Sunday, November 20, 2011

The signs of economic meltdown are coming thick and fast

I hate to sound like a doom-and-gloom type, but I write about the economy so as to warn those who have ears to hear. There are certainly enough warnings to be found in the events all around us right now!

1) European politicians, diplomats and financiers are trying to persuade China to invest in their bonds and other financial instruments, to help ease their economies out of their current dangerous situation. However, China's foreign exchange reserves may be too tied up in other investments to be available to bail out Europe.

Most of [the] money in the world's biggest store of foreign exchange reserves is prudently kept in near-cash instruments to fund import and debt service bills in the event of an unforeseen domestic emergency, or invested in long-term assets that, if sold in size to help Europe, would spark panic on global financial markets.

In fact, analysts reckon China's armory has only about US$100 billion to spare.

2) For the first time during this crisis, a senior Chinese politician - Vice-Premier Wang Qishan - has stated openly that a recession is inevitable. Reuters reports:

A long-term global recession is certain to happen and China must focus on domestic problems, Chinese Vice Premier Wang Qishan has said.

"The one thing that we can be certain of, among all the uncertainties, is that the global economic recession caused by the international financial crisis will be chronic," Wang was quoted by the official Xinhua news agency as saying at the weekend.

Wang's comments were the most bearish forecast ever by a top Chinese decision-maker about the world economy.

3) The US Federal Reserve has printed so much money - or, in reality, generated it by computer entries, rather than actually printed banknotes - that it's now the largest single holder of US government bonds, surpassing even China. Effectively, this country is financing its expenditure by printing money that has nothing of value whatsoever backing it up. Inevitably, that means inflation down the road.

4) The 'welfare state' built up in Europe over many decades is now facing implosion. The same must inevitably occur here in the USA in the not very distant future - even though the US 'welfare state' isn't as comprehensive (or expensive) as its European counterparts.

5) Financial troubles have tipped almost all of the world's leading economies into recession, or something approaching recession. The Telegraph reports:

The OECD's index of leading indicators for China, India, Brazil, Canada, Britain and the eurozone have all tipped below the warning line of 100, with the pace of the decline in Europe exceeding the onset of the Great Contraction in early 2008.

Professor Simon Johnson, a former chief economist at the IMF, rattled nerves earlier this week by warning the world is "looking straight into the face of a great depression".

The grim data is coming thick and fast. Japan's machinery orders fell 8.2pc in September as the post-Fukushima rebound lost steam and the delayed effects of the super-strong yen began to bite. Export orders have been declining for eight months. "Outright contraction is possible in the quarters ahead," said Mark Cliffe from ING.

Exports in the Philippines dropped 27pc in September, the sharpest fall in two years. Korea's exports have showed sharply, caused by a 20pc slide in shipments to Europe. Manufacturing has been contracting for the past three months.

Christine Lagarde, the IMF's chief, warned in Asia that "there are dark clouds gathering in the global economy. Countries need to prepare for any storm that might reach their shores".

. . .

Fiscal and monetary stimulus has disguised the underlying sickness in the debt-laden economies of the West over the past two years. This heavy make-up has at last faded away, exposing the awful visage beneath.

It is a delicate moment. The risk of a synchronised slump in Europe, the US and East Asia is bad enough. What is chilling is to face such a possibility with the monetary pedal already pushed to the floor in the US, UK and Japan.

Worse yet is to do so with Europe spiralling into institutional self-destruction, allowing its debt crisis to metastasize because EMU has no lender of last resort.

There's more at the link.

6) In the most recent warning sign to emerge, there's a growing glut of metals on the world market. This was a hallmark of the 2008 financial crisis, when demand for steel and other metals plummeted. Now it looks as if the same thing is happening today. For example, it's reported from New Orleans:

Long-vacant New Orleans warehouses are bursting with metals such as copper, lead, aluminum and zinc as manufacturing slows down with the economy.

. . .

The flurry is a result of a program that began in 1998, when New Orleans became one of a limited number of cities around the world to be designated by the London Metal Exchange as a site to hold metals until manufacturers are ready to use them.

New Orleans is now the second-largest London Metal Exchange site in the country behind Detroit, according to the exchange, and has more copper, zinc and steel in storage than any other place in the United States.

. . .

With the global economic slump continuing for longer than anyone imagined, metals are now piling up in the 53 New Orleans-area warehouses certified with the London Metal Exchange because they're not needed around the world for manufacturing.

Again, more at the link.

7) Europe's crisis goes beyond finance to the essence of national versus continental identity. As Stratfor points out:

Europeanists ... come from the generation and class that are deeply intellectually and emotionally committed to the idea of Europe. For them, the European Union is not merely a useful tool for achieving national goals. Rather, it is an alternative to nationalism and the horrors that nationalism has brought to Europe. It is a vision of a single Continent drawn together in a common enterprise — prosperity — that abolishes the dangers of a European war, creates a cooperative economic project and, least discussed but not trivial, returns Europe to its rightful place at the heart of the international political system.

For the generation of leadership born just after World War II that came to political maturity in the last 20 years, the European project was an ideological given and an institutional reality. These leaders formed an international web of European leaders who for the most part all shared this vision. This leadership extended beyond the political sphere: Most European elites were committed to Europe (there were, of course, exceptions).

Now we are seeing this elite struggle to preserve its vision.

. . .

Given the nature of the crisis, which we have seen play out in Greece, the European elite can save the European concept and their own interests only by transferring the cost to the broader public, and not simply among debtors. Creditors like Germany, too, must absorb the cost and distribute it to the public. German banks simply cannot manage to absorb the losses. Like the French, they will have to be recapitalized, meaning the cost will fall to the public.

Europe was not supposed to work this way. Like Immanuel Kant’s notion of a “Perpetual Peace”, the European Union promised eternal prosperity. That plus preventing war were Europe’s great promises; there was no moral project beyond these. Failure to deliver on either promise undermines the European project’s legitimacy. If the price of retaining Europe is a massive decline in Europeans’ standard of living, then the argument for retaining the European Union is weakened.

As important, if Europe is perceived as failing because the European elite failed, and the European elite is perceived as defending the European idea as a means of preserving its own interests and position, then the public’s commitment to the European idea — never as robust as the elite’s commitment — is put in doubt. The belief in Europe that the crisis can be managed within current EU structures has been widespread. The Germans, however, have floated a proposal that would give creditors in Europe — i.e., the Germans — the power to oversee debtors’ economic decisions. This would undermine sovereignty dramatically. Losing sovereignty for greater prosperity would work in Europe. Losing it to pay back the debts of Europe’s banks is a much harder sell.

There's more at the link. Highly recommended reading.

8) Ultimately, as I've pointed out before (and as we read in point 4 above), the 'welfare state' is at the root and heart of today's economic problems. Karl Denninger gets to the point.

There is only one debate to have in this regard: What services do you wish to demand of your government at all levels -- federal, state and local?

Now temper that with the following: Every service you demand must be paid for in current taxes.

Violation of that second precept is why we're in this mess. It is why the unholy game between Wall Street and Washington exists. This violation is exploited by both major political parties (e.g. ads showing Bush "pushing Granny down the stairs") to play you off the guy or gal next door through intentional lies in this regard.

This scam is now coming to a close not due to the ethics of the people in DC and on Wall Street but simply because mathematical limits have been reached. We're seeing the dislocation first in Europe and that should not surprise either -- they too made promises they couldn't pay for with tax revenues, and in general made more expensive promises than we did.

. . .

The willful and intentional misconduct from various agencies in our government in the form of false reporting and willful and intentional aversion of eyes from outright scams and frauds, however, does not and cannot change mathematical outcomes. Arithmetic does not care about political promises.

WE MUST decide as a people, via the political process, exactly what services we want our government to provide. WE MUST give our government the charge to provide those services only for that which we are willing to pay for with current taxes, without exception.

That's the beginning and end of it folks.

There is no other answer. There is no other alternative. This isn't about wanting something different, it's about facts. The schemes and scams in DC and through the financial system are at their core attempts to avoid the outcome of basic arithmetic. Medicare, for example, cannot be fixed under our current medical system where costs are escalating at 10% a year and have been for two decades.

. . .

It doesn't matter how high taxes are set -- there is no tax system you can design that will allow this outcome to occur.

The wonks and "high level" people in DC know this. Bernanke knows this. The bankers know this. In fact the bankers have their own formula for estimating doubling time called "The Rule of 72" that dates back to before we had pocket calculators and math had to be worked on an abacus, slide rule or pencil and paper.

You had better come to grips with these FACTS and demand that the lies stop, because if we don't and continue to allow votes to be bought with fraudulent promises that cannot be kept then it is inevitable that our nation's economy and government will collapse.

That's not an opinion, it's a mathematical certainty.

Again, more at the link. Bold, italic and underlined print are Mr. Denninger's emphasis.

Keep your heads down, folks. The financial avalanche isn't here yet . . . but it's on its way.


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