Global Economic Crisis

After months of individual sovereign downgrades by the three leading ratings agencies, S & P has now entered a quantum leap by placing almost the entire Eurozone on a credit watch, including the behemoth economies of Germany and France. Furthermore,  Standard & Poor’s followed up by placing the European Financial Stability Facility, the vehicle for supposedly bailing out problematic Eurozone sovereigns and banks, on a negative credit watch. The fact that even the EFSF is on the verge of a downgrade, along with potentially almost all the sovereign states using the euro, is proof positive that the Eurozone debt crisis is irreversible, the politicians have lost control, and when the inevitable downgrades follow this devastating credit warning from S & P, all hell will break loose.

In the meantime, the clownish politicos of the Eurozone continue their interminable series of emergency meetings, continuing to promise a final and complete solution to the Eurozone debt crisis. However, in a rare moment of candor, German Chancellor Angela Merkel admitted that at best, a solution was years away.   Given all that, will China and the other BRIC nations, along with private investors, really want to invest in Euro bonds? 

WALL STREET POLICE: GLOBAL ECONOMIC CRISIS

Officer Larry of the NYPD is on his way to Zuccotti Park in lower Manhattan to arrest peaceful protesters involved with the Occupy Wall Street movement. Being a public spirited member of the New York Police Department, Officer Larry does remind us that there is a global economic crisis underway that rivals the Great Depression of the 1930s.

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The figures for China’s purchasing managers’ index (PMI) for November registered a mere 49 points, according to the China Federation of Logistics and Purchasing. This figure represents a contraction in the crucial Chinese manufacturing sector. It has been due to its role as factory to the world that China’s GDP has been propelled to the second largest in the world. The latest PMI has been amplified by a similar index compiled by HSBC, which is also reporting a contraction in the industrial sector. This dismal news on the supposedly rapidly growing Chinese economy is being attributed to a decrease in exports to the Eurozone countries, now mired in an ever-worsening sovereign debt crisis. The data on China’s PMI is the worst since February 2009, at the tail-end of the free fall contraction in the global economy after the onset of the global economic crisis in the fall of 2008.

How worried should one be about the industrial contraction in China? Many observers have already pointed out that China’s rapid growth at a time of economic decline and stagnation among advanced economies was in large part artificially induced by massive government spending, in particular on uninhabited apartment complexes and unoccupied shopping malls. But more importantly, how worried is China about the economic health of its largest customers, in both the Euozone/UK region and the United States? This is what Chinese Vice Finance Minister Zhu Guangyao said about the current global economic crisis: “The current global crisis may be in some way more severe and challenging than that of 2008 after the collapse of Lehman Brothers.”

The Chinese political leadership is clearly worried about the spillover effects of the Eurozone debt crisis on China. This has led to some radical about-turns in economic policymaking. Concerns about inflation and banks with a significant portfolio of bad loans have been discarded. The authorities in Beijing are again focused on growth at all costs, involving the loosening of monetary policies and requirements on Chinese banks for minimal provision for reserves against bad loans. However, with a much smaller proportion of its economy driven by domestic consumption compared to the Eurozone, U.K. and U.S., there is only so much the government can do to induce growth at a time of stagnation or contraction of its exports to its largest customers. In the final analysis, China cannot go on indefinitely building uninhabited cities as a means of creating “growth” in its GDP. 

Despite all the talk in economic circles about the large economies in East Asia being “decoupled” from the advanced economies in Europe and North America, China is as much a prisoner of the impact of the Eurozone debt crisis as is America-just as Europe and China were prisoners of the subprime mortgage meltdown in the United States. In our integrated global economy, no one is immune to the effects of a legacy of bad economic and fiscal policymaking in Washington and Brussels, least of all Beijing.

WALL STREET POLICE: GLOBAL ECONOMIC CRISIS

Officer Larry of the NYPD is on his way to Zuccotti Park in lower Manhattan to arrest peaceful protesters involved with the Occupy Wall Street movement. Being a public spirited member of the New York Police Department, Officer Larry does remind us that there is a global economic crisis underway that rivals the Great Depression of the 1930s.

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The Organisation for Economic Co-operation and Development has revised its economic forecast for the Eurozone and the UK. In both areas, the OECD is predicting negative growth in Q4 of 2011 and Q1 of 2012. Two consecutive quarters of negative GDP growth meets the technical definition of a recession. Other economists believe that the Eurozone, United Kingdom and the United States have already entered a double-dip recession.

As the global economic crisis worsens, the debt crisis metastasizes and more and more sovereigns are having their public debt downgraded by the ratings agencies, the equity markets are soaring again. Why is that happening, when global economic and financial fundamentals are so rotten? It appears that a false rumour that the IMF was going to bailout Italy from its suffocating public debt was the catalyst for the stock markets to rally strongly. Even when the report was officially denied, the equities maintained their climb. It must be that equities reside in a parallel universe, devoid from the inconvenience of fiscal, financial and economic reality.

WALL STREET POLICE: GLOBAL ECONOMIC CRISIS

Officer Larry of the NYPD is on his way to Zuccotti Park in lower Manhattan to arrest peaceful protesters involved with the Occupy Wall Street movement. Being a public spirited member of the New York Police Department, Officer Larry does remind us that there is a global economic crisis underway that rivals the Great Depression of the 1930s.

global economic crisis eurozone debt crisis, OECD, Organisation for Economic Co-operation and Development

As all but the most gullible no longer have faith in the European politicians to resolve the increasingly deadly sovereign debt crisis among the PIIGS nations in the Eurozone, the last ditch hope is now resting with the European Central Bank. The new president of the ECB, Mario Draghi, is under increasing pressure to abandon the bank’s defined mandate to maintain price stability, and to instead become the Eurozone’s lender of last resort. It can only do that by firing up its printing press, and conjuring new euros out of thin air.

Only Germany, with a long historic memory dating back to the massive monetary inflation of Weimar Germany in the early 1920s, remains in opposition to the ECB unleashing its printing press. Otherwise, politicians, hedge fund managers and investors are demanding that the ECB flood the world with euros. In their eyes, inflation is preferable to a deflationary recession, and the inevitable devaluation of the euro resulting from monetary creation would cheapen European exports. All a good thing, so they claim. No wonder Mario Draghi is being cajoled into becoming the savior of the European monetary union, and possibly the global economy.

My take on the ECB becoming the lender of last resort? I think we have the evidence of what would likely occur right in front of us. In the U.S., the Federal Reserve under the direction of its chairman, Ben Bernanke, has been in the money printing business since the onset of the current global financial and economic crisis in 2008. The Fed has been in many cases the lender of last resort in America, buying everything from U.S. Treasuries to toxic assets from banks and companies, while flooding the land with instantly manufactured liquidity and maintaining a zero interest policy at its discount window. We have all seen how effective such a policy measure has been in the United States. Bernanke’s record includes unprecedented fiscal deficits, many state and local authorities in the U.S. tottering on the brink of bankruptcy, unemployment levels not witnessed since the Great Depression of the 1930s and an economy functioning at stall speed and about to enter a double-dip recession, despite unprecedented levels of monetary, not to mention fiscal stimulus.

 If the European Central Bank follows in the footsteps of Bernanke, I don’t see how the results will be any different for the Europeans. Printing money may sound attractive to the desperate, but it is at best a short-term panacea, which solves nothing in the long run, and creates its own set of complications and economic distortions. Ultimately, a printing press cannot correct the flawed concept of a single currency for a multitude of different political cultures and economies.

WALL STREET POLICE: GLOBAL ECONOMIC CRISIS

Officer Larry of the NYPD is on his way to Zuccotti Park in lower Manhattan to arrest peaceful protesters involved with the Occupy Wall Street movement. Being a public spirited member of the New York Police Department, Officer Larry does remind us that there is a global economic crisis underway that rivals the Great Depression of the 1930s.

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The debt crisis contagion in the Eurozone continues to metastasize. With Italy’s ten year government bonds above the red line of 7 percent yields despite a new government, Spain is now approaching that same zone of danger. Spanish government bonds with ten year maturities are very near the toxic level of 7 percent. With the two largest PIIGS nations in the Eurozone on the verge of insolvency, it is quite clear that the attempts to a avoid a contagion from the Greek debt crisis have been a monumental failure.

The politicians in Europe are so desperate that they have actually ditched democracy in a last ditch effort to avert a catastrophic implosion of the Eurozone.  Appointing  unelected governments and forbidding popular votes on economic and fiscal policy , not to mention eroding national sovereignty are the last refuge of the bumbling European politicians. The latest developments in the Spanish debt crisis show that these desperate measures are likely to be as dysfunctional as all other previous efforts to forestall an inevitable disaster from occurring.

WALL STREET POLICE: GLOBAL ECONOMIC CRISIS

Officer Larry of the NYPD is on his way to Zuccotti Park in lower Manhattan to arrest peaceful protesters involved with the Occupy Wall Street movement. Being a public spirited member of the New York Police Department, Officer Larry does remind us that there is a global economic crisis underway that rivals the Great Depression of the 1930s.

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Not long after my last post warned how near Italy was to passing the 7 percent yield on its ten year government bonds, the dire red line has been passed. It should be pointed out that the crisis in Italy is not only based on market reaction to its horrid politics; the Italian economy is coming apart at the seams, with business bankruptcies proliferating amidst a demographic contraction that makes future economic growth in a time of austerity highly implausible.

Now that Italian bonds with ten year maturities are above 7 percent in yields, the Eurozone is reeling  and global markets are swooning, after experiencing a maddening series of rallies based entirely on false hopes predicated on statements from hopelessly inept politicians.

Now, except for the most gullible, the consensus among economists who even previously expressed optimism about a global economic recovery is that the Eurozone is likely headed to some form of break-up. If Americans are laughing at their comrades across the Atlantic, they shouldn’t be. The economic and fiscal tragedy unwinding in Europe is a harbinger of what soon lies in wait for the United States, which has the mother of all fiscal imbalances.

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The Eurozone’s latest Greek debt bailout plan, following previous Greek, as well as Portuguese and Irish bailouts, was supposed to ring-fence the largest PIIGS nations; Spain and Italy. The Spanish economy is highly vulnerable to a raging economic recession and massive unemployment. However, it is Italy, with a two trillion euro public debt and stagnant economic growth, that is now the greatest danger to the Eurozone. The supposed ring-fencing of Italy that was the prime motivation for the Greek debt write-off and bailout is clearly a failure. Only days after the latest Eurozone debt crisis plan, spreads on Italian government bonds are soaring.

The latest yield on ten year bonds issued by Italy is now in excess of 6.6 percent. Should  these yields pass seven percent, it becomes mathematically impossible for Rome to finance its deficits and debt repayments. That would mean that the Italian government would require being bailed out. The problem, however, is that there is not enough resources available in the Eurozone to bail out Italy. The only hope left, and it is a feeble one at best, is that Italian Prime Minister Silvio Berlusconi will resign, and thereby restore some level of market confidence. However, the problems with Italy’s finances go beyond one single bumbling politician. The issues are structural, not personality-based, and so far no real viable solutions have emerged.

A full-fledged Italian sovereign debt crisis will probably be the kiss of death to the Eurozone, at least in its present form.

WALL STREET POLICE: GLOBAL ECONOMIC CRISIS

Officer Larry of the NYPD is on his way to Zuccotti Park in lower Manhattan to arrest peaceful protesters involved with the Occupy Wall Street movement. Being a public spirited member of the New York Police Department, Officer Larry does remind us that there is a global economic crisis underway that rivals the Great Depression of the 1930s.

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French President Sarkozy and German Chancellor Merkel had barely popped open the champagne bottles when their supposedly final, permanent fix to the Greek debt crisis got thrown for an unexpected loop. There is a word of Greek origin called “democracy” which has been totally lacking in all the machinations of the policymakers and their financial lobbying friends since the eruption of the global economic crisis. Now, in a surprise move, Greek Prime Minister George Papandreou announced plans for a popular referendum on the latest Eurozone bailout package. Knowing that the public of Greece is overwhelmingly opposed to the bailout crafted in Brussels, the European politicians and the markets castigated the Greek prime minister. This morning, the consensus was that Papandreou would certainly resign and cancel the referendum. Based on these reports from supposedly reliable sources, the stock markets  launched a major rally.

When Papandreou addressed the Greek parliament, however, he did not offer his resignation. He also did not cancel the referendum. Instead, he invited opposition New Democracy leader Antonis Samaras to join him in a national consensus supporting the Eurozone bailout package, with the carrot being that if this occurs, he would then find the referendum unnecessary. Samaras has responded by calling on Papandreou to resign, and for new Greek elections to be held within 6 weeks.

Instead of resolving the Greek debt crisis, the latest effort from the clowns in Brussels has sparked more political instability in Greece, while in the meantime the other PIIGS insolvent Eurozone members, in particular Italy, are headed for their own debt catastrophes, unhindered by the supposed definitive solution to the sovereign debt crisis in Europe that is now up in the air.

WALL STREET POLICE: GLOBAL ECONOMIC CRISIS

Officer Larry of the NYPD is on his way to Zuccotti Park in lower Manhattan to arrest peaceful protesters involved with the Occupy Wall Street movement. Being a public spirited member of the New York Police Department, Officer Larry does remind us that there is a global economic crisis underway that rivals the Great Depression of the 1930s.

global economic crisis Antonis Samaras, eurozone debt crisis, George Papandreou, greek debt crisis

The International Labor Organization is the latest global body to warn about the ongoing global economic crisis. According to the most recent report from the ILO, the global economy is about to tip into what it calls a “a new and deeper jobs recession.” Given that advanced economies already are experiencing levels of unemployment and underemployment rivaling the Great Depression of the 1930s, it is not surprising that the ILO believes that the next phase of the jobs crisis will lead to a sharply elevated risk of social unrest.

As fiscal austerity becomes the preferred policy response in advanced economies to the ongoing global economic crisis and its related sovereign debt crisis, even higher levels of unemployment are unavoidable. The current spread of the Occupy Wall Street movement to many other cities across the world points to the validity of the ILO’s warning about spreading social unrest.

WALL STREET POLICE: GLOBAL ECONOMIC CRISIS

Officer Larry of the NYPD is on his way to Zuccotti Park in lower Manhattan to arrest peaceful protesters involved with the Occupy Wall Street movement. Being a public spirited member of the New York Police Department, Officer Larry does remind us that there is a global economic crisis underway that rivals the Great Depression of the 1930s.

global economic crisis ILO, International Labor Organization, jobs crisis, occupy wall street

Once again, as they have already done countless times before since the emergence of the European sovereign debt crisis, the 27 political head honchos of the European Union have once again boasted that they have saved the global economy from collapse with finally, the real definitive cure for the crisis. However, the only thing really distinct with this latest version of the EU cure is that the numbers are much larger. The politicos claim that they have received agreement from impacted banks to  write off 50 percent of the value of outstanding loans to Greece. Banks in turn will receive recapitalization from the EU. And perhaps most striking in terms of attempting to win investor confidence, the value of the EFSF, or Eurozone bailout fund, will expand from just over $400 billion to around $ 1.4 trillion. No wonder the European politicians are patting themselves on the back, while predictably stock exchanges across the globe are rallying to new, dizzying heights.

So, should we believe that this time, after so many failed attempts also advertised as the real solution, the politicians have finally got it right? I don’t think so. The massive write-down of Greek debt will jeopardize the financial solvency of many European banks, requiring massive recapitalization. That is supposedly why the European Financial Stability Facility is being expanded to a level of one trillion euros. But where will the Europeans get this money? From the same banks they will need to bail out? From investors already spooked by a 50 percent write-down on Greek debt? From China?  From already over-leveraged German taxpayers? In the meantime, the other PIIGS nations are on the brink of insolvency (Portugal, Italy, Ireland and Spain), not to mention fragile eastern European economies, which nobody in the EU will even discuss. No wonder the agreement announced in  Brussels is lacking in specific details.

Nouriel Roubini  tweeted this morning, “Little in EZ plan to restore growth/competitiveness. Without it financial schemes (greek haircut, bank recap, levered EFSF) alone will fail.” Professor Roubini has had a far more reliable track record in predicting the trajectory of the global economic crisis then all the 27 EU political leaders and their army of economic and financial advisors combined. The fact that Nouriel Roubini is already predicting that the EU’s latest bailout plan will fail is far more significant, in my view, then all the stock market rallies being fed by the latest self-congratulatory propaganda coming out of Brussels.

WALL STREET POLICE: GLOBAL ECONOMIC CRISIS

Officer Larry of the NYPD is on his way to Zuccotti Park in lower Manhattan to arrest peaceful protesters involved with the Occupy Wall Street movement. Being a public spirited member of the New York Police Department, Officer Larry does remind us that there is a global economic crisis underway that rivals the Great Depression of the 1930s.

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