Debt Crisis -- Greece 2011 Compared to Argentina in 2001

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.

Headlines such as "Hopes for Greek debt progress lift world stocks" and "Wall St opens higher on European hopes" are in the financial news today. Before investors buy into the hype, they should realize that the powers-that-be always deny an obvious and inevitable default before it takes place. Greece in 2011 is on a very similar trajectory to Argentina in 2001 and is well past the point of no return for a default just as Argentina was back then.
There are many similarities between the current Greek debt crisis and the Argentina debt crisis in 2001. Greece is not using its own currency, but a transnational one, while Argentina pegged its currency to the U.S. dollar.  A connnection to a greater currency allows only limited policy responses and prevents the usual money printing that would have take place when debt becomes too high. This in turn causes a gradual rise in inflation up to the point of hyperinflation (Greece and Argentina have both experienced hyperinflation in the past). While skyrocketing interest rates in Greece are implying there is massive inflation, the official inflation rate is under 3%. Yields on one-year Greek governments reached approximately 100% on Tuesday, telling a very different story.  

While the Greeks are certainly underestimating their inflation rate (they have been caught lying and continually underreporting their debt figures and no numbers from the Greek Statistical Office can be trusted), it is relatively minor no matter what the actual number. Inflation is caused by a falling currency and hyperinflation by a collapsing currency. Since the euro is not dropping that much and Greece uses the euro, inflation is not showing up there. Argentina tying its currency to the dollar also created a very low inflation rate as long as the peg lasted.  There is no free lunch however (even though you may have repeatedly heard that there is from politicians). Profligate government spending eventually leads to major inflation. The inflation only showed up in Argentina after it decoupled its currency from the U.S. dollar and it will show up in Greece after it decouples from the euro. Instead of gradually building inflation, sudden major inflation will take place.
The Argentina crisis began when a new government was elected in December 1999 and had to deal with years of mismanagement from the previous administration. Greece elected a new government in October 2009 and shortly thereafter it revealed that it had a lot more debt and higher budget deficits than it had claimed. In both cases, sharp spending cuts were implemented and serious riots followed. By December  2000, Argentina had acquired bailout funding from the IMF. Markets rallied and press reports indicated everything was going be OK. Greece received its first bailout from the EU and the IMF in the spring of 2010 and markets rallied and press reports indicated that everything was going to be OK.  In both cases everything that followed wasn't going OK.
By the spring of 2001, events started spiraling downward in Argentina. In the spring of 2011, events started spiraling downward in Greece. In August 2001, Argentina received an increase in its standby loan agreement from the IMF. Greece received promises of a second bailout from the EU, but with some mandatory debt swaps as part of the deal. Argentina engaged in debt swaps in June of 2001. Interest payments on Argentina's debt eventually overwhelmed rescue attempts and on December 5, 2001, the IMF announced it would not disburse promised aid to Argentina. A collapse followed shortly thereafter. The EU is now questioning whether or not to continue to make disbursements to Greece. If the disbursements stop at any point, Greece will default shortly thereafter just as Argentina did.

No government is of course going to admit that it is going to default. If it did, no one would purchase its bonds and this would cause an immediate default.  It is not surprising that the Greek government is denying the obvious, EU leaders are grasping at straws to explain how a Greek default will be avoided, or that the mainstream media is trying to spin those straws into a golden fantasy of solvency. Argentina denied that it would default right up to the end as well, just like every other country (and major company) facing the same predicament has in the past. Despite the claims that, "this time is different", it never is.

Disclosure: None


Daryl Montgomery
Author: "Inflation Investing - A Guide for the 2010s"
Organizer, New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. There is no intention to endorse the purchase or sale of any security.

Consumer Confidence Still Worse Than Last 4 Recessions

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.


Fed Chair Ben Bernanke said yesterday that he expected a recovery in consuming spending. Media headlines blared the good news and stocks rallied. The details of 'sometime in the next several quarters' got lost in the shuffle however. Nor did the media report that Bernanke has rarely made a prediction that has turned out to be correct.

An examination of where consumers are now compared to previous recessions can help shed some light on any impending consumer recovery. The Conference Board's consumer confidence number was 50.4 in July. The highest number in the 'recovery' so far was 63.30 this May. The number 90 is used as the dividing line between a lackluster and healthy economy. U.S. consumers haven't registered confidence levels anywhere near that level since December 2007 when the recession began. Confidence was 90.6 that month and then fell and has remained below 90 since that time.

Consumer confidence behaved differently before the 1990/91 recession than afterwards as is the case for a host of economic data. It was after 1990/91 recession when the first 'jobless recovery' took place. Prior to that time, unemployment bottomed during the same quarter that GDP bottomed. Only after U.S. government statisticians started making 'adjustments' to how the economic numbers were calculated in the 1980s, did such impossibilities as 'jobless recoveries' (an oxymoron if ever there was one) start to occur. Consumer confidence is affected by unemployment, so the confidence numbers would reasonably be expected to begin to lag the official recession dates as well.

The two recessions before the 1990/91 recession took place between January 1980 and July 1980 and July 1981 and November 1982. Consumer confidence bottomed in May 1980 at 50.10 (almost the same as the current value) right in the middle of the 1980 recession. The low number for the 1981/82 recession was 54.30 in October 1982, just before the recession's end. The worse point for consumer confidence in the 1982 recession was better than the July 2010 reading. The recovery we are supposed to be in now wouldn't have been recognized in the 1980s.

The 1990/91 recession took place from July 1990 to March 1991. During that period, the low point in consumer confidence was 55.10 in January 1991. That wasn't the ultimate low however. That was 47.30 in February 2002 - eleven months after the recession officially ended. A slow to improve employment picture kept consumers in a subdued state.

The 2001 recession was unique in that it was the only recession in history where consumer spending didn't decline. Since consumer spending accounts for around 70% of U.S. GDP, it is very difficult for a recession to take place at all is there isn't a drop in consumer spending. During the official dates of the recession, March 2001 to November 2001, the low point in consumer confidence was an amazingly high 84.90 in November. The ultimate low was 64.30 in March 2003 -relatively good for a recession bottom. The low point for the 2001 recession is almost the high point that we have experienced in the current recovery.

Recently, the low point in consumer confidence was 25.30 in February 2009. That is not just the bottom for the current recession, but the all-time low (the all-time high was 144.70 in 2000). After committing trillions of dollars for bailouts, $3 trillion in federal deficit spending in the last two years, and zero interest rates since December 2008, we have now managed to achieve a consumer confidence number that is worse than or around the low point for the last four recessions. From the consumer's perspective, government efforts to handle the current downturn look like the most expensive failure in history.

Disclosure: No positions.

Daryl Montgomery
Organizer, New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.

Past Recessions Provide Insight Into When the Fed Will Raise Rates

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. We have coined this term to describe the current monetary and fiscal policies of the U.S. government, which involve unprecedented money printing. This is the official blog of the New York Investing meetup.


The Federal Reserve left the fed funds rate in the zero to 0.25% range at its March meeting. This is the 15th month that the Fed has maintained rates at an all-time low. At the conclusion of the meeting the Fed stated that it will keep rates near zero "for an extended period of time", so no rate increase should be expected for at least several more months. Examining how the Fed reacted to past recessions can provide investors with some insight into when the Fed will actually change to a more restrictive interest rate policy this time around.

According to the official record, the previous U.S. recession took place between March 2001 and November 2001. This recession was unique in that it is the only one in U.S. history where consumer spending didn't drop and it was also one of the mildest recessions on record. Fed funds bottomed at 1.00% in June 2003 - 19 months after the recession was supposedly over. The backdrop was very low inflation. New reports of a jobless recovery were common even in the fall of 2003 and there was great concern at the time because the unemployment rate was at the 6% level (as opposed to 10% today). Fed funds remained at a low point for 11 months. So the Fed started raising its funds rate 30 months after the recession officially ended. If we optimistically assume that the current recession ended in July 2009 because GDP turned positive in the third quarter of the year, this would imply Fed funds would start rising around January 2012.

The recession before the one in the early 2000s took place between July 1990 and March 1991. Fed funds bottomed at 3.00% in September 1992 - 18 months after the recession officially ended. Jobless recovery was also a big news item in 1993. Commentators noted that payroll employment in the 7 previous U.S. recessions had increased on average around seven percent in the two-years following the business trough, but had barely budged in that time period after the 1990-1991 recession. The unemployment rate was around the 7% level. The backdrop was declining inflation. The fed started raising rates in February 1994, so the low rate was maintained for 16 months and this was 35 months after the recession was declared to be over. This would imply that the Fed will start raising rates around June 2012.

The prior recessionary period was the double dip recession that took place between January 1980 to July 1980 and July 1981 to November 1982. This recession was actually created by Federal Reserve policy and sent the U.S. industrial base into a decline from which it never recovered. Inflation was high and at its peak, so interest rates were at the start of a long-term decline. Fed chair Volcker kept raising Fed funds rates until they reached 20%. They last time that they were that high was October 1981. They were then lowered until they had fallen to 8.5% in December 1982. The funds rate was then raised until a new lowering cycle began in September 1984. The funds rate bottomed at 5.875% in August 1986. High fed funds rates did not cause our current recession, so this period of economic history is not necessarily relevant to today's situation. The recession did take place at the beginning of a multi-decade shift in interest rates and this is also occurring now, although we are at the bottom of the cycle and not at the top like we were in the early 1980s. Japan's experience since 1990 indicates that rates can remain at or near their low point for well over a decade.

Before our current recession, the worst post World War II recession occurred between November 1973 and March 1975. Inflation was high and rising during this time period, so interest rates were generally trending upward. Unemployment peaked at 9.0% in May 1975. The concept of jobless recovery was an unknown phenomenon. The fed funds rate reached a low of 4.75% in January and November 1976. The Fed started a consistently more restrictive interest rate policy 21 months after the recession ended. That would imply that April 2011 could be the first Fed funds rate increase this time around.

Historical examination indicates that when the Fed starts raising rates depends on when a recession occurs in the context of a longer-term inflationary/deflationary cycle. When the inflation rate has already been falling for a decade or more or is around its low point, it takes longer for a rate rise than it does in a rising inflationary environment. Two to three years after a U.S. recession has been declared officially ended seems to be the norm before a tighter interest rate environment begins regardless of the inflationary backdrop. If the Fed raises rates on the short side of this number, this will indicate we are heading into rapidly increasing inflation. If it takes more than three years, it will indicate the possibility of grinding deflation as has occurred in Japan since the 1990s. The first alternative is the proverbial devil and the second is the deep blue sea.

Disclosure: None

NEXT: The Dollar, Euro, Gold, Oil and Treasuries

Daryl Montgomery
Organizer, New York Investing meetup
http://investing.meetup.com/21

This posting is editorial opinion. Like all other postings for this blog, there is no intention to endorse the purchase or sale of any security.