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Posts Tagged ‘Eurozone crisis’

COMMENTARY: Earlier this month, I wrote and predicted that central banks appeared to be moving toward a coordination of monetary policies in anticipation of an accelerating of the decline of the global economy. Today that appears to be the case.

On July 4, central banks in China, Europe and the UK simultaneously undertook action to stimulate monetary variables in an attempt to get ahead of the curve of the declining global economy. But they will find that monetary policy has very little impact on this current global condition.

The European Central Bank, ECB, cut rates to a record low of 075%, as it is now clear virtually the entire Euro economy, including the UK, are in recession or rapidly approaching it–as this writer predicted 8 months ago would happen.

The Bank of England, with rates already at near zero (0.5%), opted for even more ‘quantitative easing’, that is printing another $78 billion, an addition to its already nearly $500 billion such QE injection to date.

China simultaneously announced another surprise cut in interest rates, the second in as many months. China economic data forthcoming probably shows a weaker economy than even currently assumed. As this writer also predicted, China’s GDP is likely to fall well below 7% (which it needs to absorb new labor force entrants), and that notwithstanding the likely forthcoming fiscal stimulus China will have to undertake before year end.

That leaves only the US and Japan among major central banks not having yet taken action. Japan will likely wait on the US to do so first. The US federal reserve does not meet until July 31, but another round of QE can be expected if the June and July job figures remain in the dismal level that they have, below 100,000 jobs created a month (and thus also below new entrants to the labor force in the US), and if US manufacturing and services remain in decline or stagnant.

But monetary action by all these central banks, coordinated or not, will have little impact on stemming the global decline. Monetary policy, that is liquidity injections into the banking system, in the current ‘epic recession’ do not result in significant increases in bank lending and,in turn, business investment that creates jobs, income growth, and therefore economic recovery. The monetary injections largely are hoarded, or else committed to short term speculation in financial markets to realize quick profits. The QE and easy money results in a temporary stock and commodity markets surge, that eventually dissipates in less than a year.

As this writer has also written on this blog earlier this year, this cycle of QE and zero rates has led to the banking system and financial markets becoming increasing addicted to the free money.

Now the banking system itself also is showing signs of growing fragility. On the surface the Euro banks are apparently the main trouble spot, especially in Spain and the Euro periphery. But the core Euro banks are also increasingly in distress. The Eurozone’s last week summit was primarily focused on a pre-emptive bailing out of the Euro banks–or at least future plans to do so. But fiscal stimulus announcements were token and not of any consequence, at best indicating plans merely to ‘move the money around’ sometime in the future. Thus the Eurozone continues to focus on monetary solutions as well, which will prove disastrous to the effort to slow the decline toward a hard landing recession. (More on the Euro Summit and its solution in a couple days, now that the ‘dust is starting to settle’ on the initial overly ‘euphoric’ response to its pronouncements regarding use of its ESM fund to directly bail out the banks and create a more bona fide central bank out of the ECB at some distant point in the future.

Today’s coordinated central bank response to the growing global slowdown will no doubt result in more coordination to come. Despite the clear effort to coordinate, ECB president, Mario Draghi, denied ay such coordination–the last time such occurred was circa the Lehman Bros. collapse in 2008. Draghi also replied to the direct question of whether the global banking system was more fragile today than in 2008 by saying it was more stable today. That too is another misunderstanding of the global situation.

The weak point in the global banking system may not prove to be Spain and its banks, but what is going on in London today, the major financial center, and has been apparently since the 2008-09 collapse. London has become the ‘Cowboy Finance Capital’ center of the global economy. High risk taking and continuing speculative excesses have been the rule and now it’s becoming apparent. UK financial regulation has been a bigger joke than even the US Dodd-Frank bill. JP Morgan’s recent losses, centered on speculation in derivatives, is one indicator of London out of control. Another is the now emerging massive scandal involving Barclays and other banks’ manipulation of Libor rates–again to maximize derivatives revenues it appears. JP Morgan’s losses have risen to $9 billion from the original $2 billion estimate. And that doesn’t count its $25 billion plus, and rising, losses in stock values. The JP Morgan speculation involves its $350 billion portfolio. The losses may be much much greater, but we won’t know for months. Meanwhile, the Barclays-Libor scandal promises unknown financial losses. This is potentially of great significance. Hundreds of trillions of dollars of derivative trades were based on Libor, not to mention 90% of US mortgage contracts. How this scandal will result in liability suits and claims, and how that uncertainty will impact financial markets, remains to be seen. The unknowns are potentially significant.

In other words, the global banking system is growing more fragile, not less, and potentially even greater in terms of its negative impact on real economies already slowing rapidly. This is unlike 2008, when real economies were booming when the financial instability hit. 2008 also was a situation when central banks’ balance sheets were not overburdened with trillions of liabilities yet, as they are now. When the global consumer had not suffered five years of unemployment, negative income growth, trillions in asset wealth destruction, and real debt accumulation. Finally, 2008 was a period when government balance sheets were not in as terrible a shape as well, or the inclination as strong toward austerity and spending contraction.

No, Mr. Draghi, the global economy–especially in the Euro and UK, and increasingly in China and the BRICS, and soon again in the US as its economy now clearly slows, is not in a ‘better shape today’.

More on the Eurozone Summit and why the US economy will continue to slow, in a subsequent post.

Jack Rasmus
July 5, 2012
Jack is the author of the April 2012 book, ‘Obama’s Economy: Recovery for the Few’, which predicted 9 months ago the current US and global economic slowdown. The book may be purchased from this blog site at discount. (see icon).

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Friday, June 1, is a date that marks a shift in the public consciousness of the state of the US and global economy.  What was touted for months over the past winter as a rebound taking hold in the US economy and the assertions that the US economy was ‘exceptional’ and would not suffer the slowdowns underway in Europe, China and the rest of the world – were all swept away on June 1 by the May US jobs report, a downward revised U.S. GDP numbers for the first quarter 2012, as well as by the rapidly deteriorating banking and general economic situation in the Eurozone.

Why Economists’ Jobs Forecasts Consistently Miss Their Mark

On the jobs front, Friday’s labor department data showed a growth of only 69,000 jobs, while the preceding month’s jobs numbers were revised downward for April from 115,000 to only 77,000. Both months were originally officially forecast by mainstream economists to show jobs growth of 150,000 and 180,000 respectively. A day earlier, the first quarter GDP numbers were also adjusted downward from 2.2% growth to only 1.9%, a decline that was totally unexpected by most economists, who had been forecasting that the current quarter, April-June, GDP would come in around the 2.5% to 3% range. But now will almost certainly end up in the 1.5% or even lower range, given a likely more rapid slowing in June.

One cannot miss jobs and GDP forecasts that badly without something being fundamentally wrong with forecast methodologies employed by most mainstream economists today, a point this writer has been making publicly repeatedly since last December.

The main excuse being offered today by economists for missing their recent jobs and GDP forecasts so badly is ‘the weather’.  The exceptionally good weather this past winter, it is argued, moved normal spring production and jobs up by several months into the winter numbers. Another favorite excuse now appearing is that growing uncertainty about the coming ‘fiscal cliff’ (read: excessive deficits) after the upcoming November elections has resulted in an unanticipated slowing of business spending, and therefore of new investment and consequent job creation.

But the extremely poor jobs numbers for May and April have very little to do with the ‘weather this past winter’. Nor with business confidence impacted by anticipated deficits and debt levels after the November elections. It’s just bad forecasting, the result of cherry-picking the most recent jobs data to forecast long term, but without considering the broader economic picture and ‘broad turning points’ in the US and global economy.

In part, the winter months’ jobs numbers were grossly overestimated statistically for several reasons. As this writer has repeatedly noted in this and other publications, the jobs numbers during this past winter were suspect in the first place, largely boosted by questionable statistical adjustments based on methodologies that were more relevant pre-2007, but less so today. When this past winter’s jobs reports, averaging more than 200,000 a month are ‘smoothed’ out with April and May jobs results, what remains is a picture of continuing stagnant jobs growth since the economic relapse of last summer 2011.

To the extent jobs growth did occur over the winter, that growth was due to business spending, the nature of which was clearly unsustainable beyond a few months. Very short term, temporary factors were at work at the time that were clear for anyone willing to look: (1) excessive inventory build-up after the general inventory spending collapse of last summer; (2) business one time leveraging of end-of-year tax cuts; and (3) auto sales recovering from summer 2011 supply disruptions combined with deep year-end price discounting by the auto companies. None of which were long-term sustainable, as recent data are now beginning to show. And none of all this has anything to do with ‘business confidence’ falling due to growing concern about deficits and debt levels post-November elections.

Since August 2011, including the questionable brief jobs surge over the winter, the U.S. economy on average has been creating jobs at a pace of barely 125,000 a month, i.e. not even sufficient to absorb new entrants into the labor force. The reasons for the long term stagnation of job creation in the U.S. are simple. There is still no real recovery in new housing and construction spending in the U.S.; the Obama administration’s policies subsidizing manufacturing and exports since 2010 have produced a mere dribble of new jobs (even though many jobs created are at half pay); state and local governments continue to lay off tens of thousands every month; hundreds of thousands of workers continue to leave the labor force monthly; bank lending to small businesses never really recovered from 2009 lows and is slowing once again; and real median household incomes have continued to decline in 2012, devastated in recent months a third time in as many years by rising gas, food, healthcare, education costs, and other prices.

Specifically, household consumption – the most important economic sector – continues today at best to stumble along, kept from contracting sharply only by rising credit card balances, historically cheap auto financing, rising household dis-saving, and, for the wealthiest 10%, by the ups and downs of the stock market (now in another sharp down phase until the Fed announces another ‘QE3’ program later this year). But there is no basic household income growth for the bottom 80%, nearly 100 million, households in the U.S. Median household income has fallen by more than 5% the past few years, continuing what is clearly a long term trend that began more than a decade ago in 2001, and thus far resulting in a decline of more than 10%.

Credit card, debt-driven, dis-saving-based consumption cannot be sustained. And without fundamental household income growth for the bottom 80%, combined with fundamental reduction of household debt loads, no sustained jobs recovery will occur.

The 1st Quarter GDP Statistical Revision

A similar critique applies to mainstream economists’ winter predictions that GDP would continue to rise in the second quarter higher than the first quarter’s initial 2.2% estimate.

As previously noted, GDP growth in the fourth quarter was largely inventory driven or a result of one-time year-end business spending designed to leverage business tax cuts. To the extent household spending occurred, it was debt and dis-saving driven. Both inventory spending and business spending thereafter slowed significantly in the first quarter, while government spending at all levels continued to decline significantly.  Manufacturing and exports grew only modestly in the quarter.

But economists nonetheless predicted manufacturing and exports would accelerate in the second quarter, jobs growth over the winter would raise income and household consumption, and the ‘warm winter’ construction trend finally signified a turnaround of the housing sector and its recovery and contribution to growth in the spring. But none of this happened after February.

Almost all economists underestimated the impact of first quarter accelerating gas and fuel prices on consumers’ spending.  The run-up in gas prices was largely the consequence of global speculators’ driving up the price of oil, combined with US refineries conveniently shutting down refinery plants simultaneously (which they typically do when there’s a surge in global crude oil prices), plus retail stations then holding prices at the pump up while crude and refinery prices fall. This coordinated supply chain development has occurred repeatedly since 2008. That year surging oil (and commodity) prices drove inflation to excess levels, despite a recession in the US already underway. It happened again in 2010, and again in 2011. The impact of rising gas prices on the US economy is generally underestimated by economists. The impact of the first quarter 2012 surge in gas prices on the current slowing of the US economy has been significant – and was generally unheeded by economists in their GDP growth projections earlier this year.

Nor were sanguine forecasts for the first quarter of accelerating jobs growth realized. Instead, jobs growth in April and May collapsed, as noted above – and with it, the projected income and consumption recovery. Home sales and home prices further disappointed, confirming no real recovery in construction. Finally, manufacturing and exports began to hit the wall of a global manufacturing slowdown, most serious in the Eurozone, but occurring in China, Brazil, India and elsewhere as well.

Already by June, bank research departments project a lower estimate for GDP growth for the second quarter, and even the third, July-September. But just as they underestimated the gas spike effect and the jobs collapse earlier, they are similarly underestimating the general impact of the Eurozone crisis and the global manufacturing slowdown now beginning to worsen rapidly.

The Eurozone Crisis and US Economic Contagion

 The Obama administration’s first and second economic recovery programs, costing nearly $1.7 trillion in tax cuts and spending in 2009-2010, failed to produce a sustained economic recovery by 2011. The third recovery program, dribbling out piecemeal since September 2011 and culminating in the absurd ‘JOBS’ bill and HARP 2.0 housing plan, is now proving no more effective than the previous two programs in 2009 and 2010.

At the center of Obama’s third recovery program has been a focus on manufacturing-exports, run by General Electric’s CEO, Jeff Immelt.  At the request of the big multinational corporations in 2010, Obama delivered more free trade agreements, more business deregulation, more pro-US business trade assistance, backed off from insisting they repatriate offshore profits and pay taxes, and introduced other manufacturing-centric US corporate assistance. This manufacturing-exports strategy was purportedly to generate the recovery that the 2009-10 first two programs did not. Manufacturing would ‘lead us out of the recession’, Obama and business announced. But it hasn’t – and it won’t.

Manufacturing now represents too small a total of the US economy at only 12% and employs only 11 million out of a US labor force of more than 150 million. The US dismantled and shipped its manufacturing base overseas over the past three decades. Multinational corporations admit that, in the last decade alone, they reduced employment in the US by 2.7 million jobs and hired 2.4 million offshore. Approximately 8 million jobs in manufacturing in the US have been lost just since 2000. Yet manufacturing, and the even smaller sector of manufactured exports, was supposed to generate the recovery in 2011-12 that still has not occurred.

Manufacturing did revive modestly since early 2011 but, as this writer predicted in late 2011, has now run headlong into a rapidly declining global manufacturing sector. The Eurozone’s manufacturing and exports have plummeted since late last year. Virtually all Eurozone economies’ manufacturing indicators (PMI) are also now declining. Moreover, China, Brazil and other key economies’ manufacturing and exports sectors are contracting as well. Manufacturing and exports are rapidly slowing across the world.

There is no therefore way US manufacturing and exports can continue to grow in a global economy where they are rapidly declining just about everywhere else. Meanwhile, housing and construction in the US is still bumping along a depression level bottom, with only apartment building showing any signs of growth. And state and local government spending continues to contract in most regions. Along with stagnant jobs growth, this is a scenario for slower growth in what remains of 2012, not a recovery.

Some mainstream liberal economists argue the Eurozone and China’s declining manufacturing and exports sectors will not negatively impact the US economy, since trade in goods is not that large a part of the US economy. But the flow of goods is not the key transmission mechanism for the contagion of the Eurozone’s accelerating recession impact on the US economy. The key transmission mechanism for the contagion is the banking system. Bank lending is already freezing up in Europe, as all the economies there (except Germany) have already crossed the threshold into what will prove a deep and protracted recession. Potential bank losses will likely spread from Spain and Greece to elsewhere in Europe, in particular Italy and France. Those losses and the lending freeze will spread to the US, where bank lending, already slowing to small and medium businesses again, will decline still further in the US, resulting in a slowing US economy in turn.  Meanwhile, the US corporate bond markets and bond issues are slowing, junk bonds in particular. That will result in a further US slowdown in business spending and job creation.

 

As this writer concluded last October 2011 in the book, ‘Obama’s Economy: Recovery for the Few’, which predicted a steeply slowing global economy in 2012 driven by the Eurozone and a ‘hard landing’ in China, Brazil, and elsewhere, “The U.S., Eurozone and U.K. economies are tightly integrated, not just financially, but in a host of other economic ways. What happens on either side of the Atlantic soon produces a similar reaction on the other.”

In the months to come, the jobs markets in the US will continue at best to stagnate; apart from seasonality factors, the housing market will continue to ‘bump along the bottom’ as it has for four years now; government spending will continue to decline; and business spending, bank lending, manufacturing and exports will continue to slow, while consumers will continue to rely on credit and dis-saving to maintain consumption. GDP as a result will continue to lag.

And when US political elites gather immediately after the November elections, both political parties’ leaders will agree by December 31 to cut $2-$4 trillion more in spending in addition to the $2.2 trillion already scheduled to begin in January 2013. But they won’t call it austerity, which is the term for the deficit cutting in Europe from Greece to the U.K that is driving their economies into a deeper crisis. US capitalists and policy makers are more clever than their European counterparts. The US code words used for austerity will be ‘grand bargain’ and ‘fiscal cliff’.

Jack Rasmus

Copyright June 2012

Jack is the author of the April 2012 published book, “Obama’s Economy: Recovery for the Few”, published by Pluto books and distributed by Palgrave-Macmillan. His blog is jackrasmus.com and website: www.kyklosproductions.com

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