EU Summit Implies Massive Money Printing on the Way

 

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.

Perhaps the EU is finally realizing that a debt crisis can't be solved by issuing more debt. The proposals emanating from their recent summit in Brussels will require massive money printing instead, especially if the EU doesn't wind up issuing eurobonds.

While EU leaders didn't state that they were going to start running the printing presses at full speed, it is the only way they can produce sufficient funds to actually implement their new policy initiatives. They may not be willing to do so however. Until there is an actual big increase in money printing, there is no reason to believe that the EU will implement any of the proposed fixes for its financial problems.

All the ideas that came out of the summit have been bandied about before. Some, such as direct recapitalization of banks (described as a "breakthrough"), had already been announced before (perhaps it should have been called a re-breakthrough). This was done in response to the EU's disastrous bailout of Spanish banks that went through the Spanish government causing significant downgrades to its credit rating and thereby raising its borrowing cost significantly. A joint banking supervisory board is now going to be added though. This seems sort of late in the game, considering the teetering insolvency of many EU banks.

As a summit attendee stated, lending money directly to banks means the loans won't have to be put on a government's books. He should have followed up with, "at least not immediately". The way Ireland got into serious trouble and required its first EU bailout was that its banking system failed and the debt had to be assumed by the government. The IMF now says it will need another major bailout soon. As long as the EU is willing to commit unlimited bank bailout funding this will not happen in other EU countries.

One new approach that did come out of the summit was a relaxation of conditions for receiving bailouts. This was not described as applying to all bailouts however. Only countries that are "well-behaving" will not have stringent conditions applied to them when they ask for a handout. This of course begs the question of why a "well-behaving" country would need a bailout in the first place. While this is an attempt to treat Spain and Italy better than Greece, Portugal and Ireland, it will not work in practice. All the previous bailout countries will demand that they be allowed to spend more money and run bigger budget deficits. Since they can't raise funds in the bond market, the EU will have to increase the amount of their bailouts. This will require a continual stream of additional payments from the EU. Where will the money come from?

The short answer is sharing debt through jointly issued Eurobonds. Not that this can happen in the near future. First a report on its feasibility will be issued in October. Then all the EU countries will have to agree to it. Whether Germany will be willing to do so remains to be seen (Angela Merkel supposedly said that this would take place over her dead body). Even if this eventually happens, and 2013 would be the earliest that it would, can bonds that mix subprime borrowers and prime borrowers be successful?  The history of this is not encouraging. This is what created the housing bubble and led to a massive financial system collapse in 2008. The issuing of eurobonds means the entire EU could default as a single entity as opposed to just the weaker members. That doesn't exactly sound like an improvement over the current state of affairs.

One interesting note from the summit was the declaration from Italian premier Mario Monti that Italy did not intend to apply for a bailout. Greek and Spanish leaders said the same thing just before their countries applied for a bailout. As the French say, "the more things change, the more they remain the same". Perhaps the EU should adopt this as their new motto. At least it sounds better than "bailouts are us".

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.

October Consumer Confidence Well Into Recession Territory

 

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 October Consumer Confidence number fell to 39.8. It is once again approaching the all-time lows that occurred at the bottom of the Great Recession. The number has never reached the 90 level since 2009, which is the cutoff for a healthy economy. The continually poor levels of consumer confidence  bring into question whether the last recession ever really ended.

While U.S. consumers are gloomy about almost all aspects of the economy, they are most pessimistic about employment prospects. Only 3% of U.S. consumers think that jobs are plentiful. While it is true that this number could have been lower during the 1930s Depression when millions of ordinary Americans went hungry and were homeless, the lowest possible value is only zero. And the current reading could actually be zero since zero lies within the statistical margin of error for the survey. In contrast, those who say jobs are hard to get came in at 47% and that would definitely had been much higher during the 1930s.

The Present Situation Index — how consumers see the state of the economy currently — was a very dismal 26.3 in October. This number has remained at fairly low levels for four years now. What has caused the overall consumer confidence  number to rise has been expectations for a future improvement in the economy. The government and mainstream media has continually told U.S. consumers the economy is getting better and will continue to get better. So, consumers have told the survey takers that don't see things as being in good shape now, but they were hopeful about the future. Consumers are starting to lose hope however. The future expectations number fell from 55.1 in September to 48.7. Apparently, you can only fool the public for so long.

The "don't believe what you see with your own eyes, but believe what the government tells you" efforts are still going strong however. Media reports cited better retail sales and a big stock market rally since early October as indications that the U.S. economic situation is improving. Retail sales may have indeed gone up since they are not adjusted for inflation and higher prices make them look better even if fewer units are being purchased. As for the wild behavior of the stock market, explosive rallies are common in bear markets and not in bull markets. They can also occur at any point because of liquidity injections into the financial system from central bankers in Europe, the UK, and the U.S. as would happen during a banking crisis like the one currently taking place in the EU. They don't last for long however.

No matter how you look at the consumer confidence, the numbers are ugly. They are not just indicating recession, they are shouting recession. Only 11% of Americans think that business conditions are good.  The Present Situations Index has dropped six months in a row. Some of the components are at rock bottom levels. Yet, the government and mainstream media keep reporting that the economy is on track for improved growth in the second half of 2011. How can such diametrically opposed views be reconciled? The simplest way to explain the discrepancy is that someone is lying. Any guesses as to who that might be?


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.

The Latest From Davos Switzerland

The 'Helicopter Economics Investing Guide' is meant to help educate people on how to make profitable investing choices in the current economic environment. In addition to the term helicopter economics, we have also coined the term, helicopternomics, to describe the current monetary and fiscal policies of the U.S. government and to update the old-fashioned term wheelbarrow economics.

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The invitation only annual World Economic Forum - a meeting of world leaders, central bank heads, economists from big financial firms, and billionaire investors - is currently taking place at Davos, Switzerland. In an opening forum, the people who pull the strings of the global economy and stock markets came to the following conclusions (long after they have been obvious to everyone else):

1. The world is facing unprecedented economic challenges.
2. Fiscal packages may not be enough to restore economic growth.
3. The multilateral financial system needs strengthening.

Fortunately, George Soros gave an early talk that had somewhat more substance than the above long-on-platitudes and short-on-specifics comments. At the same time, Nouriel Roubini who is in Switzerland, but possibly not at the conference, released a purposely well-timed statement about just how costly it would be to fix the banking system.

Soros stated that the current crisis has the potential to be worse than the one during the Great Depression in the 1930s. According to his calculations, the global banking system in developed countries still needs an additional $1.5 trillion to be rescued. Furthermore, the only way to pay for this is with money creation, or in other words - inflation. Nouriel Roubini now says that he estimates the total global bank losses from the Credit Crisis will be $3.6 trillion, far higher than his original estimates (and mine as well, last July at a talk at St. Johns University, I estimated $2 trillion, which was double the consensus at the time). Roubini further stated the biggest U.S. banks are insolvent (New York Investing first said Citibank was insolvent at the end of 2007).

Expect some talk about the two approaches to fixing failed banking systems. These are the Japanese model and the Swedish model. The Japanese reacted to their failed banking system in the 1990s by propping up as many failed institutions for as long as possible and the consequence was economic and stock market stagnation that has now lasted almost two decades. The Swedes had a banking collapse in the mid-90s and took that opposite approach. They took swift and drastic action, which was painful in the short term, but proved highly successful and their economy revived quickly. So far, the United States has come closest to the failed Japanese model in dealing with the banking crisis. The political will to step on some very rich and powerful vested interests has been lacking as has the willingness to admit that top U.S. banks such as Citibank and Bank of America are insolvent.

One person that is not yet at Davos is Federal Reserve chair Ben Bernanke. He is busy keeping fed funds rates at zero at the Fed meeting in Washington. The meeting ends today and presumably he will be jetting off to Switzerland shortly thereafter. Expect the quality of debate at Davos to suffer accordingly.

NEXT: Government Wants to Play Good Bank, Bad Bank

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.