Notes on the continuing economic slide

The signs continue to pile up that very serious economic trouble is almost upon us.  It baffles me more than words can say that people read these headlines and articles, just as I do, but don't seem able to link them to each other, or put two and two together to get four.

I link to each article as a heading, then quote briefly from it.  Please click on the links to read each article in full.


1.  Quantitative easing programs have failed;  now protectionism looms.

We know from a body of scholarship that fiscal belt-tightening in countries with a debt above 80pc to 90pc of GDP is painful and typically self-defeating unless offset by loose money. The evidence is before our eyes in Greece, Portugal, and Spain. Tight money has led to self-feeding downward spirals. If bondyields are higher thannominal GDP growth, the compound effects are deadly.

America may soon get a first taste of this, carrying out the epic fiscal squeeze needed to bring its debt trajectory back under control with less and less Fed help. Gross public debt will hit 107pc of GDP by next year, and higher if the recovery falters as pessimists fear.

With the fiscal and monetary shock absorbers exhausted -- or deemed to be -- the only recourse left is to claw back stimulus from foreigners, and that may be the next chapter of the global crisis as the Long Slump drags on.

Professor Michael Pettis from Beijing University argues in a new book -- "The Great Rebalancing: Trade, Conflict, and the Perillous Road Ahead" - that the global trauma of the last five years is a trade conflict masquerading as a debt crisis.

There is too much industrial plant in the world, and too little demand to soak up supply, like the 1930s.

. . .

"In a world of deficient demand and excess savings, every country will try to acquire a greater share of global demand by exporting savings," he writes. The "winners" in this will be the deficit states. The "losers" will be the surplus states who cannot retaliate. The lesson of the 1930s is that the creditors are powerless. Prof Pettis argues that China and Germany risk a nasty surprise.

2.  The Euro crisis isn't over.

As far as Mr. Connolly is concerned, Europe's heart is still rotting away.

The European political class, he says, believes that the crisis "hit its high point" last summer, "because that was when there was an imminent danger, from their point of view, that their wonderful dream would disappear." But from the perspective "of real live people, and families and firms and economies," he says, the situation "is just getting worse and worse." Last week, the EU reported that the euro-zone economy shrank by 0.9% in the fourth quarter of 2012. For the full year, gross domestic product fell 0.5% in the euro zone.

Two immediate solutions present themselves, Mr. Connolly says, neither appetizing. Either Germany pays "something like 10% of German GDP a year, every year, forever" to the crisis-hit countries to keep them in the euro. Or the economy gets so bad in Greece or Spain or elsewhere that voters finally say, " 'Well, we'll chuck the whole lot of you out.' Now, that's not a very pleasant prospect." He's thinking specifically, in the chuck-'em-out scenario, about the rise of neo-fascists like the Golden Dawn faction in Greece.

. . .

Superficially, there is some basis for the official view that the worst of the crisis is over: Interest-rate spreads, current-account deficits and budget deficits are down. Greece's departure from the single currency no longer seems imminent.

Yet unemployment is close to 27% in Spain and Greece. The euro-zone economy shrank ever-faster throughout 2012. And—most important in Mr. Connolly's view—the economic fundamentals in France are getting worse. This week France announced it would miss its deficit-reduction target for the year because of dimming growth prospects.

It's one thing to bail out Greece or Ireland, Mr. Connolly says, but "if the Germans at some point think, 'We're going to have to bail out France, and on an ongoing, perpetual basis,' will they do it? I don't know. But that's the question that has to be answered."

3.  China has its own debt bomb.

Since 2007, the amount of new credit generated annually has more than quadrupled to $2.75 trillion in the 12 months through January this year. Last year, roughly half of the new loans came from the "shadow banking system," private lenders and credit suppliers outside formal lending channels. These outfits lend to borrowers—often local governments pushing increasingly low-quality infrastructure projects—who have run into trouble paying their bank loans.

Since 2008, China's total public and private debt has exploded to more than 200% of GDP—an unprecedented level for any developing country. Yet the overwhelming consensus still sees little risk to the financial system or to economic growth in China.

That view ignores the strong evidence of studies launched since 2008 in a belated attempt by the major global financial institutions to understand the origin of financial crises. The key, more than the level of debt, is the rate of increase in debt—particularly private debt. (Private debt in China includes all kinds of quasi-state borrowers, such as local governments and state-owned corporations.)

On the most important measures of this rate, China is now in the flashing-red zone.

4.  US freight shipments have plummeted to their lowest level in two years.

This is the first year-over-year contraction since the 2007-2009 Great Recession - and places the reality of the dismal Q4 GDP print in context ... freight expenditures fell in January leading to a 1.6% drop over the last year - compared to a 27.2% rise in January 2011, and 22.2% rise in January 2012.

Freight shipments are a leading indicator of whether companies are either shipping or ordering goods.  They're not - at least, not at anything like their former levels.  Guess what that means for the US economy?


5.  Eight US retailers that will close the most stores in 2013.

It is the time of year again, when America’s largest retailers release those critical holiday season figures and disclose their annual sales. A review of these numbers tells us a great deal about how most of the companies will do in the upcoming year. And while successful retailers in 2012 may add stores this year, those that have performed very poorly may have to cut locations during 2013 to improve margins or reverse losses.

For many retailers, the sales situation is so bad that it is not a question of whether they will cut stores, but when and how many.

It's a sobering list.  I'm sure most of my readers shop at more than one of the retailers named in the report;  but before long, we may find our local store isn't there any more . . .

On the subject of major retail chains, James Kunstler comments (profanity warning at the link!):

Though the public hasn't grokked it yet, WalMart and its kindred malignant organisms have entered their own yeast-overgrowth death spiral. In a now permanently contracting economy the big box model fails spectacularly. Every element of economic reality is now poised to squash them. Diesel fuel prices are heading well north of $4 again. If they push toward $5 this year you can say goodbye to the "warehouse on wheels" distribution method. (The truckers, who are mostly independent contractors, can say hello to the re-po men come to take possession of their mortgaged rigs.) Global currency wars (competitive devaluations) are about to destroy trade relationships. Say goodbye to the 12,000 mile supply chain from Guangzhou to Hackensack. Say goodbye to the growth financing model in which it becomes necessary to open dozens of new stores every year to keep the credit revolving.

Then there is the matter of the American customers themselves. The WalMart shoppers are exactly the demographic that is getting squashed in the contraction of this phony-baloney corporate buccaneer parasite revolving credit crony capital economy. Unlike the Federal Reserve, WalMart shoppers can't print their own money, and they can't bundle their MasterCard and Visa debts into CDOs to be fobbed off on Scandinavian pension funds for quick profits. They have only one real choice: buy less stuff, especially the stuff of leisure, comfort, and convenience.

The potential for all sorts of economic hardship is obvious in this burgeoning dynamic ... K-Mart will close over 200 boxes this year, and Radio Shack is committed to shutter around 500 stores.

. . .

What we're on the brink of is scale implosion. Everything gigantic in American life is about to get smaller or die. Everything that we do to support economic activities at gigantic scale is going to hamper our journey into the new reality. The campaign to sustain the unsustainable, which is the official policy of US leadership, will only produce deeper whirls of entropy.

There's more at the link.

Earlier this month I wrote that an economic tsunami is bearing down upon us.  Read the headlines and articles cited above, then judge for yourselves whether I was being overly pessimistic.  Note, too, that not only the USA is involved - the rest of the world's economies can't help but be affected.  Europe and/or China can bring us down with them, and we can surely do the same to them if we're the first domino to fall.  It's only a question of who will falter first.

Peter