, they went further. Some of them (Japan’s Central Bank just joined the group) stopped paying interest to commercial banks parking their funds with them.

More of everything

And when even that proved to be insufficient, some of them started charging interest on deposits as a way to force banks to lend more in order to induce more growth. (Even Janet Yellen, the Chairwoman of the US Fed, just declared during a congressional testimony that negative interest rates could be looked at here in the US as a policy option, in some scenarios).

All these gimmicks produced some results. But nothing stellar. With all this gigantic monetary stimulus, the US has been growing at a modest 2%. Europe, at roughly 1%, has done much worse. Still, notwithstanding meager results, the international financial community seemed to be comfortable.

As long as the central banks seemed to be in control, busy doing one thing or another to  prop up markets and keep stock markets reasonably buoyant, (regardless of the weak underlying economic fundamentals), it all looked promising.

Artificial valuations 

Except that everybody, unless totally insane, must have known that nothing was right. Here is the thing. The extravagantly long season of monetary easing did not do much to grow the economies. But zero interest rates pushed cash from savings into stocks, therefore artificially boosting stock prices.

This cannot go on for ever.

Therefore, investors paying high prices for inflated assets must know that these high valuations were and are artificial. What happens when the central banks cannot provide any more monetary easing?

Governments have done nothing 

It is true that central banks intervened so heavily mostly because governments did practically nothing. Sadly, in most western countries there has been no serious attempt to launch new pro-market, pro-growth, pro-investments policies. And it is obvious that, without a business friendly policy environment, there will be fewer investments, less innovation, less enterprise, fewer new companies, and fewer new jobs. And this means no growth, or lackluster growth.

But policy-makers, paralyzed by their ideological blinders that privilege spending on social issues as opposed of investments in future growth, sat on their hands.

It is true that central bankers, at least in the US and in the EU, pleaded with governments. They wanted action, real reforms that would free up resources, favor enterprise and therefore new growth. They did say that they could not manage the economies all on their own. But nobody listened, and almost nothing happened.

No reforms in the US 

In the US nothing has been done about reforming entitlement spending (Social Security, Medicare and Medicaid) and a horrendously complicated, burdensome federal tax system that discourages business creation. On the contrary, instead of reducing regulations, the US government keeps adding more, this way suffocating enterprises with unnecessary mandates.

In Europe, if anything, it is even worse. In Japan, Prime Minister Shinzo Abe back in December 2010 announced “Abenomics” a major reform plan consisting of “three arrows”: fiscal stimulus, monetary easing and structural reforms. Well, thanks to a subservient Bank of Japan, he got the monetary easing. But the rest –especially the structural reforms– did not happen. Abe simply could not deliver. Japan continues to stagnate.

Central banks keep easing 

So, confronted with systemically weak economies, and no help from policy-makers, the central banks tried to provide more oxygen via monetary stimulus. And it worked; but only a little. However, in so doing, the central banks created unprecedented asset price distortions and misdirected the allocation of capital. Trying to buy some time, they created a gigantic mess.

Nervous investors 

And now investors are very uneasy. They are on the lookout for any signs that may indicate the imminent collapse of this house of cards. They know that China, the most astonishing example of fake growth almost entirely financed (since the 2008 Great Recession) by unprecedented levels of new debt, is doing poorly. How poorly? Well, we do not know, because we cannot trust Chinese economic statistics. But global investors know that something really bad is brewing there. There is massive industrial over capacity, and no new demand. There is capital flight. For how long can the Chinese Government keep so many virtually bankrupt companies open? Not for ever.

And the same investors know and fear the cascading effects of the China retreat, some of them already unfolding, (and captured by Maersk’s warning on world trade flows deterioration). Indeed, South Korea, Thailand, Japan, Indonesia, Australia and others are closely tied to the Chinese economy. Many of their companies are part of China’s supply chains. So, as China goes down, they follow. This means a broader contraction.

Commodities down 

And then you have all the commodities producing countries, also hurt badly by China’s slow down. This would be bad enough as it is. But it is made a lot worse by the fact that the rapid growth of many sectors (not just commodities) in emerging markets was debt-financed. Now that business is down, and profits have disappeared, where is the money to pay back the loans? These companies are going down, while their fall causes losses in the financial sector. This means more negative ripple effects.

So, here is the picture. Stock markets are over valued. Commodities producing countries are in bad shape because of lack of demand from China and over supply. There is too much bad debt.

Too much debt

Now, is this another September 2008 in the making? Who knows really. It is clear that no major economy is in high gear. On top of that, at least some highly indebted companies will be unable to make it. There are nasty rumors of troubled European banks with too many non performing loans on their books. Now they are abandoned by investors who fear the worst.

In China, at least for now, the losses are disguised through heavy-handed interventions by the state. But what about elsewhere? In the US, for instance, many of the companies that participated in the now defunct shale oil boom borrowed heavily to finance their operations. Because of the oil price collapse, now many of them will go under. This already hurt producers, contractors, suppliers and vendors, not to mention tens of thousands of high paying jobs lost. And you have to add the banks that financed the energy boom to the list. More broadly, the global financial system is exposed to a lot of non recoverable loans in emerging markets.

Bad news 

So, there you have it. The global economic slow down is here to stay, according to Maersk and others. I would trust them. It is their core business to properly understand trends in trade flows.

Commodities prices are not going to rebound. Mining multinationals from Glencore to BHP Billiton to Vale are in bad shape. China got a massive indigestion and stopped buying. Brazil is in a recession. Russia is doing poorly because of low oil prices. Europe is fragile. And there is a lot of bad debt in distressed emerging countries.

US cannot insulate itself 

It is true that in this rather gloomy context the US is not doing so badly. We have some growth, (a bit more than 2%), and unemployment is way down, (4.9%). The point is that the US is not strong enough to be able to insulate itself from these global currents. While the American economy is less dependent on foreign trade, many large US companies are tied to world markets. (Think about Caterpillar, or General Electric). If they suffer because of lost foreign sales, there will be ripple effects. At some point America as a whole will also feel the pain.

And if this happens while investors lose confidence in the Fed’s ability to keep propping up markets with some more tricks, then all bets are off. At that point expect a mad rush for the exit.

Right now a US recession seems a very distant possibility. But may be it is a lot closer than we think.


US Economy Slowing Down

WASHINGTON – The US stock market, while not doing great, is still up. And yet the US economic outlook is not that good anymore. In fact it is getting worse. So, why the continued confidence in fairly expensive stocks? This is a mystery to me.

Bad numbers 

Here are some alarming figures. As reported by the WSJ, US corporate profits are down. In the third quarter they declined 1.1% from the second. But compared to the same period last year they are down 4.7%. This is a bad trend, and it should be noticed by investors.

Domestic profits fell by 2.8% from 2014. More significantly, profits derived from foreign operations fell by 7.4% compared to 2014. Several analysts quoted by the WSJ expressed the opinion that the US economy –and exporters in particular– has been hit by a global slump that is not going away.

Oil doing badly

On top of this, the US oil sector is in a horrible situation. Oil prices are less than 50% of what they were more than a year ago. Some energy companies that had invested heavily in shale oil may survive even with drastically reduced profits. However, extracting oil from shale is expensive. It made sense to invest in this once booming sector when oil was up at $ 100 a barrel. But now it is at $ 40. Therefore expect more jobs losses, bankruptcies and consolidations in this once thriving sector. Certainly no major contribution to overall economic growth from oil in the near future.

A global slump 

Around the world, wherever you look, it is mostly bad news. Europe’s economies are doing poorly. In fact, the European Central Bank, ECB, is contemplating more Quantitative Easing, QE. Japan is also stuck in a low to zero growth zone. Brazil is in a recession made worse by a huge political scandal. Perennially mismanaged Venezuela essentially imploded. Saudi Arabia is running serious budget deficits. Russia is also in a recession. Argentina, now under new management after the election of Mauricio Macri as President, will have a tough time extricating itself from the consequences of the disastrous economic policies of his Peronist predecessor.

Most of Africa has been hit hard by the collapse of commodity prices. Therefore, do not expect much new demand from there. China is slowing down. As a consequence, all China’s suppliers, from South Korea, to Chile and Australia, are suffering because of falling exports.

None of this looks good.

(And I am not even going into the scenarios of possible economic crises stemming from the simmering conflicts in the Middle East, with ISIL, Assad, Iran, Russia, Turkey, Iraqi Shia, Kurds, and what not engaged in an endless battle. And what about a possible flare up of the underlying tensions between China, its neighbors, and the US emerging from China’s expansionist policies in the South China Sea?)

Do US stock investors seriously believe that the US will not be affected by these global negative trends? All alone, the US will power ahead, while the rest of the world slows down, or worse?

Lower consumer spending 

And, to make matters even worse, US consumer spending, the main driver of GDP growth, is also slowing down. It had increased by 3.6% in the second quarter, and it is now down to 3% in the third.

As I said, with this rather uninspiring picture in front of them, I do not see why US investors keep buying overvalued stocks.


Will The Fed Raise Interest Rates? May Be Not

WASHINGTON – Until a couple of days ago, most economists bet that the US Federal Reserve would finally begin to raise interest rates at its December 2015 meeting, this way ending the anomaly of the longest era of zero interest in modern history.

Promising picture

The general picture looked propitious for such a move. The US economy just added 271,000 jobs in October, many more than expected. Wages are going up a bit. Unemployment is down. Overall, it seemed that the new data indicated that a strong economy would fuel more inflation. And this new trend would justify raising interest rates.

What will happen to stocks? 

And what about the consequences? Well, here it gets tricky. This Fed move on interests would signal to stock investors that the ground may begin to shift. Higher rates mean that in a short while, (depending on how fast the Fed moves to bring interest rates from zero back to a historic norm of about 4%), other investment instruments like savings accounts or bonds will become once again more attractive.

In short, if it is indeed true that this unprecedented era of zero interest created a stock market bubble because it forced people to move away from other forms of investments, then we can expect that its end may bring about a stock market decline, or worse.

Right now, people have an extra incentive to invest in stocks because –thanks to zero interest rates decreed by the Fed– it is the only game in town. You cannot make any money by placing your funds in savings accounts. When interest rates go up again, people will have choices.

Fed watching 

Because of all this, these days markets move up or down mostly on the basis of what analysts believe the Fed will or will not do, and how soon. This happens because stocks are sensitive to interest rates moves, and also because there is no action on any other economic policy front that may trigger market reactions.

Paralysis in Washington 

Washington is paralyzed by political dissent. Therefore, no chance of anything happening there that would influence economic policies and therefore economic and investment decisions. No serious public spending reform plan on the agenda, no changes to major entitlements, and no tax reforms that would modify economic incentives.

In other words, nothing is coming from Washington that would signal markets that soon it will be easier to go into business, create new companies, invest in them and profit from them.

Will the Fed move?

So, we are left with Fed watching. As noted above, looking at the positive signs from the US economy that were streaming in in the last few days, it looked as if the Fed would finally have the margin to move.

Indeed, on the surface, the US is doing fine. The stock market is buoyant. Lots of new jobs added in October. More Americans are employed. Higher interest rates, phased in a little bit at a time, would not smother this fairly solid economy.

Outlook not so good anymore 

Well, this was only a few days ago. But now things do not look so good anymore. For example, let’s take a look at commodities. By any measure the sector, a close proxy of industrial activities, looks awful. The Bloomberg Commodity Index is now down to its lowest level since the 2008 financial crisis. The price of copper, widely used in all sorts of industries, is now down to a six-year low. Most commodity prices are back to where they were before China engaged in its gigantic domestic investment program that drove up the cost of everything. As a minimum, this serious decline means that most industrial economies, and not just China, are slowing down.

Commodities down, world trade down 

And it gets worse. Because of sharply lower demand for their products, many emerging markets that produce and export commodities are either in a recession or close to it, (think of Brazil and South Africa). Besides, despite the official statistics pointing to lower but still significant growth, China is exporting and importing less of everything. This affects all its trading partners, from Australia to South Korea.

And there are more bad signs. Maersk, the Denmark based leading maritime shipping company, recently announced that it canceled several orders for new vessels. In other words, a giant player that manages a large chunk of world trade does not believe that current and projected global traffic volumes justify buying more container ships. (Incidentally, recent data about the movement of goods in and out of major US ports also indicate a sustained decline).

More Americans are working, but few good jobs

Back in the US, while more people have jobs, most of the recent additions are in leisure and hospitality, health care, and other services. Most of these jobs are low paying. In many cases they are not full-time. In other words, there are no new jobs in critical wealth creating sectors such as oil and gas, mining and manufacturing.

Sure, more American are employed, and this is good news. But their jobs depend on government spending (health care), and on the spending of other Americans employed in wealth producing sectors.

So, here is the thing. While we have more bartenders and waiters, we have had zero growth or declines in manufacturing, oil and gas, and mining. This is not a sign of a robust economy, going forward.

If the global economy slows down significantly, many US exporters will be hurt. Some, like Caterpillar, are already doing poorly. And this is because fewer foreign customers are engaged in new construction projects. Hence no need to buy more earth moving equipment from Caterpillar.

Other Central Banks not about to raise rates 

Last but least, you have to consider what the other monetary authorities are doing. The Bank of England just decided not to raise rates. The European Central Bank is engaged in Quantitative Easing and plans to have more of it, largely on account of disappointing growth within the Eurozone, (only 0.3% in the last quarter). The Japanese economy is (once again) sputtering.  Finally, China is trying to stimulate its economy by easing credit and lowering the amount of reserves banks need to keep. Therefore you can expect more, not less, monetary easing in the rest of the world.

So, here is the global picture. The US may be doing almost OK –for now. But the rest of the developed and developing world is slowing down. For this reason all other central banks will keep interest rates at zero or close to zero.

If the US acts on its own 

In this context, if the US will raise rates all by itself, as a minimum we can expect a massive flood of foreign capital seeking higher rewards into America. This would drive the US dollar further up, significantly hurting US exporters, including all major manufacturing companies. And remember that the newly added US jobs in leisure and hospitality largely depend on other gainfully employed people having the discretionary income to spend on restaurants and holidays.

Stampede out of stocks? 

And it gets worse. Everybody agrees that the US stock market is overvalued on account of zero interest rates that drove people away from other forms of investments. What we do not know is how overvalued.

Assuming even a modest Fed move on interest rates in December, we cannot expect rational, measured reactions. Foreign investors, fearing that the Fed might get aggressive, may flee from higher risk countries. The dollar shoots up. US exporters are hurt, badly. Their stocks sink, dragging down their vendors and suppliers. Other vulnerable stocks follow. Can this become a rout that drags down “everything”? Yes, this can happen.

Is the US economy rather weak, after all? 

Therefore, the odds are now against the Fed raising rates. But, wait a minute. If the Fed does not raise rates, then it signals to Wall Street that the US economy, contrary to its earlier analyses, is not that strong. If even a modest Fed move on interest rates might upset the whole thing, this means that the economy has no strong foundations.

For this reasons, some investors are likely to sell stocks anyway, finally realizing that they are holding stuff of dubious, most likely artificially inflated value.

Preserve your capital, stay out of over valued assets 

Either way, we lose. If investors were wise, they would give up the notion of making any money in stocks, given this weird environment characterized by a slow-moving US, a weak global economy, and expensive assets.

US stock are over valued. Therefore it is not smart to keep buying them. Of course, if you go into cash, you make no money, we know that. Still, better to make zero profit than losing your capital. As I said, if investors were wise…

Thanks To The Central Banks, The Equity Bubble Is Getting Bigger

WASHINGTON – Imagine this. There are lots of chronically sick patients in the hospital. Many of them are deteriorating rapidly. The right therapies cannot be administered because of absurd delays caused by infighting within the Ministry of Health. 

Give them morphine 

The physicians in charge of the hospital know what is needed to take care of the patients. But they have no resources. The only thing they have got is morphine, lots of it.

Well, since we cannot cure the patients, at least let’s alleviate their severe pain. “Morphine for everybody!” orders the Director of the hospital. “But sir, this is no cure”, argues a young doctor. “What do we do when the effect of morphine wears off?”, he asks. “Well, we will give them some more. We have ample supply”, replies the Director.

Quantitative Easing is morphine

This may be a far-fetched analogy, but here it is. The patients are the sick economies in Europe, Japan, the US and now –in a major way– China. The Ministry of Health are the Governments incapable of tackling the structural issues of lack of productive investments, labor market rigidity and high public spending. The hospital Director are the Central Bankers. And the morphine is an ample supply is Quantitative Easing, (QE).

Central Bank left alone to manage the economies

The Western economies are really sick. There is too much leverage, low productivity, too much private debt and out of control public spending. But Governments do essentially nothing about any of this. They are paralyzed by ideological disputes and bogus arguments about austerity and income redistribution. The only institutions that can do “something” are the Central Banks. They have no real “cure” for any of this. But they can provide temporary relief by keeping interest rates close to zero, (here is the morphine, in the form of QE), thereby giving everybody the illusion that the situation, while difficult, is manageable. The patients are still very sick. But (thanks to ample doses of QE-morphine) they feel no pain; and so they are led to believe that they have been cured.

More QE, it is still party time!

This is totally absurd. But this is exactly what is happening. The European Central Bank, after having launched its own QE a while ago, just declared that the Eurozone economies need some more monetary easing. The Central Bank in China just announced some more easy money measures, in a country, mind you, that accumulated a monstrous amount of debt (much of it bad debt) in just a few years.

Watching all this unfold, Wall Street correctly concluded that in this environment where everybody is injecting even more liquidity there is no way that the US Federal Reserve will go against this powerful current and raise interest rates in 2015. With US rates still near zero, it still makes sense to put money in equities, since everything else will give you no financial reward.

Investors got the message. “It is still party time!” And so, Wall Street shot up on Thursday. The Dow Jones added 300 points. There was further growth on Friday. Has this optimism about equities got anything to do with the real economy? Not really.

Perverse incentives 

This is yet another Fed-induced rally. (By indirectly signalling that it will not raise rates in 2015, the Fed gave the green light). Needless to say, this is madness. Equity prices in developed economies now are largely disconnected from the fundamentals.

Even worse, thanks to QE governments in highly indebted countries, from Europe to the US, are under no pressure to reform their public finances, because they can keep borrowing at very low interest, this way creating and sustaining the insane delusion that more and more debt is a good way to finance chronic over spending.

Commodities took a dive 

In the meantime, though, emerging countries whose commodities fueled the crazy debt-driven Chinese construction investments binge are feeling the pain. As China could not sustain its own truly over sized madness, it stop buying stuff.

Therefore, commodity prices collapsed. As a result, Brazil, Australia, South Africa, Chile, Argentina, Zambia, and many others are suffering, in a major way. They built their budgets with the unwarranted assumption that commodity prices would stay in the stratosphere for ever. Now they have to go back to the drawing board.

In the meantime, their semi-impoverished people have no extra cash to buy new things, while their currencies are worth a lot less. This penury will further depress exports from industrial countries, this way further reinforcing the global downward spiral.

No incentives to engage in serious reforms 

So, here is the picture. The global economy is doing poorly, in large part because of minimal growth in the debt-burdened West where Governments still spend money on unaffordable entitlements instead of creating a business friendly environment that will encourage private investments in wealth-creating innovation.

Most emerging markets are in recession or close to it.

But at least in Europe, Japan, the US (and now China) the real extent of the problem is disguised. Developed countries enjoy a drug-induced financial markets buoyancy (QE is morphine) because the Central Banks keep pumping in liquidity, this way allowing the stock market bubbles to continue.

Another big bubble 

This is a gimmick. A dangerous gimmick. At some point it will have to stop. I am not sure when. But it cannot go on for ever. I do not even want to think about what will happen when this gigantic bubble will explode.

Greece: Anti-Austerity Tsipras Will Implement Austerity

WASHINGTON – The sovereign people of Greece, in their wisdom, just decided to give another chance to Alexis Tsipras and his Syriza-led government. And what is the political mandate?

New mandate for Syriza

Well, the new mandate is to implement the draconian austerity pact that Tsipras agreed to earlier on with Brussels. So, is Syriza now pro-austerity? Well, it did not use to be. In fact, it won an earlier election on a platform that strongly opposed most of the austerity measures agreed to by the previous New Democracy conservative government.

The story is complicated 

Now, let see if we can clarify all this. Tsipras won a previous national elections with a pledge to renegotiate the entire austerity/loans package with the EU/ECB/IMF. The negotiations were difficult, in fact messy. In the end, Tsipras fired his Finance Minister, (apparently to please Brussels). The EU finally came up with a “take it or leave it” package, which included lots of painful stuff (spending cuts, smaller pension, etc.). Tsipras did not like this at all. He ordered a referendum on the package, inviting Greek citizens to vote “No”. The vote was held. The “No” people won –by a huge margin.

And then, what? Well, then Tsipras, after a lot of noise, accepted, yes, accepted, another huge rescue package –with even more onerous conditions for Greece than the one he urged his countrymen to vote against in the referendum.


(Are you with me, so far?)

And who will implement this package on the Greek side? Aware of major dissent within his own Syriza ranks, Tsipras dissolved parliament and ordered new elections.

And what did the Greeks do? Did they vote Tsipras out of office, as he is manifestly guilty of having turned sides on the critical austerity issue? Again, please remember that the Greeks had previously voted for him precisely because he was the leader of the most strident anti-austerity party. Later on, they followed his wishes and voted “No” on the referendum on the package that the evil EU wanted to impose on Greece.

Given all this, what did the Greeks do? They voted for Syriza, his party. And so Tsipras is again Prime Minister. Except that his program is now the opposite of the one that got him elected the first time.

Anti-austerity is now pro-austerity 

So, here we go. The anti-austerity party is now pro-austerity. The Greeks were vehemently opposed to more fiscal pain when it was administered by a center right government. But now that even more brutal measures have been agreed to by a leftist government, the whole thing all of a sudden becomes acceptable.

This is a farce

If you think that this looks like the plot of a Hollywood farce, you are right.

In fact, it is a farce.

The entire Greek leadership is a farce. The EU leadership that actually believes to have “solved” the never-ending Greek crisis is a farce. And the Greeks who brought this calamity upon themselves are both actors and spectators in the same farce.

Unserious country 

The only thing is that, in reality, while some aspects of this story are indeed comical, there will be real suffering in a hapless country run mostly by thieves, ideologues, and clueless amateurs.

Greek Crisis Aside, Most Of Europe Is In Decline

WASHINGTON – With all the excitement surrounding the Greek debt farce, (yes, it is mostly a farce), most observers are pretending not to notice that at least half of Europe is in a state that can only be called terminal economic stagnation, eventually leading to decline.

All is well

It is pathetic to watch pundits on TV telling us that, unlike Greece, Spain and Italy have courageously embraced reforms and now –what do you know– they are doing a lot better.

Which is to say that if only the Greeks would follow the example of their enlightened Mediterranean neighbors, all of Europe would get back to prosperity.

Progress in Italy ? 

Well, let’s give a closer look at this praiseworthy progress. Here are the IMF macroeconomic projections on Italy. After a ritual acknowledgment of Italy’s efforts to improve its fiscal outlook while reforming somewhat its labor markets, the IMF projects that in 2015 Italy’s GDP will grow by 0.7%, its unemployment rate will be at 12.5%, while its national debt will be equal to 133.3% of GDP. Impressive, no?

By 2020 on account (we assume) of the impact of targeted reforms promoted by the no-nonsense Renzi government growth will be 1%, unemployment will be “down” to 10.7% and the national debt will be “only” 122.9% of GDP. Got that?

Growth that may be approaching 1% is actually impressive according to the analysts, while unemployment above 10% is swell, (not to mention that youth unemployment is about double that, while in the south of Italy it reaches 40%).

The new normal

Well, this is what passes for healthy recovery, these days. And this projection of course excludes recessions, downturns or other crises.

So, here is the picture of Europe painted by the experts. Greece is doing poorly because it is unwilling to recognize its serious predicament. But –hey– Italy is making real progress thanks to its smart leaders, while in Spain unemployment is rapidly going down. Really? The last time I checked unemployment in Spain was well above 23%, while youth unemployment is “down” from 53% to 49%. This tragedy is in fact presented as good economic news. Have we gone totally mad?

Terminal decline

The truth is that, while Italy did not jump into the Greek abyss, it is a country in terminal decline. And so is Spain and Portugal; while stagnating France is flirting with the idea. And up north Finland is not doing well, while the Balkan EU countries do not give any reason for rejoicing. No, there will be no Croatia economic miracle. And do not hope that the Bulgarian economy can grow more than 0.9%

So, here is the real story. Greece is an almost comically extreme case; but a large chunk of Europe is essentially in decline. And why is that? Well, it is the compounded effect of statist policies, unaffordable entitlement programs and falling birth rates, combined with structural disincentives to investments in innovation, enterprise and ultimately growth.


What is worse is that this decline is denied. In fact, the experts tell us that because  of intelligent pro-growth reforms and the beneficial effects of quantitative easing administered by the European Central Bank, Greece aside, thing are mostly back to normal. Really?

When analysts tell you that all is well when Italy, a supposedly modern industrial country, is projected to grow at a 1% rate in 2020, that is 5 years after the implementation of intelligent reforms, while carrying a national debt that will stay well above 100% of GDP in eternity, then we have entered a new era, an era in which idiotic wishful thinking passes for sound judgment.


Can Greece Be Saved?

WASHINGTON – The latest round of negotiations aimed at solving the Greek crisis (Yes, 6 years later we are still at it!) reminds me of what where described as the heroic but also grotesque efforts by the Spanish doctors who really, really wanted to prolong the life of semi-dead dictator Francisco Franco, back in November 1975.

Franco died

Well, guess what, heroic medical efforts notwithstanding, Franco was an old man. And he finally died.

In the case of Greece, the issue is not old age. It is about the crushing effects of a stupendous amount of debt (the Greek national debt is now $ 347 billion, 177% of GDP) that cannot possibly be paid back by a very weak country, poorly managed by a populist, ultra-left government.

There must be a solution

And yet, just like the Spanish doctors, the European central Bank (ECB), the International Monetary Fund (IMF) and the European Union (EU) Commission representatives keep on negotiating with Greece, as if by trying harder some magic solution will be found.

Political deal

The only (fake) “solution” is a political deal masquerading as serious debt restructuring. As Athens’ creditors believe that a Greek bankruptcy would cause too much unwanted and possibly unmanageable confusion, may be a panic in international financial markets, I bet that they shall invent a last minute “agreement” that will solve nothing. It will however provide political breathing room by kicking the proverbial can a bit farther down the road.

No progress since 2009

The facts are known. Greece was on the verge of bankruptcy at the end of 2009 when the new government announced that its predecessor had essentially cooked the books this way falsifying the actual debt figures.

Believe it or not, there has been no real progress since then. There have been numerous bailouts. But the fact is that more bailouts simply mean more debt. In the meantime, there has been and there is no serious plan aimed at reviving a comatose Greek economy, while the Greeks still have a hard time trying to adjust to the harsh reality of the end of subsidies for everyone, tolerated tax evasion, and soliciting briberies as a common practice to increase one’s income.

Keep trying

Just like Francisco Franco in 1975, Greece is near death. But, just like the Spanish doctors, most of the players still insist that there must be a way to ensure that Greece will stay in the Eurozone, that its economy will be somehow powered up, and that an orderly program that will guarantee the repayment of all the outstanding debt will be agreed upon and adhered to.

The Spanish doctors were eventually defeated by the limits of human biology. The negotiators trying once more to save Greece  will continue until they will realize that this farce cannot go on.

However, based on the record so far, we are still a long way from this moment of truth.

In The New Economic Normal, Bad Is Actually Good

WASHINGTON – The worst part of the economic “new normal” created by the massive central banks interventions is that we have lost any sense of reality when it comes to evaluating actual economic performance.

In America these days mediocre passes as good

In America we have employment growth. And this is good. But we are barely at pre-recession levels. And this is in part due to the usually ignored fact that millions of people have left the job market, and so they are no longer counted as unemployed. Besides, there are too many low-paying part time jobs for people who seek full time occupations. Overall, the economy, while growing, is performing well below the 3% post war average. And yet most business publications tell us that all is well, and so investors keep buying shares.

Indeed, the US stock market is booming; even though there is almost no correlation between stocks high valuations and actual economic performance. But nobody says anything about this obvious disconnect. Nobody points out this absurdity. How do you explain that? Have financial analysts and business writers lost their minds?

Solid growth in Europe?

In Europe the overall economic picture is a lot worse. But now, according to Reuters, there is a true ray of hope.  A recent headline reads “Eurozone set to report solid growth, for a change”, May 10, 2015).

“Solid growth”? Well, this looks really good. And what do the Reuters editors mean by “solid growth”? They mean 0.5%. Yes, half a percentage point these days passes for solid growth. And the article has words for praise even for Italy. What do you know, even Italy joined the solid growth pack. It looks that this Mediterranean sleeping giant is finally waking up. It posted 0.2% in the last quarter. Now this settles it. With Italy pushing up the average with its impressive 0.2% growth, no wonder that the Eurozone is doing so well.

We lost any sense of reality

Look, I appreciate optimism and the attempt to focus on even modest good news. Certainly 0.5% growth is better than no growth. But, in the old days, 2% or 3% was solid growth. In this crazy era, dominated by the valuation distortions engineered by central banks, dismal passes for tolerable, and barely OK is actually good.

Financial magic will take care of all issues

The unpleasant truth is that Europe is in decline, while America is flirting with this trend now prevailing among most mature industrial democracies, from Spain to Japan. But practically nobody says a word. No alarm bells.

“Hey, all is well in the Eurozone. Do not be a pessimist. Look: we have 0.5% growth”. But what about the 11% Eurozone unemployment rate? And what about the dismal jobs prospects for young people? What about gigantic levels of national debt? “No problem, super wizard Mario Draghi, ECB Maestro, took care of it with QE. That simple. Now just relax, and enjoy the good times.”

Europe Sliding Into Irrelevance


WASHINGTON – Here is today’s Europe. Stagnating economies, non-existent innovation, high debt caused by unaffordable pensions and other entitlements, and educated young people going away in search of opportunity.

Old societies

And there is more: high unemployment, especially for young people, and declining birth rates. Combined with the slow but steady drain of the most ambitious within the new generations, declining birth rates (below replacement levels in all of Europe, with the exception of France), mean frail societies dominated by senior citizens whose main preoccupation is not investment in the future but collecting pensions.

Generous pensions  and other entitlements were pledged by politicians  who over promised, thinking that the money to pay for future benefits somehow would materialize.

Immigration from Africa

If you think this is bad enough, sorry to say that there is more. Yes, add to this depressing mix the steady inflow of desperate illegal immigrants from North Africa, Sub-Saharan Africa and the Middle East. They escape from poverty, wars  and political chaos, hoping to find something better in Europe. This is not a massive wave, but a steady, daily drip-drip. Tens of thousands arrive every month, and this has been going on for years, with no end in sight.

Now picture this. Italy has zero growth and high unemployment (above 10%). Youth unemployment is about 40%, and around 60% in the South. And yet now the same tired, over stretched and impoverished Italian state has to provide for thousands of new illegal immigrants who sail daily from North Africa, landing in Sicily. (So far, 20,000 new arrivals in 2015).

And what can these poor migrants, (many of them women and children), add to a semi-comatose Italian economy? Nothing. Absolutely nothing. In fact, they represent a new cost. They are poor, illiterate, and unskilled. On top of that, a majority of them are Muslim, this way adding another layer of complexity to the already impossible task of integrating millions of aliens into a new society.

We have a strategy

In all this, there is an amazing degree of wishful thinking in Europe that has now passed the threshold of collective insanity. Here is the plan, the smart (and painless) strategy to get out of all this.

“No worries. Mario Draghi and the European Central Bank, (ECB), have got this thing under control. You see, they have launched Quantitative Easing, (QE). And this clever remedy works practically like a (free of charge, mind you!) Elixir of Long Life.

All of a sudden –Puff!– interest rates are down to zero, And this magic remedy means that (essentially broke) governments now and going forward can keep borrowing, since the cost of servicing new debt is down to nothing. 

Therefore, this QE Elixir means that we can keep on ignoring the fiscal disasters caused by monstrous and totally unaffordable welfare states. As long as we can issue more bonds, all is well. We shall pay pensions by issuing more bonds. This is a really smart policy, and it will work wonders.

Yes, we may concede that Greece overdid this a little bit. But everybody else will be fine. Italy’s national debt is now 130% of GDP? Totally manageable. France’s economy is semi-comatose? Wait for QE to work its magic.”

No reforms

While delivering his monetary cocaine, Draghi did also say to the EU policy-makers that they should get serious about realistic new fiscal policies, and pro-growth legislation. But the policy-makers have gladly taken the QE cocaine dished out by the ECB and ignored the warnings.

In all this, Europe is not going to go down in flames, in the midst of financial chaos and political unrest. No, just like on old person afflicted by a variety of serious, but not lethal, chronic diseases, Europe will shrivel, and slowly slide into irrelevance.