Round One: US Shale Wins, OPEC Loses

WASHINGTON – Here is the news. The US shale oil industry, while badly wounded by the price war waged by Saudi Arabia, is still standing and fighting on. In fact, it is now better than ever. Thanks to rapid technological innovation, it has been successfully re-engineered. Although bruised, it is slimmer, more productive and more efficient than ever.

Unsustainable low prices

Saudi Arabia instead may not be able to sustain its own scorched earth, low oil prices campaign; not because of its impact on Saudi oil profitability, (still very healthy); but because Saudi Arabia needs a much larger oil revenue to finance its budget and to continue subsidizing a population that looks at public money as an entitlement. Indeed, low oil prices for the indefinite future may jeopardize the very survival of the Saudi state.

How it started 

A couple of years ago, when oil prices started sliding due to a supply glut, Saudi Arabia announced that, contrary to expectations, it would not cut production in order to jack up crude prices. This was an unusual reaction, and all analysts wondered what prompted it.

In the past, OPEC’s strategy had been to maintain price stability at a fairly highly level. Not too high so that it would financially damage buyers; but high enough in order to guarantee high margins for OPEC producers. That balance seemed to be with oil prices at around $ 100 per barrel. In order to achieve this goal, OPEC, led by Saudi Arabia, in order to support prices would cut production when supply exceeded global demand.

New policy 

So, why the new course of action? Why would Saudi Arabia allow oil prices to slide? There were several theories. Saudi Arabia wanted to damage Iran. No, the Saudis were going after Russia, because they did not like its military support to Syria. But the most popular theory was that the Gulf oil giant wanted to kill its newest but possibly weakest competitor: the US shale oil industry.

US shale

Indeed, thanks to the use of hydraulic fracturing (or fracking) the booming US shale oil industry had surprised the entire world. Using fracking to extract oil from shale formations, with incredible speed American shale oil producers had added millions of barrels of US production in just a few years, this way creating the global oil glut that caused the rapid crude price decline. This sudden change in global demand and supply obviously worried the Saudis, the established oil markets arbiters.

Too expensive? 

That said, just like almost everybody else in the oil business, the Saudis “knew” that extracting oil from shale is very expensive. The consensus was that US shale oil could be profitable only with crude well above $ 60 per barrel.

Yes, shale oil production via fracking is a fantastic innovation. But production costs are much higher than the industry average. Therefore, if you wanted to get rid of this US shale oil annoyance that caused a global supply glut, just drive the price of crude way down for a while by over supplying already saturated markets, and the the US shale oil producers would go bankrupt. As easy as that.

Make them go bankrupt

And for a while it seemed that the Saudi game plan (assuming that this is what they were really trying to do) was actually working. With oil going from $ 100 to $ 60 and then down to $ 40 a barrel, US shale oil companies’ profits fell or disappeared altogether. The most indebted small and medium US producers could not get more financing. And so they went under. A large number of operations stopped.

It was a carnage. In just a couple of years, tens of thousands of shale oil industry jobs were lost. A very large number of vendors and suppliers to the shale oil sector suffered. Entire communities that catered to energy workers had to absorb major losses.


However, guess what, the huge body blow of declining oil prices that in no time had gone from $ 100 to $ 40 per barrel, or even lower, surprisingly did not kill the US shale oil industry.

To the amazement of all industry practitioners, the shale oil sector managed, in almost no time, to become more efficient and more productive. Costs were slashed, year after year. Oil recovery rates improved, quite substantially. Yes, as a consequence of falling prices, overall US oil production went from 9.7 million barrels a day down to 8.5 million; a net loss of 1.2 million. But the survivors are now nimble and profitable, even with oil below $ 50 per barrel. Many of them can still make money with oil at $ 40 per barrel. 

Saudi Arabia now in trouble 

Meanwhile, it looks as if Saudi Arabia cannot live much longer with the consequences of its own low crude prices policies. Let’s make it clear. The Saudi oil industry is not in any trouble. It remains very profitable even at low prices, simply because Saudi oil extraction costs are very low.

However, the problem is that the Saudi government needs oil at $ 100 in order to finance its budgets, public investments plans, and a variety of subsidies offered to almost all Saudi citizens.

Out of cash

Sustained low oil prices caused a sudden state revenue shortfall. And this has created a huge fiscal problem. For the time being, Saudi Arabia can cope. It has used some of its vast currency reserves. It has issued bonds to finance its large and expanding budget deficit. So far, so good. But the outlook is not at all promising. Assuming low prices for the indefinite future, little by little Saudi Arabia will run out of cash.

Given all of the above, at some point OPEC, led by Saudi Arabia, will have to cut production in order to increase oil prices. This will increase Saudi state revenues and stabilize the Kingdom’s fiscal situation.

Shale producers are more flexible 

That said, this will also be good for US shale producers. Unlike other “conventional oil” producers, the US shale companies now have the technology that allows them to ramp up production relatively quickly, while cutting it when global supply is excessive. Which is to say that when prices go up more rigs will go into operation. When prices start sliding due to excessive supply, shale oil operators can shut down some operations, without going bankrupt in the process.

Shale wins

All in all, the plucky US shale upstarts, usually small companies sometimes poorly managed and not well-financed, managed to take huge blows, quickly reinvent themselves, and come back, stronger than before. This proves that disruptive technological innovation is possible –even in mature industries like oil. All in all, at the end of this oil price war round, shale wins, OPEC loses.



No More Startups In America

WASHINGTON – President Obama confidently declared to the Nation in his last State of the Union Address that the American economy is back. Under his administration the Great Recession of 2008 was contained, and then 14 million new jobs were created. The economy is growing at a healthy pace.

Not that good 

Well, it is not that good. What we have had since 2009 is the worst economic recovery in modern American history. The average rate of growth used to be 3%; now it is 2%. A huge deterioration. And this decline occurred notwithstanding an unprecedented period of high federal spending (hence the debt explosion) and zero interest rates that were supposed to guarantee higher growth. Unemployment is down to 5%. But this is largely because far fewer people are active workers. Millions have dropped out. Labor participation is extremely low.

Add to this millions of people who have part-time jobs only because they cannot find full-time occupation and the picture turns dark. Most of the new jobs created by this economy are in low paying sectors: waiters, janitors, nursing assistants, store clerks.

What we have is a highly indebted, slow-growing American economy that at its best is able to create low paying services jobs. And the trouble is that the President and many others claim that this is good. We are doing fine. No, we are not. With this feeble growth, and this unprecedented level of debt we are well on our way to a slow but inevitable economic decline.

The “Land of Opportunity” 

America used to be the “Land of Opportunity”. By this I mean the country in which many wanted to be entrepreneurs because they knew they had a fair chance to succeed. The broader context –laws, regulations, contracts enforcement, patent protection, credit availability, taxation– was generally pro-business.

And then there was a huge continental size market populated by eager consumers. When Americans see something new, or better, or cheaper they will buy it. For all these reasons, many Americans who started new enterprises did well, while some did extraordinarily well.

In that era the “Self-Made Man” became the quintessential American icon. At the same time a symbol of success, and a role model for others aspiring to be business owners.

Old model not working anymore 

Well, this old model is not working anymore. Sure, whatever may be happening to the US Stock Market in recent days, the American economy is still growing; certainly more than anemic Europe, or semi-moribund Japan. Employment is growing. The US Dollar is strong. But, compared to its historic average, America has been experiencing very slow growth, while the income of lower middle class and working class Americans has been stagnating for decades.

Low rate of investment 

So, what is the problem? The problem is in a bad combination of higher taxes, suffocating regulations and Fed-induced perverse incentives that push large companies to issue more debt, instead of investing to expand operations.

The net result, as David Stockman points out in his Contra Corner, is that net investment in 2014 was only 2.3% of GDP. This is barely half the 4-5% average that prevailed in the high growth era of the 1950s and 1960s. And right now, Stockman notes, net investment is still below the 2007 levels.

Fewer new businesses created 

And this disappointing investment data is confirmed by the declining number of new businesses being formed. The declining number of new enterprises is the red flag, the proverbial canary in the economic mine, indicating that a negative trend is now dominant.

Simply stated, new businesses, the proverbial startups, are the heart and soul of the American economy. Hard to think about future growth and dynamism if their numbers go down. But this is exactly what is happening.

As Daniel Henninger points out in a WSJ piece, the number of one year old businesses grew nicely from 550,000 in 1987 to 650,000 in 2006. But then they started going down.

The recession 

Of course we have to factor the Great Recession of 2008 and 2009. Many companies, large and small folded. But the recession, however severe, ended. Since 2009 we have had many years of uninterrupted growth. Still, the number of new startups keeps declining. In his WSJ piece Henninger quotes data from the Kauffman Foundation. In 2012 there were only 400,000 new companies created in America.

And it gets worse. A 2014 Brookings Institution report, also quoted by Henninger, indicates that since 2008 every year there are more companies going out of business than new businesses created. This is a horrible trend.

What happened? 

Now, we can debate the causes of all this. I cited bad monetary policies, high taxes, and a positively anti-business regulatory environment. Other talk about the crisis of innovation, (not enough of it to give life to new technologies and new companies that will produce them), “secular stagnation”, or whatever.

The pro-growth eco-system is gone 

The fact is that, due to multiple factors, the legendary pro-growth American economic “eco-system” is no longer there. The old, easy to understand incentives to start a business and grow it are no longer there. In some sectors the regulatory thicket is almost impenetrable. As a result of all these new obstacles, fewer young people have the interest and the aspiration to become entrepreneurs.

This is a major problem. Whatever may happen in Wall Street in the next few weeks, this entrepreneurship decline is a real, structural impediment to robust future growth. America has become a country in which debt-driven, slow growth is the new model.

Debt driven economy 

Of course, until now financing operations through extremely low interest corporate bonds seemed extremely smart. Many companies got essentially free money. Yes, but it looks that this free money was used to fund current operations or stock repurchases. It has not been used to fuel new investments.

The fact that President Obama ignored all this in his State of the Union Address is a bad indication. Of course, he is defending his 7 years economic policy record.

But in so doing he is also telling America that this new era of slow growth, dangerously high levels of debt, under employment, declining entrepreneurship and lack of innovation is actually alright.

And, no, it is not alright. This is a road to economic and societal decline.

A new mandate

Let’s hope that a new President will have the mandate to shake up the system. We need aggressive deregulation, lower corporate taxes, and a genuine pro-business policy environment.

We need risk takers who once again feel that it makes sense to start a business in America, without having to worry all the time about inspections and compliance with obscure rules that most people do not even understand.

Italy Still In Crisis, But Some Media Are In Denial

WASHINGTON – Sometimes I wonder where is the boundary between self-deception and willful manipulation. Are some media in free countries deluding themselves or are they really trying to deceive you when painting a rosy pictures of what is in reality a dreadful situation?

Italy’s public debt 

For instance, take the perennial tragedy of the Italian gigantic national debt coupled with a sorry-looking economy that, after almost 10 years in recession, is still below pre-crisis level; this way making it virtually impossible for Italy to exit the negative spiral of high debt and almost zero growth.

Italy’s public debt is not even close to Japan’s world record (240% of GDP); but, at above 130% of GDP, it is among the worst cases. Coupled with a non performing economy, this massive debt is just like an enormous millstone around Italy’s neck.

Right now, thanks to European Central Bank (ECB) policies that reduced interest rates to almost nothing, this gargantuan fiscal hole is still manageable. But debt service on such a large-scale is a huge liability for a country whose economy has been doing very poorly for almost a decade. (After years in the red, Italy’s projected economic growth for 2015 is 0.9%).

It keeps growing

Worse yet, this debt, albeit slowly, keeps growing. 2015 will be the worst year ever, with debt touching almost 133% of GDP. At some point, interest rates will go up again. When that happens the Italian economy, unless a miracle occurs, may be unable to generate the additional revenue to manage this level of debt, let alone begin retiring it.

Change of direction? 

Alright, you get the picture: a dreadful situation. That said, I was really intrigued when I saw this headline in La Repubblica a major Italian daily: “Stability, Padoan: Debt Takes Opposite Course, It Goes Down, After 8 Years”.

Well, the meaning of the headline is clear, and unmistakable. It says that according to Pier Carlo Padoan, Minister of the Economy and Finance in the Renzi government, there has been an inversion. Public debt is now actually going down. Think of that.

What happened? 

Now, this is news. What happened? Some dramatic spending reform that actually cut outlays? Something like dramatic public pensions reform? Or health care reform that cut cost in a serious way?

Well, none of this. In fact, the headline is false.

If you bother to read it, the article clearly states that Italy’s public debt will actually go up –and not down– in 2015. It will grow to 132.85% of GDP –a historic record. However, according to a government forecast delivered by Minister Padoan, “the news” is that debt is projected to go down to 131.4% of GDP in 2016, and hopefully down to 127% in 2017.

Fake news

So, here is the thing. Debt is still incredibly high. And it will go even higher this year. But the government projects that its wise policies will bring about…what? Well, a really modest reduction next year, and a slightly bigger one the following year. Of course this is only a forecast that may turn out to be wrong, as most forecast usually are.

Just a hope, smuggled as news 

So, there you go. The dramatic change of direction declared as fact in the headline does not exist. It is at a best a hope for a future decline –and a very modest decline at that– of what is and will remain a gigantic public debt.

Again, even assuming that this inversion would really take place next year and the year after, it is so small that it would change essentially nothing. Public debt decreasing –may be– from 133% to 127% of GDP, in a few years? And this is news?

Delusion and deception 

I repeat the opening question: is this optimistic headline another sad case of self-deception, or is it a conscious attempt to present to the readers a rosy picture, even without any real facts supporting it?

Given what I know about Italy, it is likely to be both. Sadly, even intelligent, educated people have lost contact with reality. They dream. Audiences will believe anything and politicians will say anything that they believe will work as a tranquilizer. “Things are getting better”. “We see the light at the end of the tunnel”.

In the swamp

The reality is that Italy is still in the middle of the swamp, and there is no real policy remedy agreed upon, let alone seriously implemented, that will tackle the over spending caused by its bloated welfare state, foster innovation, investments, productivity, and ultimately jobs creation. Without these changes actually taking place, you can count on continuing high unemployment, (currently 12.4%), an anemic economy, high taxes, and a perennially over sized public debt.

Who Believes China’s Official Economic Statistics?

WASHINGTON – We all know that China’s economy is slowing down. The Chinese government itself announced this. What we do not know, however, is how significant the slow down is, and what exactly is causing it. Is this a small issue, or is it a big, systemic problem just beginning to manifest itself? Who knows really. And much of this uncertainty is due to the fact that we cannot rely on the information released by Beijing about China’s economic performance.

A little slow down 

Chinese officials calmly admit that GDP growth at 6.9% is a little less than the 7% they expected. And they have recently hinted that probably next year growth will be a bit lower. May be 6.5%. Premier Li Keqiang said this much during a recent visit to Seoul.

What we are told is that this gentle slow down is part of a general reconfiguration of the Chinese economy. Under the expert guidance of the Communist Party, China will gradually move away from its traditional reliance on large-scale investments and exports, while more consumer spending will be encouraged. At the same time there will be more innovation, more green initiatives and improved sustainability.

The message from Beijing is simple and reassuring. All is well in China. May be a few adjustments will be needed. But all is going well, and according to plan.

Not true 

Yes, except that most likely none of this is true. According to some Western analysts, China is on the verge of a major collapse. They have created a gigantic, debt-funded bubble that is about to burst. There is monstrous over capacity in every major industrial sector linked to construction. There are tens of thousands of empty buildings. Several state-owned corporations are losing money; but they keep going thanks to easy financing coming from state-owned banks. Is this an exaggeration? May be.


Still, as a minimum, the optimistic official GDP numbers collide with other official Chinese figures related to electricity consumption, (down), cement production, (down), and steel production, (down). Hard to believe that China manages to keep the same rate of GDP growth when key indicators that should move up along with GDP are instead going in the opposite direction.

And there is more. The Singapore economy, a good proxy for what is going in China, is down, significantly. Recent export data from South Korea show a huge drop. Simply stated, China is buying a lot less from a key supplier. Not an indication of a growing Chinese economy.

Well, what is the point of all this? There are two points, actually. The first one is that the deterioration of the Chinese economy is most likely a lot more severe than anything that has been officially admitted.

False data routinely released 

But the second point is probably even more significant. China clearly releases false economic statistics, and it has been doing this routinely, for who knows how long.

Now, this is no detail. This is not akin to the White House Press Secretary trying to paint today’s events in a favorable light that will make the US President look good. We call this spin. Not laudable, perhaps unethical, but not utter fraud.

However, what China does is akin to the White House Press Secretary announcing from his podium that the US economy grew at a rate of 2.5% when it grew instead by only 1.5%. He goes out there, speaking to the nation, and he knows he is lying. There is a distinction between spin and falsehood.

And yet we accept that China does this.


This situation is unprecedented. After 30 years of impressive growth, China wants to be treated as a mature world power and a major economic player, now fully integrated in the world economy. This is not a country akin to the old Soviet Union that lived in its own universe. And this is not Mao’s China either, a country run into the ground by its leader’s bizarre ideology. And yet the government of this modernized and vastly more productive China lies about fundamental economic data. And how do we react to this?

Well, we do essentially nothing.

Look, I realize that this is an awkward situation, and that there is no easy solution. How do you say this? Well, for the moment we do not say it. Indeed, as far as I know, no Western Government is on record stating that the Chinese release false or at least not fully reliable data. Ditto for the IMF or the World Bank.

Business media reporting on China

And what about Western business media? Well, they are becoming a little more assertive about producing the evidence and the work of private forecasters and analysts that contradicts official Chinese data. Almost all China watchers agree that China overstates its growth figures. The disagreement is on the degree of the lie. Some argue that real GDP growth is 6% and not 7%. Other claim that it is even lower, may be 5% or even 4%.

But the media are careful in how they phrase all this. They know that this is potentially an explosive issue. Think of the consequences. Does The Wall Street Journal want to see its Beijing bureau closed down, and its correspondents expelled from China, guilty of producing slanderous stories about China? Probably not. Hence extreme caution when reporting on any analysis of Chinese official data.

A major economic player? 

That said, all this is absurd.  The fact is that no one believes the official data. But it is not polite to say this openly. Talk about the Emperor having no clothes.

So, here is the thing. China wants to be treated with respect. And yet it behaves just like the old Soviet Union when it comes to releasing false data and distorted information. All this smells just like the old-fashioned Communist propaganda. And what do we do about this? Essentially nothing. We listen to the releases, and we politely nod.

Sure enough, in private government leaders and financial analysts make calculations based on what they believe is really going on in China, or at least I hope this is what they do.

But in the meantime most mainstream media keep publishing or airing the false data released by Beijing, in most cases without any cautionary note about the reliability of these figures.


As the terrible crash of 2008 revealed, here in America we got into major trouble because people chose to overlook alarming signs. And this happened in a country with a lively free press and hundreds of capable analysts, not to mention laws that require detailed disclosures and full transparency.

The idea that we can deal with China as a regular business partner when we have no clear understanding as to what is really going on in this vast economy simply because we cannot trust official data is totally preposterous.

Basic rules apply to all, China included

At some point the Chinese need to be told that rule number one for those aspiring to be at the head table in the global economy is full transparency and publishing accurate information.

Somehow the Chinese believe that they have become so big and so important that basic rules do not apply to them.

They should be told otherwise.




WSJ: Chinese Economy Not Fixed

WASHINGTON – “Chinese factories continue to pump out too much steel, glass, cement and other items even as they battle mounting debt, slumping prices and weak demand. Factories in the world’s largest manufacturing nation have suffered 43 consecutive months of deflation. And loan demand among manufacturers in the third quarter turned negative for the first time since a central bank index started in 2004”.

–The Wall Street Journal, October 31, 2015

Where Is The New African Middle Class?

WASHINGTON – In a recent article focusing on why the African middle class is still rather small, The Economist points out that rosy expectations about more broad-based prosperity failed to materialize. Indeed, while sub-Saharan African economies have experienced significant economic growth in recent years, this is simply not enough to expand the ranks of a new middle class.

Scaling back 

The news is not entirely negative. There has been some expansion. But far less than what many had predicted. For example, the article points out that Shoprite Holdings, a major South African retailer, just a few years ago announced that it planned to open anywhere between 600 and 800 stores in Nigeria, Africa’s most populous country, (173 million).

Well, Shoprite ended opening up only 12 stores. You see the difference. 600 stores assume a large, reasonably affluent middle class that can afford supermarket shopping, as opposed to low income buyers who do their shopping with street vendors who barely get by with a tiny volume of sales. A total of 12 stores in a country of 173 million indicates that this scenario of more widespread prosperity failed to materialize. Most Nigerians are still poor.

The commodities boom is over

In truth, many African economies are growing. But in recent years this growth was the result of the global commodity prices boom triggered in large measure by Chinese unprecedented demand. This commodities explosion proved to be a short-lived, exceptional phenomenon. Now that China’s artificial boom is over, demand for Africa’s raw materials has declined. And this means lower revenues and stagnant standards of living.

Beyond this, you have to add Africa’s chronic malaise, a mixture of inefficiency, cronyism, lack of accountability, and corruption. This malaise in many cases translates into large income inequalities. Those in power and the well connected benefit in a disproportionate way from whatever growth is produced. Most of the others get little. Hence a small middle class.

Fine. We get all this. However, while good governance matters, the real reason why the middle class is not expanding in Africa is that the economic base is still very narrow.

Lack of electricity is the number one problem 

And by far the main reason for this is lack of electricity. Yes, lack of electricity. We can talk all we want about democracy, transparency, the need to fight corruption while creating systems that improve accountability. However, the fact is that without electricity you cannot have broad-based economic growth.

For many readers in developed countries this may sound really odd. We take electricity for granted. But imagine a situation in which, if you live in a city, power is cut off for several hours, every day. And if you live in a rural area there is no electricity whatsoever, period. Imagine doing routine things, (reading, ironing, riding an elevator, running a washing machine, watch TV, use your computer), without any power.

No power, no growth 

Of course, if you are a rich city-dweller in Africa, you can buy a generator. But making your own power is expensive. Imagine running a small manufacturing company relying on your generator for several hours, every day. This is possible, of course. But it adds to costs, in a major way. And this means non competitive products and smaller markets. If you live in a city and you are poor, forget about expensive generators. Lack of electricity means no lights, no refrigeration, no chance to watch TV.

If you live in an African village with no power, you are essentially cut off from the larger economy. Sure enough, these days you probably have a cell phone, and you may have access to a solar-powered phone charger.

The rural poor stay poor 

But you have no electricity. This means using wood or charcoal for cooking. Alternatively, you have to spend a large percentage of your truly small income, (we are talking about people surviving on a couple of dollars a day), to buy fuel for a stove.

And forget about basic developed world amenities such as refrigerators. Forget about switching on the (non existing) lights at night. In such circumstances of basic deprivation it is very difficult, in fact nearly impossible, to advance to the middle class. Lacking electricity, most African are condemned to a life of perpetual poverty in which at best people survive thanks to subsistence agriculture.

Other factors also matter 

Of course, there are additional factors that prevent economic growth, and therefore the expansion of a fledgling middle class. Health and education are key issues. Difficult to have economic progress with too many semi-illiterate and sick people.

Right next to these constraints, you have infrastructure, or lack thereof. While electricity is fundamental to any kind of economic development, good road, ports and modern customs systems that allow the easy movement of goods are also critical.

Yes, while this may sound odd, moving goods by truck on old roads is quite complicated in Africa. Likewise, clearing goods through antiquated (and often predatory) customs systems may take several days, or even weeks. All these obstacles hurt commerce and all companies that want to be engaged in international activities.

Economic growth will lead to the expansion of the middle class 

So, what about the future of the African middle class? Very simple. Hard to picture any significant expansion without basic modernization that will make more economic growth possible. Africa has come a long way. There are hundreds of millions of cell phone users, there are plenty of ATM machines, and internet penetration is improving. But African societies must fill huge gaps. While many issues are relevant and should be addressed, the number one problem is still power generation and distribution.

In Africa this is literally the difference between day and (hopelessly dark) night.


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.

Italy’s Bad Growth Numbers Described As Good

WASHINGTON – When drastically reduced expectations become the “New Normal” lousy economic numbers in Western countries become acceptable, and miserable growth is actually cause for celebration. Here is an example. I watched via the internet a recorded staff meeting at La Repubblica, one of Italy’s most prestigious newspapers.

Good news 

When it came to discussing economic issues, the journalist in charge was happy to report good news to his colleagues. Indeed, in the second quarter of 2015 the Italian economy grew a bit more than expected. Therefore it is likely that the projected 0.7% GDP growth for 2015 will be achieved. (Never mind that part of this pitiful growth is due to public investments, while private sector investments actually declined).

The broader context

Got that? On track for 0.7% growth –may be. And this is the stellar Italian economic achievement coming after 3 straight years of recession. More broadly, please note that Italy’s GDP is stuck at the pre-2008 recession levels. And do not forget the staggering 12.5% unemployment rate, (with peaks of 40% when it comes to jobless young people in the South). Add to this the perennial cancer of organized crime (Mafia, Camorra, and N’drangheta are just the best known “brands”) that has successfully expanded from its native south to the rest of the country.

But –hey– we are on track for 0.7% GDP growth. That’s great news!

Focus Economics take

Well, if you want a real analysis, here is how Focus Economics describes Italy’s economy:

“Italy suffers from political instability, economic stagnation and lack of structural reforms. Prior to the 2008 financial crisis, the country was already idling in low gear. In fact, Italy grew an average of 1.2% between 2001 and 2007. The global crisis had a deteriorating effect on the already fragile Italian economy. In 2009, the economy suffered a hefty 5.5% contraction—the strongest GDP drop in decades. Since then, Italy has shown no clear trend of recovery. In fact, in 2012 and 2013 the economy recorded contractions of 2.4% and 1.8% respectively”. 

“Going forward, the Italian economy faces a number of important challenges, one of which is unemployment. The unemployment rate has increased constantly in the last seven years. In 2013, it reached 12.5%, which is the highest level on record. The stubbornly high unemployment rate highlights the weaknesses of the Italian labor market and growing global competition. Another challenge is presented by the difficult status of the country’s public finances. In 2013, Italy was the second biggest debtor in the Eurozone and the fifth largest worldwide”. 

The real picture 

So, here is the real picture: highest unemployment on record, high debt, years of recession, lack of global competitiveness and now feeble growth. This is the “real story” regarding the Italian economy.

But for those who cover day-to-day events for a respectable newspaper a projected 0.7% GDP growth, after 3 years of recession, is good news.

Once again, welcome to the “New Normal” of low standards and zero expectations.


David Stockman: We Are Losing Manufacturing Jobs

WASHINGTON – In his Contra Corner blog David Stockman (Budget Director under Ronald Reagan) has been warning us that we live in Fed-induced economic fantasy, possibly a hallucination, in which soft numbers pass for indications of solid growth.

Back to where we were

The ugly truth is that, notwithstanding the unprecedented length of the Fed-mandated zero per cent interest policy, America is barely back to where it was  before the 2008 recession. As for jobs growth, it is real. However, we should carefully look at the economic reality behind these numbers. What kind of jobs are we creating?

Jobs losses in manufacturing, gains in health care

Indeed, the just released August figures provide a warning. The mildly good headline is that we have added new jobs, (+ 173,000). However, this is a bit less than what was expected, and this is a bit disappointing.

If we break this number down, the real story is that the smaller than expected jobs growth is due to a net decline in the sectors that actually have an impact on the real economy: manufacturing and mining, (-17,000 jobs). This has been compensated by significant employment growth in services, such as health care.


Which is to say that America is stagnating where it matters: in the true wealth-creating sectors of the economy, while we add jobs in (low pay) services sectors that depend largely on public financing, notably health care. The fact is that nursing assistants, while valuable, do not generate any new wealth, factory workers do. The soft August jobs numbers do not fully reveal this disturbing reality.

Now, the loss of some manufacturing jobs is not so terrible. Because of technological progress and automation, (robots), factories can keep their output while employing fewer people. But, below a certain level, these losses spell decline.

The end game

And if we combine the two trends –loss of jobs in industry and employment gains in low added value services– we begin to see the end game: a feeble economy that no longer generates any real wealth.

How Stockman sees it

This is how Stockman himself presents the issue in his Contra Corner blog. The figures and the graph below, copied from his recent entry, are truly alarming.

“Putting this all together, since the start of the Second Great Depression, the US economy has lost 1.4 million manufacturing workers, but has more than made up for this with the addition of 1.5 million waiters and bartenders”.

America Losing Its Small Companies

WASHINGTON – Dozens of analysts tell TV viewers that, whatever may be happening in China, things look good in America. Employment is up. Second quarter GDP growth has been revised up to 3.7%. Consumer spending is steady. So, if you are watching CNBC, Fox Business or Bloomberg TV, you are told not to worry. The stock market may suffer a bit because of inordinate volatility. But the US economy, while not roaring, is on solid ground.

The importance of small businesses

Well, not so. And we hear this from a former Bill Clinton senior adviser. Thomas McLarty, former White House Chief of Staff, just wrote in the WSJ, (Small Business and the Secret of Big Growth, September 3, 2015), that Americans are no longer creating new small businesses at the rate they used to. And this is really alarming.

Indeed, contrary to what some may believe, most Americans do not work for Coca-Cola, Procter & Gamble, Monsanto, Google, General Electric, Boeing, United Technologies, Ford or Microsoft. Most Americans are employed by small or medium-sized firms whose names you never heard.

Jobs creators 

Put it differently, small firms are the true grass-roots innovators and jobs creators. They are the backbone of the US economy. Indeed, the secret of America’s (past) economic success is (was?) the willingness of average people to take a chance and start their own business. Granted, because of poor planning, lack of capital and other reasons, many new ventures failed. But many more succeeded, this way creating new companies that employed people who then became consumers, this way expanding the economy.

Small companies are choked to death

Well, this worked reasonably well –until not too long ago. But now it is a different story. First of all, notwithstanding the unprecedented zero interest rate policy decreed by the US Fed in the aftermath of the 2008 recession, it is much harder for small businesses to obtain loans. No credit often means death by suffocation.

And then we have high and difficult to understand taxes, and excessive regulations that require spending an inordinate amount of time on compliance related matters.

Finally, there is a clear disconnect between the existing education system (especially at the Community College level) and the skills required by many businesses. This means that small companies that would like to expand operations cannot find the skilled workers they need.

Lower taxes, deregulation 

A recent survey (quoted by McLarty in his piece) conducted by the National Small Business Association indicates that small businesses want a simplification of the tax code and lower taxes, a reduction of the national deficit, and an end to the partisan gridlock in Washington.

No action 

These are clear, (albeit not simple), common sense demands. And yet there is no bipartisan effort, let alone action, on any of these fronts in Washington.

In this at times bizarre political campaign, as we debate “anchor babies”, and the daily allegations of police brutality, the American economic engine is stalled.

And nobody cares.