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Posts Tagged ‘recovery’

The Recovery Is Stalling. We Need Pro-Market Reforms Now. | Mises Wire

Posted by M. C. on October 16, 2020

Government shutdowns have created a solvency problem with severe long-term ramifications in large parts of the business fabric. One in five companies in the UK are considered “zombies,” almost 12 percent in the United States, and more than 15 percent in the eurozone.

Daniel Lacalle

The Economic Sentiment Index of the European Commission for August shows that the recovery of the European economy is slowing down. Not only has the pace of recovery slowed significantly, but the data for Spain reflected evidence of being the only economy in the euro area where the index fell compared to July. If we look at the Organisation of Economic Co-operation and Development (OECD) leading indicator index, the evolution is also worrying. 60 Bloomberg also tracks the daily activity in most economies, and the evidence points to a deceleration in August in most developed and emerging economies. Only the United States seems moderately better in comparison, although the slowdown in the recovery process is also evident.

Many may say that it is normal to see a deceleration in the recovery after such a fast bounce in June and July, but when most economies’ outputs remain 10 to 20 percent below February levels after the reopening, we must be concerned. We also must warn about a rapid recovery in GDP (gross domestic product) that comes mostly from massive increases in debt and government spending. The reality is that for most businesses and households the economy remains far away from 2019 levels.

Why Such a Rapid Change in Trend?

The first and wrong analysis is usually to blame the slowdown on a bad tourist season affecting the travel and leisure sector. Of course, it is an important factor, but many other parts of the economy are showing an abrupt change in trend. Furthermore, the worsening of the indicators is clearly reflected in industry and consumer confidence, with manufacturing purchasing managers’ indexes (PMIs) slowing down in the eurozone and even entering contraction in Spain.

The forced closure of the economy by government decision and the lack of confidence in the future have a profound midterm impact on the economy.

Government shutdowns have created a solvency problem with severe long-term ramifications in large parts of the business fabric. One in five companies in the UK are considered “zombies,” almost 12 percent in the United States, and more than 15 percent in the eurozone. The Bank of Spain warns that 25 percent of Spanish companies are in a situation of technical bankruptcy and business closure.

Governments have ignored the fragility of the private sector for years, while corporate debt and solvency ratios reached new record highs. However, what is more important is that governments have not paid any attention to the weakness of the small business fabric, millions of companies with one or two employees that managed to survive day by day, that had no debt or assets and have been destroyed by the misguided and ineffective forced shutdown, not because their owners used the wrong strategies.

The excess of capacity built in the fake and indebted growth period of 2017–19 is also evident in the weak recovery. Small businesses’ death by working capital and so-called strategic sectors’ zombification through low rates and high liquidity are the collateral damage of the eternal stimulus we have seen in the post-2008 period, particularly in the European Union, where large conglomerates are viewed by governments as hidden social security systems and behave almost like state-owned enterprises in numerous cases. The August composite manufacturing index in the eurozone shows this slack. It worsened from 54.9 in July to 51.6 in August. Still expanding, but a massive slump for one month. Following the daily activity indices published by Bloomberg Economics, economic activity in the euro area is still 10 percent below February levels, and recovery slows after reopening.

The main problem is that all this occurs in the middle of the largest chain of stimuli since the creation of the eurozone. The balance sheet of the European Central Bank has soared from 39 percent of the GDP of the eurozone at the beginning of the year to 55 percent in August 2020, much larger than the balance sheet of the Federal Reserve (33 percent of US GDP) or of the Bank of England (32 percent), though still far from the monetary insanity of the Bank of Japan (120 percent). Negative interest rates, a European Central Bank that has bought more than 20 percent of the outstanding debt of most member countries, liquidity injections into the financial system via targeted longer-term refinancing operations (TLTROs), and a fiscal stimulus of almost 10 percent of GDP, yet the eurozone economy is not even close to February levels.

These stimuli do not solve a problem of solvency and falling sales. Most businesses that are closing are not doing so due to lack of access to credit or because interest rates are high (they are the opposite), or due to lack of public spending. They close because sales after reopening are nowhere near the levels needed to cover growing expenses and tax bills. Death by working capital, as I mentioned previously.

Europe and the rest of the world must learn that huge stimulus can disguise the risk of highly indebted countries with serious solvency problems but it does not solve it.

At some point we must begin to understand that periods like the current one are precisely the most dangerous. With the excuse of attending to a crisis, structural imbalances are increased while the productive sector is left abandoned.

When we read about the “support for businesses” in these stimulus packages the majority are just giving companies the opportunity to borrow more now to pay taxes in the future.

This chain of stimuli and government spending will not strengthen the economy. At best, it will zombify sectors that already had growth, productivity, and debt problems before the pandemic. There is some hope, however. Countries like France are recognizing for the first time that the measures they must take if they want to get out of this crisis are reforms that free the economy. These include serious tax-wedge and administrative reforms that attract investment, employment, and improve competitiveness. There must also be reductions of the tax burden on productive sectors, elimination of bureaucratic obstacles, reduction of so-called social charges and hiring costs, lifting of useless regulatory restrictions, incentivization of high-productivity sectors instead of subsidization of low-productivity ones, etc.

Structural reforms are urgent, but the eurozone and Japan have shifted from using monetary policy to buy time to implement those structural reforms to using such monetary stimulus as an excuse not to implement them.

Most developed economies face a dangerous dilemma: choose to follow the path of debt stagnation or strengthen the economy to exit the crisis in a stronger way. Unfortunately, the first alternative benefits a political sector that refuses to adjust, although in the medium term it destroys it by making debt and deficits unsustainable. Author:

Daniel Lacalle

Daniel Lacalle, PhD, economist and fund manager, is the author of the bestselling books Freedom or Equality (2020),Escape from the Central Bank Trap (2017), The Energy World Is Flat (2015), and Life in the Financial Markets (2014).

He is a professor of global economy at IE Business School in Madrid.

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Of Two Minds – What Could Go Wrong? Plenty

Posted by M. C. on October 9, 2020

Charles Hugh Smith

Quite a lot of things can go wrong, especially if the mainstream’s rose-tinted sunglasses induce a delusional confidence in fantasy.

The conventional assumptions are remarkably rosy: the “recovery” is V-shaped in all the ways that count (i.e. the top 10% are once again doing well), the Federal Reserve will never let stocks go down or interest rates rise ever again (never never ever!), and the Federal government will borrow and blow endless trillions in stimulus ($2 trillion every six months seems about right, but since there’s no limit, we’ll double it if that’s needed to bail out every zombie corporation, bloated bureaucracy, skim and scam in the land).

what could go wrong? Gordon Long and I considered the question and came up with: quite a lot of things can go wrong, especially if the mainstream’s rose-tinted sunglasses induce a delusional confidence in fantasy.

What Could Go Wrong? (43 min. video)

1. A key part of the happy story is the US dollar (USD) will continue its decline, which is wunnerful for stocks and exporters: dollar down, stocks up, yea!

The official explanation for this free-fall is the USD will weaken as the Fed eases / prints. The mainstream thinking is that Japan and the Euro bloc are farther along in their socialization of debt (i.e. their central banks are monetizing fiscal deficits) and so the US will have to play catch-up, weakening the USD.

What could go wrong?

US-centric analysts forget the USD is the primary reserve currency and due to Triffin’s Paradox, it doesn’t just serve the US economy, it serves the global economy. You will never hear a Fed representative admit this publicly, because the PR / fantasy is that the Fed only cares about the American public (awww, gosh-darn it, aren’t they sweet?) and keeping inflation low and employment high.

In reality, the Fed’s core interests are enriching and protecting private banking globally, and maintaining U.S. global hegemony via a strong dollar. Recall that geopolitically, no empire ever got stronger by weakening its currency.

The Fed never addresses the USD’s global role and so conventional pundits ignore geopolitical forces: capital flows, the global need for dollars to service debt denominated in USD and reserves, etc.

Also recall that China pegs its currency to the US dollar, not the other way around. That alone tells you the role each currency plays in the global economy.

For the USD to weaken, the yen and the euro would need to significantly strengthen. But there’s a problem with this thesis.

Rather than being stronger, Japan and the EU are weaker than the US. Credit impulse is essentially zero in both Japan and the EU, both their banking sectors are insolvent, their economies have been stagnant for years (EU) or decades (Japan) and their demographic declines are accelerating. Both are export-dependent, an Achilles Heel as world trade / globalization enters a secular decline that could easily gather momentum.

The US needs capital flows into the US economy, so negative rates are a non-starter. Non-US borrowers have USD denominated debts of around $3 trillion, so demand for USD is not optional, it is a function of credit, commerce and reserves.

Simply put, the US is not about to sacrifice the euro-dollar / petro-dollar and its commercial hegemony just to satisfy domestic pleading for negative rates. Furthermore, Japan and Europe have proven that negative rates only weaken the private banking sector–the exact opposite of the Fed’s Prime Directive.

If the USD strengthens substantially, which it tends to do in crises, that will be very negative for equities. (No, no, no, the Fed has our backs! The Fed will never let my precious portfolio drop a single dollar!)

So sorry, but the Fed’s Prime Directives are not related to your portfolio at all. The Fed’s PR is all about domestic stocks, implicitly or explicitly, but when push comes to shove, your portfolio will be sacrificed without any hesitation to protect private banking and USD hegemony. The empire eats first, and only the tragically misguided believe US stocks are all that matters to the Fed.

2. The Fed’s easing, QE, etc. will spark a new round of credit expansion.

What could go wrong?

Credit expansion is on life support. There are very few investment opportunities, which is one reason why corporations have poured earnings into stock buybacks. The Fed can’t create low-risk, high-profit investment opportunities, not can it make poor credit risks into good credit risks.

Banks can’t afford to lend to insolvent households, zombie corporations or small businesses. The credit expansion impulse is impaired by the overhang of bad debt, excessive leverage, zombie corporations, etc. and there’s nothing the Fed can do about it. The Fed is pushing on a string.

Furthermore, the Fed is now encountering political resistance to its “enrich the wealthy and bail out zombie corporations” monetary policies. Its room to bail out the super-wealthy is increasingly constrained politically. The Fed is signaling that its focus is shifting from free money for financiers to funneling new money directly to households.

3. The federal government will borrow and spend trillions, sparking renewed growth.

What could go wrong?

As noted, banks cannot lend to poor credit risks, nor can they force those who don’t want to borrow more to take on new loans. Federal spending doesn’t magically create good credit risks or well-collateralized creditors.

Small businesses cannot lower their fixed costs enough to survive, and many of these costs such as taxes and fees will be rising as cash-starved local governments seek more revenues.

The free money will flow not into productive investments but into demand for goods and services which are constrained by declines in trade, high fixed production costs, retirement of key workers, etc.

Inflation will leap, surprising everyone who believed the “low inflation forever” story. As inflation soars, the purchasing power of the federal spending will plummet accordingly.

As UBI, Fed helicopter money, etc. becomes institutionalized, the working poor will exit low-paying, high-stress jobs, creating labor shortages. Small business won’t be able to pay higher wages and survive, and low-margin corporations will be squeezed as well.

There’s much more in our discussion: What Could Go Wrong? (43 min. video)

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Recent Podcasts:

What Could Go Wrong? (43 minutes, with Gordon Long)

AxisOfEasy Salon #24: It’s Not a Conspiracy. It’s a Culture. (1 hr)

My COVID-19 Pandemic Posts

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Of Two Minds – Forget the V, W or L Recovery: Focus on N-P-B

Posted by M. C. on June 30, 2020

The only realistic Plan B is a fundamental, permanent re-ordering of the cost structure of the entire U.S. economy. Call it DeGrowth, or creative destruction, or disruption if you prefer, but whatever name we use, the reality will be extraordinarily disruptive, uncertain, risky and unpredictable.

Charles Hugh Smith

The only realistic Plan B is a fundamental, permanent re-ordering of the cost structure of the entire U.S. economy.

The fantasy of a V-shaped recovery has evaporated, and expectations for a W or L-shaped recovery are increasingly untenable. So forget V, W and L; the letters that will shape the future are N, P, B: there is No Plan B .

All the hopes for a recovery were based on a quick return to the economy that existed in late 2019. All the bailouts and stimulus programs were based on this single goal: a quick return to The Old Normal . This was Plan A.

For all the reasons that have been laid out here over the past six months, The Old Normal is gone for good. The Old Normal economy was too precarious, too brittle and too fragile to survive the toppling of any domino, as the only Plan A “solution” was to push destabilizing extremes to new extremes , i.e. doing more of what failed spectacularly and increasing the fragility of precariously fragile systems .

A short list of what’s been irreversibly destabilized due to a systemic collapse in demand, exponential rise in risk and uncertainty, dependence on over-indebtedness, imploding global supply chains, structural decline in income and employment and the rapid emergence of new business models that obsolete high-cost, inefficient, sclerotic, bureaucratic monopolies include:

1. Healthcare

2. Higher education

3. Commercial real estate

4. Tourism

5. Restaurants / live entertainment

6. Business travel / conferences

7. Office parks, commutes, urban work forces, etc.

8. High-cost urban lifestyles

We could also include entire sectors that have yet to recognize the tsunami that’s about to wash away their Old Normal: marketing, finance, local governance, etc.

The problem is there’s no Plan B for anything in the U.S. economy. There is only Plan A, a return to 2019 / The Old Normal . If that’s no longer possible, there is literally nothing left on the policy / response plate.

What nobody dares even ask is: what businesses and industries will still be financially viable running at 50% capacity? How many cafes, restaurants, resorts, airlines, etc. will turn a profit operating at 50% capacity? How many can not just survive half of the seats being empty, but turn a profit?

The short answer is very few, because the operating costs of most businesses are unbearably high. The likely survivors are those enterprises with low fixed costs and low operating costs– enterprises that own their facilities in locales with low property taxes, and enterprises that can be run by the owners without employees.

How many enterprises have these kinds of barebones cost structures? Very few.

For most enterprises, the only way they can lower their costs to a level that enables their survival is to cut costs by half: cut rent, mortgages, debt service, property taxes, fees, utilities, insurance, etc. by half.

That would mean everyone down the line would have to survive on half of their previous revenues: landlords, banks, local municipalities, service providers, and so on.

How many of these institutions and enterprises could survive on 50% of their previous revenues?

The only realistic Plan B is a fundamental, permanent re-ordering of the cost structure of the entire U.S. economy. Call it DeGrowth, or creative destruction, or disruption if you prefer, but whatever name we use, the reality will be extraordinarily disruptive, uncertain, risky and unpredictable.

As many of us has explained over the years, unstable, brittle, fragile systems characterized by soaring inequality, pay-to-play political corruption and dependence on debt, leverage and speculative bubbles were unsustainable.

Plan B can be a chaotic mess of denial and failed half-measures that only make all the problems worse, or it can be a positive transformation that results in a society that does more with less. The choice is ours.

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Trump, Discounting Debt and Printing Money

Posted by M. C. on May 18, 2016

Here is a question posed by a friend.  My response follows.

Hey, I’m interested in what you think of Trump’s recently (TERRIBLY PHRASED) proposal to promote recovery or restoration of income, etc. for those still damaged by the Crash of 2009 – 2011.
Here’s a discussion by monetary theorist Ellen Brown.

The Fed has caused the dollar to be worth 1% of what it was worth in 1913. Its main purpose is to bail out banks, fund wall street big shots and pay for war. It ain’t about us little guys.

Passing thoughts as I read.

I will be kind to Ellen Brown and say Libertarian economists have little regard for her economic chops. That said Ellen’s final paragraph is a pleasant surprise.

Ben Franklin was a statist and had the government money printing contract. According to Murray Rothbard in “Conceived in Liberty” the “Continental” became so worthless soldiers eventually did not bother to collect their pay.

Lincoln’s greenbacks killed 600-700,000 so Northern industry could keep taking advantage of the cheap Southern labor. Machine gun disguised as printing press. Most countries that ended slavery managed to do it without killing off a generation. “Robust national growth” consisted to a great degree of crony capitalist (Lincoln railroad buddies) endeavors helped along by fake money and stealing land.

Low inflation is due to banks holding on to a lot of the counterfeit money as the article states. Businesses are propping up the market to a degree by buying back their stock, not by being productive. My understanding is the Dow has only a dozen or so big players propping the numbers up. If all the extra cash were let loose at once I think there would be people with wheelbarrows in breadlines.

Anyone going to the grocery store or buying clothes knows inflation numbers are fake. “Corrections” for farm prices, energy or weather paper over what us rubes have to deal with in real life.

Helicopter money leads to bridges to nowhere, backing badly run solar panel companies, Chevy Volts and Chinese towns that are empty with nearby airports with no planes and “tallest buildings” with no tenants. No shortage of poverty, ignorance or disease though. This is another way of saying central planning government is incapable of properly directing resources. That is what they free market is for.

“Free money” always has government strings attached. Just like when Edinboro accepts government money but has to teach the way the government directs. As you may know the strings are what fouls things up. Remember when W gave us all rebates to stimulate and a large chunk went to paying off credit card debt instead? Best laid plans…

Agree. Fractional reserve banking is like printing money. Lending legal money they don’t have. So when people get scared and go to retrieve their money there is none to be had. Fractional reserve banking should be as illegal. It is fraud.

Ron Paul indeed says to renege on the debt. I don’t understand the legalities/ramifications but I feel certain it is impossible to repay debt without printing massive amounts of money. I read where current unfunded government liabilities of all kinds is roughly $200T. There will be economic collapse well before the printer covers that.

It sounds like The Donald accidentally spoke the truth about paybacks then later “clarified”. Restructuring our debt ala chapter 11 seems the only reasonable solution. Just like in real, beyond the beltway life. Who really knows what The Donald thinks about printing money? He is nuts if he thinks it is a viable solution to our woes. But no worse than the Keynesians running our show.

If printing money is so benign why not fund the government entirely with a printing press? Why not just pay everybody a guaranteed income by printing? That is what The Bern wants to do. It is welfare on a massive scale. The potential doctor who could be treating a cancer instead sits around waiting for the government check just as he was indoctrinated.

Argentina, Venezuela, China, Japan, the EU and the US are all printing money and choking on it. The printing press got the world in the mess it is in and the government solution is more of the same. How can it get any plainer?

The Fed is the proverbial free lunch. No such thing.

Who really knows what The Donald thinks about printing money? He may be nuts but no worse than the Keynesians running the show.

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