The latest on the global economy

All sorts of interesting signs and portents are erupting, for those who have eyes to see them and ears to hear them.  Here are just a few from the past couple of days.


1.  Greece's State health system has run out of money to pay for prescription drugs.  The Financial Times reports:

Millions of Greeks are being forced to pay full price for essential medicines because the state health system has run out of cash to pay pharmacies for supplying prescriptions, health officials said on Wednesday.

Pharmacy owners staged a 24-hour nationwide strike to press the government to start paying arrears of €250m [about US $325 million] for prescriptions issued in March and April after last-minute talks on Tuesday between Panagiotis Pikrammenos, the prime minister, and union officials broke down.

The dispute highlights Greece’s mounting cash flow problems amid recent political turmoil. While the finance ministry achieved spending targets agreed with international lenders, social insurance funds used up half their annual budget allocations in the first four months, according to official figures.

“There is a cash crunch. … The state has stopped funding [the National Organisation for Health Care Provision] EOPPY, and they have stopped paying us,” said an official from the PanHellenic Pharmaceutical Association. ‘We cannot continue to subsidise the health service out of our pockets.”

There's more at the link.  This is the equivalent of a slow, lingering death sentence for at least thousands, perhaps tens of thousands of Greeks whose ongoing health is dependent on medication, but who can't afford to pay for their own prescriptions.  The fact that it's been allowed to develop illustrates like nothing else the true depths of Greece's economic crisis.  Imagine what would happen in the USA if Medicare and Medicaid were to suddenly refuse to pay for prescription medication.  How many millions of Americans do you think would die over the next year as a result?


2.  Japan's credit rating has been downgraded.  The New York Times reports:

The ratings agency Fitch on Tuesday lowered its assessment of Japan’s sovereign credit to A+, an investment grade just above the likes of Spain and Italy, and criticized Tokyo for not doing more to pare down its burgeoning debt.

The downgrade, Fitch’s first for Japan since 2001, underscores the sheer scale of the country’s debt burden, as well as political and demographic challenges that have hampered efforts to tackle it. Japan’s public debt will hit almost 240 percent of its gross domestic product by the end of the year, Fitch warned.

Again, more at the link.  Note, too, that Japan's demographic crisis will in large part determine whether it can ever recover from its present economic crisis.  Some commentators doubt that it will.  For example, Ambrose Evans-Pritchard pointed out yesterday that Japan's fiscal death is a warning to the West.


3.  A sign of the Eurozone's desperation for safe investments:  Germany sells bonds at 0% interest.  Yes, you read that correctly - zero interest.  The Telegraph reports:

Germany's status as a safe-haven during the eurozone crisis was confirmed after its central bank said it would issue two-year bonds at zero interest for the first time.

The Bundesbank said it would issue €5bn [about US $6.3 billion] of the bonds at an auction on Wednesday, which are expected to sell as investors rush to buy the eurozone’s safest bonds amid renewed fears over Greece.

While some eurozone countries are suffering from rising borrowing costs Germany enjoys low interest rates on its sovereign debts as investors are certain that the financial future of Europe’s largest economy is assured.

“If this is not a signal of complete financial market dislocation, nothing is,” said Marc Ostwald, strategist at Monument Securities.

More at the link.

Can you understand how mind-bogglingly crazy this is?  Eurozone investors have just competed with each other in subscribing to this offer.  In effect, they've handed the German government a two-year interest-free loan.  They won't get back anything but their capital when the bonds mature.  It's the same return they'd get if they simply stuffed the money under their mattresses for two years and hoped for the best!  This is an absolutely insane move from any point of view except one . . . investors' sheer desperation to find a safe place to stash their Euros.

Consider their uncertainty right now.  Some countries may exit the Eurozone and re-establish their national currencies.  If they do so:

• Their governments will probably try to stop their citizens from sending or taking Euros out of the country, and are likely to impose exchange controls;
• They may (probably will) arbitrarily impose a punitively low exchange rate between the Euro and their new currency, effectively reducing the value of their citizens' savings and wealth (perhaps by a very significant proportion, up to a third or even a half);
• They may seek to have banks in other European countries seize Euro accounts held by their citizens and repatriate the funds.

No-one knows what will happen to the Euro if such exits occur.  However, investors assume (probably with good reason) that the German economy will be least affected by these risks, because it's the strongest in the Eurozone and has the most disciplined fiscal policy.  That makes Germany just about their last hope for a 'safe haven' - even at zero interest!  Also, German bonds are relatively immune to seizure by other governments, unlike bank accounts held by non-citizens.  As far as Eurozone investors are concerned, security trumps return on investment at present.

(Personally, if I had a substantial amount to invest right now, I'd be buying gold - not shares or paper certificates, but the actual metal in coin or other readily negotiable and easily transportable form.  Gold isn't necessarily a good investment in terms of interest, dividends or growth, but in an uncertain economic environment offering a significant risk of inflation, even perhaps hyperinflation, it's a worthwhile store of value.  Right now I'll go for that security rather than worry about growth or return on investment.)

To return to the Eurozone:  consider what these zero interest German bonds imply about the US dollar.  The Treasury is still offering US securities at a positive interest rate (albeit not very high):  but many Eurozone investors nevertheless prefer to put their money into German zero-interest bonds instead.  What does this tell you about their confidence in the economic future of the USA, and their expectation of the future value of the dollar?  Yep . . . I thought you could figure it out. Of course, the US mainstream media have been quick to inform us about this, and its implications for this country . . . haven't they?


*Crickets*


Yeah.  Right.

Draw your own conclusions.

Peter