Sunday, May 20, 2012

All over the world, the economic dominoes are tottering . . .

As I've mentioned three times during the past ten days, Europe's on the brink of a major economic upheaval.  It's drawing closer by the day - and when it hits Europe, it'll hit the USA next, along with every developed economy in the world.

(For the benefit of those who may have come late to this subject, and would like to know more about the background to the European economic crisis, please read Gonzalo Lira's useful and informative primer on the subject.  You'll find it very helpful.)

The latest developments include (but are not limited to):

1.  Europe:  Some multinational companies are sweeping their European bank accounts clear of Euros on a daily basis, and converting them to what they regard as 'safer' currencies.

"... with just about everyone reckoning Greece is heading for the exit, the treasury operations of multinational companies have gone into overdrive. WPP, Reckitt Benckiser and Diageo, to name just three, have taken to a daily sweep of euros from their accounts to reduce the risk of any overnight devaluation.

Sir Martin Sorrell, the WPP chief executive, confirms that the advertising giant is also converting euros it doesn’t need to safer haven currencies, notably the dollar, to minimise risk.

. . .

... one of the most dangerous scenarios is where a company has 'a big subsidiary that has obligations in euros but has an income stream or assets that suddenly turn into drachma'. All this would be exacerbated by the fact, that 'if a country leaves the eurozone and simultaneously defaults on its sovereign debt obligations you are also looking at the collapse of its banking system'.

. . .

Any Greek exit [from the Euro], and the potential redenomination of euro contracts into drachma, would also trigger a legal bunfight over the principle of 'lex monetae' – broadly that the state determines its own currency at the point of payment.

The principle is a legal minefield when it comes to the euro because economic monetary union compelled all member states to transfer 'irrevocably' monetary sovereignty to the European Union. If Athens quit the euro, however, Greek companies would be expected to claim that they could honour any obligations in a depreciating drachma – a stance local courts are likely to back. Much would then depend on the legal jurisdiction of any contract as to whether it was actually enforceable."

2.  The USA:  Ambrose Evans-Pritchard points out that, even more than the Euro currency crisis, the growing risk of a US recession poses the greatest threat to Europe.

"The US economy has slowed to stall speed. A few lonely forecasters fear that America has already fallen back into recession, replicating the terrible double-dip of 1937.

The Philly Fed’s manufacturing index dropped suddenly to minus 5.8 in May. The US Conference Board’s index of leading indicators fell in April. Job creation has slipped from 250,000 a month to nearer 130,000 in March and April.

The Economic Cycle Research Institute (ECRI) says post-War personal income growth in the US has never been this weak for three months in a row without triggering a recession. It has happened ten out of ten times.

It is this fresh menace - combined with China’s failure to calibrate its heralded soft-landing - that poses the real danger to southern Europe’s arc of depression over the next year. Greece is just a poignant detail.

. . .

Ethan Harris from Bank of America says there is a strange nonchalance over America’s coming austerity or “fiscal cliff” as Mr Bernanke calls it. “If the US and European crises interact, and feed on one and another, a recession becomes a real risk. This would be a replay of Japan’s experience of the mid-1990s, when a combination of premature fiscal tightening and the Asian crisis triggered a recession and deflation,” he said.

The stakes are higher this time. It is why leaders of the US, Britain, Japan, and Canada joined the Franco-Italian axis at Camp David over the weekend ..."

3.  China:  its vast, unused stockpiles of raw materials now cast ominous shadows over the world markets for such commodities.  Reuters reports:

"When metals warehouses in top consumer China are so full that workers start stockpiling iron ore in granaries and copper in car parks, you know the global economy could be in trouble.

At Qingdao Port, home to one of China's largest iron ore terminals, hundreds of mounds of iron ore, each as tall as a three-storey building, spill over into an area signposted "grains storage" and almost to the street.

Further south, some bonded warehouses in Shanghai are using carparks to store swollen copper stockpiles - another unusual phenomenon that bodes ill for global metal prices and raises questions about China's ability to sustain its economic growth as the rest of the world falters.

. . .

This week, the world's biggest miner, BHP Billiton (BHP.AX) (BLT.L), said it was putting on hold a China-centric plan to spend $80 billion over the next five years to expand its iron ore, coal, energy and base metals divisions.

In his most cautious comments yet, BHP Chairman Jacques Nasser also said he expected commodity prices to cool further and that investors had lost confidence in the global economy.

"We should pause, take a deep breath and wait and see where the pieces fall around the world," he said.

. . .

Copper has already shed 9 percent in the past two weeks to hit a four-month low of $7,625. Many traders reckon it's only a matter of time before prices test $7,500 or lower, which could spark panic selling.

Iron ore has fared little better. Steel mills are digesting stocks at an average rate of 10 percent this year compared to 20 percent over the past five years, according to BoA Merrill Lynch. Prices are 8.3 percent lower so far this quarter.

Steel futures are also down over 5 percent this year, as mills produce at record levels even though demand is weak."

Taken in combination with China's failure to achieve an economic 'soft landing', as Ambrose Evans-Pritchard pointed out above, this news is of great concern.  Furthermore, Reuters also provided this intriguing video report about a Chinese analyst's investigations, which suggest that 'official' Chinese economic data may be less than accurate.

4.  Europe and the USA:  The end of a utopian dream?

Janet Daley points out that the current economic crisis in Europe is really the failure of a decades-old utopian dream.  She notes that the same is true of the USA as well.

"... when will we confront the most fundamental dilemma of this European crisis: that in order to offer the comprehensive entitlement programme that is promised by European “social solidarity”, the EU would not only have to churn out endless mountains of progressively more meaningless currency, but would also be forced to institute forms of economic control that Eastern Europe might have recognised?

As I write, Greece is experiencing what is now called a “bank jog” – a fairly slow “run”. By the time you read this, it may have become a sprint. How long before the (unelected) Greek government imposes a freeze on all bank accounts? Or exchange controls to prevent anyone taking or sending more than very small amounts of money out of the country? When will we start to see prosecutions for “economic crimes” in which the survival of the political project takes precedence over the right to access and make free use of your own funds? Not to mention tanks in the streets to control social unrest. The West may have won the Cold War but its own brand of utopian solution – the great economic and political union that would put an end to war and social instability – is toying dangerously with mechanisms that are certainly anti-democratic and come close to being totalitarian.

. . .

... it is not the dream of European co-operation that was doomed from the start: given the ancient hatreds and unforgivable sins of the past, that was difficult, but it was not impossible. What has made the project unworkable is the insistence that the EU be a vehicle for democratic socialism: the impossible dream was not European unity but universal “social solidarity” stretching across a continent, for which the single market was simply a milch cow to produce the funds.

Unfeasibly enormous social security and entitlement promises were made on the basis that the free market would always provide. Nobody bothered to ask what would happen when the market faltered or fluctuated (as genuinely free markets do) or when the sense of entitlement outgrew the wealth that could be created. The problem is not unique to Europe. They are facing the same question in the US, where benefits programmes – particularly social security (the US federal pensions system) and Medicare – have become as untouchable, and as financially unsustainable, as they are here.

How long will freedom survive in the face of mass rage at the loss of the economic security that has come to be seen as a basic human right? People were told that they could have lifelong protection from want without any restrictions on their liberty or their economic self-determination. So now the cake has been well and truly eaten and had. The EU is going to have to admit sooner or later that this fantasy has run its course."

There's more at the link.  Bold print is my emphasis.

It's coming, friends.  The headlines every day merely confirm the inevitable.  Within the next couple of months at the latest, we're either going to fall off an economic cliff, or the world's central banks will seek to postpone disaster (they can no longer avert it - it's way too late for that) by printing money like there's no tomorrow.  This may succeed in staving off short-term collapse, but only at the expense of significantly increased inflation in the medium to long term, and possibly hyperinflation in some economies in the short term.

If you've got a job, give thanks to God for it (no matter how boring, frustrating or unsatisfactory you may find it) and hold onto it for dear life!  There won't be many available anywhere else for the foreseeable future.  Also, if you're not already doing so, learn to live within your means, even if that means rice and beans every second day for your main meal.  Those who don't, or can't, or won't live within their means are about to get cut off at the knees, economically speaking.



Anonymous said...

And if you had depression era parents, give thanks for what they taught us.

trailbee said...

Thank you for keeping us up to date. A couple of months ago you ran a post, naming John Mauldin. I have since subscribed to his letters, as well as three others. The incredible relativity of these European events and the United States is very scary. It is a shame that we do not have anyone in our government who is actually willing to share these stats and what they prophesy. We are teetering on a cliff, and the VOTERS should care what is being done to them (me) which would immediately decide where their votes should go.

perlhaqr said...

Are there even any US steel mills left? It occurs to me we may end up really extra special screwed if China has a collapse, simply because we won't be able to acquire these raw commodities anymore.

And hell, the EPA probably won't let anyone open a new steel mill here, anyway.

Larry said...

U.S. Steel is still around.
Nucor, too, though they recycle scrap steel.