Global Economic Crisis

The latest statistical measure of the catastrophic economic depression hammering Greece  reveals that in Q1 of 2012 the Greek economy contracted 6.2 percent.  The Greek economy, beyond any doubt, is in free fall.  Without recourse to printing its own money, the euro-strapped Greeks cannot even inflate away their debts.  Unless, of course, they exit the euro. Then, they will have many other financial and economic problems left to contend with.

As the Greek economy implodes, the political establishment in Athens is helpless. The most recent Greek parliamentary election punished the pro-austerity establishment parties, strengthened the parities opposed to the austerity deal with the Eurozone, but left no clear winner. The latest talks to cobble together a coalition government have failed. New elections will take place in a few weeks.

The politics and economics of Greece are feeding on each other in a self-sustaining negative feedback loop. They are both in complete disarray.

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The recent Greek election, to no one’s surprise, severely punished the pro-austerity establishment parties, and greatly strengthened the anti-establishment political parties advocating the ripping up of the European bailout and austerity package. Currently, Greece is without a government.

As Greece slides into political disarray, its economy continues in meltdown mode. With the Greek economic  contraction accelerating, debts accumulating despite the bailout, and the unstable political situation prevailing, it is no shock that the most recent numbers show that Greece has an official unemployment rate of 22 percent. Without a doubt, Greece is in a sustained economic depression, with no clear light visible at the end of the tunnel.

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he latest numbers from the Bureau of Labor Statistics indicate that the United States supposedly “created” 115,00 jobs in April. Not even President Obama’s supporters are cheering loudly over this figure, as it indicates a slowing down of job creation-and that is if the number is accurate. As many know, BLS jobs numbers are usually a mathematical abstraction based  on assumptions and inferences, not hard numbers. In any event, if there were 115,000 jobs created in April, that is below the approximately 200,000 new jobs that must be created in the U.S each month in order to keep up with population growth. In other words, 115,000 new jobs in April would mean that the American unemployment rate would increase.

But in April, again according to the BLS, the U.S. unemployment rate did not increase; in fact it “declined” to 8.1 percent. If job creation is lagging behind the expected entry of new workers into the U.S. labor market, how did the magicians at the Bureau of Labor Statistics construct a reduction in unemployment?  Very simple. There are so many discouraged unemployed workers in the United States, they are simply giving up and “leaving” the labor force. In many cases, actually, the BLS is exercising initiative and assuming that a certain proportion of the unemployed simply drop out of the workforce each month.

The real meaning of the April jobs number is that the participation of age-eligible Americans in the labor force -both working and unemployed-is at a 30 year low. How is that synonymous with an economic recovery?

In point of fact, a staggeringly high rate of unemployment, made artificially lower by not counting those long-term unemployed workers as being part of the active labor force, is by no means characteristic of a post-recessionary economic recovery. What has recovered since the onset of the global financial and economic crisis in 2008 are equity prices, which have regained almost all of their losses. However, that recovery is not due to increased consumer demand stemming from the reentry into the workforce of formerly unemployed workers. Rather, stock prices regained most of their losses and have enjoyed a recovery due almost entirely to the loose monetary policies of the Federal Reserve under the tutelage of its chairman, Ben Bernanke.

In contrast with the policies of President Franklin Roosevelt during America’s Great Depression of the 1930s, which focused on facilitating job creation, the policymakers in the U.S. have focused their efforts on reinflating equity prices through quantitative easing (money printing) and offering banks (including investment banks) historically low interest rates, in effect free money. Perhaps sooner than we can imagine, history will render its verdict on this policy of neglecting a recovery in the labor market in favor of reinflating the stock market.

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Now they tell us. During the height of the global financial and economic crisis, Canada’s supposedly “conservative” government boasted that Canadians had the safest, most secure banking system in the world. Never was a hint made that these banking institutions required taxpayer bailouts. However, the Canadian Broadcasting Company (CBC) is now reporting the following:

“Canada’s biggest banks accepted tens of billions in government funds during the recession, according to a report released today by the Canadian Centre for Policy Alternatives. Canada’s banking system is often lauded for being one of the world’s safest. But an analysis by CCPA senior economist David Macdonald concluded that Canada’s major lenders were in a far worse position during the downturn than previously believed…says support for Canadian banks from various agencies reached $114 billion at its peak. That works out to $3,400 for every man, woman and child in Canada, and also to seven per cent of Canada’s gross domestic product in 2009.”

This revelation ties in with other developments throughout the advanced economies afflicted by the crisis. Bankers and their ilk received trillions of dollars in taxpayer-funded bailouts, and the public is only aware of the tip of the iceberg. Of course, the governments claim this was necessary to prevent economic implosion (due to reckless behaviors by bankers).  But the sovereigns are rapidly losing credibility with their own publics, as the global economy continues to stagnate and weaken under a mountain debt, a debt incurred  for bailouts of the financial sector.

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For the first time in about 40 years, the UK has gone into a double dip recession. London’s Office for National Statistics reported a 0.2 percent contraction in GDP in Q1 of 2012. That drop, following a 0.3 percent fall in Q4, represents two consecutive months of economic contraction, meeting the technical definition of an economic recession.

The UK’s Chancellor of the Exchequer, George Osborne, said, “It’s a very tough economic situation. It’s taking longer than anyone hoped to recover from the biggest debt crisis of our lifetime… over many years this country built up massive debts, which we are having to pay off.”

That sums of the UK’s economic and fiscal conundrum, and that of other advanced economies. The austerity measures required to trim back government deficits represent a fiscal drag on the economy. That in turn retards economic growth and reduces government revenues, countering the intended goal of the austerity measures. On the other hand, maintaining high deficit spending is unsustainable. The politicians have created problem that defies solution.

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The financial pundits and Eurozone boosters are gloating, with fingers crossed behind their backs. The recent auction of Spanish sovereign bonds by Madrid reached its target sale in excess of two and a half billion euros. But what the cheerleaders ignore is that the bonds sold for only two reasons; a substantial increase in the yield on the 10-year bonds from 5.4 percent to 5.74 percent. The increase of 34 basis points was also helped by the perception that the European bailout fund stands ready to assist Spain and her creditors.

Despite all the recent happy talk about the global economy allegedly “turning the corner” and the Eurozone sovereign debt crisis being ameliorated, the signs are all there for those with open eyes. The crisis remains, and despite the policy of kicking the can down the road, all the indicators point to deterioration rather than amelioration.

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The director of the International Monetary Fund, Christine Lagarde, sounds very worried, while engaging in contradictory messaging in her speech before the Brookings Institution. On the one hand, she mimics what Fed Chairman Ben Bernanke did two years ago with his talk of “green shoots.” Lagarde speaks of the U.S. economy showing glimmers of positive data, while acknowledging, in her own words, that,  “Only a few months ago, we seemed to be staring into the abyss.” She urges the advanced economies to take advantage of the glimmer of “good news” to invest in growth and more bailouts for the financial sector, while also warning about the sovereign debt crisis afflicting the Eurozone.

“Clearly, the risk that looms largest is that sovereign and financial stresses return with renewed force in Europe,” Christine Lagarde told the Brookings Institution. But what solutions does the IMF have to offer? Borrow more to recapitalize banks that made the wrong bet on risky loans while simultaneously boosting government deficit spending to “stimulate growth?” Or, cutting back on government spending, thus creating a fiscal drag that leads to negative growth without reducing deficits? The IMF and its leader, just like the politicians of the advanced economies, have run out of solutions, other than meaningless cliches.

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The yield on Spanish government 10-year bonds has risen another 13 basis points, now standing at just over 5.8 percent.  This is in line with the deteriorating economic and fiscal situation in Spain. Madrid has recently enacted draconian government spending cuts. However, the conundrum is this; previous government spending was unsustainable, but the most recent cuts are a massive fiscal drag, which will also exacerbate the government deficit in its annual spending. Investors know this, which is why Spanish bond yields are rising.

With the highest official unemployment rate in the Eurozone (23 percent)and the economy continuing to contract, there is increasing concern that the center of gravity in the Eurozone sovereign debt crisis has migrated from Greece to Spain. In the meantime, the European Central Bank continues its policy of stealthily monetizing debt throughout the Eurozone through its printing press.

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Spain’s central bank, The Bank of Spain, has officially stated that for the second time since the onset of the global economic crisis in 2008, Madrid’s economy is in recession. The news that the Spanish economy has entered a double-dip recession is no surprise for the Spanish people, currently experiencing the misery of an official unemployment rate of 20 percent.

In the words of the Bank of Spain, “The most recent information for the start of 2012 confirms the prolongation of the contraction in output.” This all happens as the Spanish government reins in spending, with a current deficit to GDP ratio of 8.5 percent. With the fiscal drag imposed by a retrenchment in government spending, there will be no Keynesian solution to Spain’s current recession. Furthermore, Spain is not alone; other vulnerable Eurozone economies are in recession-or about to double dip into one. The economists keep telling us that economic growth is the only solution to the Eurozone’s debt crisis. With many of its struggling economies in negative or stagnant growth, it is hard to see a solution to the Eurozone’s debt crisis, other than bank-destroying sovereign defaults and inflation-creating loose monetary policies by the European Central Bank.

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Only a few weeks after the latest  version of the Greek bailout package, the President of the European Central Bank, Mario Draghi, is boasting that the worst of the Eurozone debt crisis is “over.” He made this remarkable claim in an interview with a German publication. Draghi boasted that the economies of the Eurozone were now stabilizing.

Draghi must be toking some powerful weed, or otherwise he is attempting to repeat U.S. Fed Chairman Ben Bernanke’s previous boasts about economic “green shoots.” The latest PMI figures from Germany, which show that the country’s manufacturing  sector is weakening, and other similar statistics from elsewhere in the Eurozone, make ECB president Draghi’s boast sound bizarre, to say the least.

Despite Mario Draghi’s high profile delivery of rosy prognostication, the Greek debt crisis is far from over, and the other PIIGS nations (Portugal, Ireland, Italy and Spain)have not seen their dangerous debt and deficit to GDP ratios, poor economic growth figures or catastrophic levels of unemployment magically improve. Draghi may be a wonderful propagandist for the Eurozone, but he is no magician.

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